Trucks in China Remain a Purely Local Affair
The long approval process for foreign investments and the China stock market have struck again, foiling yet another foreign investor with ambitious plans to enter the China market. This time, the victim was not a private equity firm, but DaimlerChrysler, a global industry leader in vehicles and trucks whose money and participation China would have been welcomed with open arms five years ago.
The ground rules are changing rapidly in China, and foreign investors are finding it increasingly difficult to gain meaningful equity stakes in existing Chinese companies. The plans of private equity firms and strategic buyers alike to penetrate the China market are now confronting the same obstacles: a bias against the sale of majority stakes; a long approval process; and a stock market that is pricing privately placed deals out of the market.
In November 2006, DaimlerChrysler agreed with Beiqi Foton Motor Co., one of China’s largest truck makers, to buy a 24 percent ownership interest in Foton for 817 million yuan (US$103.8 million at that time). Foton had agreed to sell 297 million new A shares to DaimlerChrysler for 2.75 yuan per share. (Daimler has since spun off its Chrysler unit to a private equity buyer in the United States, and is now simply known as Daimler.) With Foton’s A shares now selling for 11.42 yuan, nearly four times the Daimler purchase price, the private transaction is under water and was rejected by the regulatory authorities. While the proposed share placement has been scrapped, Daimler announced its intention to do a joint venture with Foton to make medium and heavy duty trucks.
Unlike China’s passenger car market, which has a heavy dose of foreign participation, China’s commercial vehicle market, which includes both trucks and buses, remains a purely local affair. Through October, 2007, China produced 1.65 million medium and heavy duty trucks, a 10.8 percent increase over the same period last year. Nearly all of these trucks were produced by local Chinese companies and sold under Chinese brand names. Daimler’s proposed equity ownership in Foton would have represented one of the few instances of foreign participation in China’s truck industry.
Dominance of China’s commercial vehicle market by Chinese companies, however, is not limited to the assembled vehicle. The diesel engine is a key component of any truck or bus, and this too is dominated by local players. In China, the top 8 diesel engine companies account for 98 percent of all production of the six-cylinder diesel engines used in medium and heavy duty trucks and large buses. Of these top 8 companies, all are Chinese companies, except for one: Dongfeng Cummins, a joint venture between Dongfeng (previously known as Second Auto Works) and US Cummins.
As China’s market develops, and Chinese diesel engine companies and truck and bus producers upgrade their quality and technology, it will become harder, not easier, for foreign players to establish a meaningful market presence in China. A truck made by a foreign company in China may sell for as much as four times the price of a truck made by one of China’s local producers. Selling at much higher prices that are well above the affordability level of the country’s freight haulers, trucks made in foreign-invested enterprises have been largely confined to serving niche markets in China as a result.
