International Law

China Truck Manufacturing Writ Large As Global Trade Microcosm.

By Dan

A few years ago, I would get calls from some of the television business shows asking me to come on to speak about China stocks or particular industries. I would always refuse by saying that I am a lawyer, not a stock analyst. I am still unqualified as an industry analyst and many of these television shows are still putting on less than legitimate analysts to opine on China stocks. 

But if I were to go on TV to talk about a particular industry, the only one I would even consider (but I still would not go) would be truck manufacturing. I say this because for around ten years, I handled virtually all of the out-of-country legal work for a good-sized truck manufacturer. My representation of this company ended maybe five years ago when it was purchased by one of the truck manufacturing mega-firms. During the time I represented this truck manufacturer, I became very good friends (and I still am) with one of their executives and this executive would keep me apprised of the industry (and he still does). A number of people left this company before, during and after its buy-out to go with other companies in the truck manufacturing business and I have stayed in touch with a number of them, either as friends or as new clients. 

This is my long-winded way of saying that though I am NOT an expert on worldwide truck manufacturing, I probably know that business better than any other. 

And so, of course, I was very intrigued by a recent Financial Times article, entitled, "Chinese truck makers take on global groups," on how "International truck makers are facing increasingly tough competition from Chinese commercial vehicle companies, which have already cornered the domestic market and are now aggressively moving on to the export market – especially south-east Asia and Africa."  

First, a bit more of what I know/have heard about the truck manufacturing business:

1. Truck manufacturing is typically fifteen years behind car manufacturing in terms of outsourcing, going overseas, and employing new technology. I do not know if this is true, but enough people in the business have told me this that I believe there has to be some truth.
2. The United States truck market can be roughly divided into two. Fleets and independent operators. The fleets are concerned pretty much solely with cost and efficiency. The independents want cost and efficiency too, but they also want a totally cool truck because that is where they pretty much live (many with their spouses). The independents are generally willing to pay more.
3. The U.S. and Europe and Australia demand quality. The United States and Australia are huge and trucks need to go a long way in those two countries. Does anyone know what a "roo catcher" is? 
4. China will be an interesting and difficult market. It is a big country, obviously, but initial truck cost is still trumping quality/efficiency.  
5. There are some decent Chinese truck manufacturers selling their trucks at "shockingly" low prices and some of these truck manufacturers have big plans.

The Financial Times article notes how "China last year produced almost half the world's heavy and medium commercial vehicles due to strong local demand and increasing exports to emerging markets where China's trucks are priced at less than half those of global truck makers." Chinese trucks "cannot compete" in Europe and North America "because they cannot meet local emission standards." Foreign truck makers have only an estimated 2 per cent share of China's truck market, as compared to a 2/3 share in cars. "China's lower cost and lower technology commercial vehicles are posing stiff competition to global truck makers" in emerging markets in in Africa and south-east Asia. Chinese truck sales in those regions have increased "25 per cent in the first half of 2010 over the first half of last year, to 134,000 units." 

Here are the kickers: 

The increasing volume for Chinese OEMs has provided enhanced profitability and allows for a larger commitment to R&D, which … will allow these domestic OEMs to compete on a global level, the [Alix Partners] report said.

"Western commercial vehicle makers have suddenly woken up to the fact that this market is very important and have started partnering up with Chinese producers,' including a recent joint venture between MAN and Sinotruk, Mr Naumann [of Alix Partners] said.

The new ventures will give Chinese companies access to advanced technology which may allow them to compete in more sophisticated markets in future, he said.

Let's break this all down:

1. Chinese truck manufacturers are going to be puring profits from their sales in emerging markets into R&D that will allow them to up their quality to be able to go into North America and Europe.
2. Western truck manufacturers are moving into China to lower their costs to be able to compete in China and in emerging market countries, which in turn will expose their technology to Chinese companies, which in turn, will better enable Chinese companies to compete on a global scale.

I am seeing something else in China's truck manufacturing business that was not mentioned in the FT article: Chinese companies licensing American technology. No doubt, my firm's background with trucks has caused us to see a disproportionate number of such licensing deals, but seeing them we are and they all have a common thread. A Chinese truck manufacturer has told its Chinese part supplier that it has x number of months to start giving the Chinese truck manufacturer a "world class" part and if the Chinese part supplier does not do that, the Chinese truck manufacturer will start buying that part overseas.

In response to this edict, the Chinese part supplier hunts down an American or European company that manufacturers the same part for a licensing or joint venture deal. I talked generally about this phenomenon in "Fear The China Joint Venture And Front-Load Your China Licensing Agreements."

This same dynamic has already taken place and been completed in a whole slew of industries and I suspect it is ongoing in a whole slew of other industries. What are you seeing out there?  

Full post as published by China Law Blog on September 12, 2010 (boomark / email).