THE YOUNG TIGERS
Brash entrepreneurs reshape China's auto industry
The feisty young entrepreneur from Zhejiang Province in eastern China was running into one roadblock after another. Neither the Chinese government nor the country's banks would help him achieve his goal of becoming the first private carmaker in the world's largest communist country.
Li's in-your-face style seemed to rankle the lords of the auto industry in Beijing.
When he finally did get a license in 1997, by acquiring a dying state-owned company, no one would sell him land he needed to put up an auto assembly plant. Eventually Li bought a building in Linghai, in Zhejiang province, that he says housed "ducks and chickens."
Li still needed to learn how to design and manufacture vehicles. But there was no money with which to bring in foreign engineering help.
"So we did it the way some countries develop nuclear weapons - secretly," Li said recently.
The company, which he named Geely, or "lucky profit," got its start by buying a handful of foreign-made vehicles. He won't name all the brands, but says there were some BMWs and Mercedes in the mix. Then Li and a small team of engineers tore into the vehicles to learn what they could. Li admits he wasn't much concerned with intellectual property rights.
"In the early days of the revolution, it is traditional to adopt some unconventional arrangements," he says. "The government didn't help us, so I had no choice but to do what I thought was correct."
Today, Li Shufu is one of the young Turks behind China's Young Tigers - the tiny, intrepid and highly ambitious carmakers that, less than a decade ago, didn't exist.
The biggest of the Tigers are led by three scrappy, high-energy businessmen whose companies reflect their personalities.
The Tigers are currently being tested. China's vehicle market has been flat since May, endangering the lofty ambitions of Li's Geely, Wei Jianjun's Great Wall Automotive Holding Co. and Yin Tongyao's Chery Automobile Co., a small state-controlled company that operates like a private one.
Geely Uliou: 1 of 4 subcompacts
Location: Hangzhou, Zhejiang province
2003 sales: 80,000
Annual capacity: 200,000
Products: Haoqing, Merrie, Uliou, Maple subcompacts; Beauty Leopard sports car
Founder and chairman: Li Shufu, 41
CEO: Xu Gang, 42
Ownership structure: Li Shufu and family, 53.2%, Hong Kong-listed stock, 46.8%
Rock star status
So far the Young Tigers have thrived among China's large domestic automakers - Shanghai Automotive Industry Corp., First Auto Works and Dongfeng Motor Corp. - and their big foreign partners.
China has produced some of the world's most hard-nosed auto entrepreneurs - little guys accustomed to fighting both the giants of western capitalism and the supreme string-pullers in a giant socialist bureaucracy.
In the process, these home-grown entrepreneurs have acquired a kind of rock star status. Li, 41, chairman of Chinese economy-car maker Geely Group, got a thunderous round of applause when he spoke at an industry conference in Beijing last June. The bombastic former refrigerator parts manufacturer turned auto mogul excites crowds with fiery denunciations of foreign dominance in China's automotive industry.
"China's car industry cannot be at the mercy of foreign giants any more, and we should cast away the illusion that they will really help boost our development capabilities," he told the group.
Afterward, reporters crowded around Li, who wants his independent company to be David to General Motors' and Volkswagen's Goliath.
The entrepreneurs have set out to build global carmakers from the ground up - something no individual has come close to doing since Soichiro Honda emerged from World War II fitting bicycles with leftover 50cc gasoline-powered engines that the Japanese military had used to power generators.
For Li and his counterparts at Great Wall and Chery, Honda-like success won't be easy. Since it started making passenger cars in 1997, Geely has sold fewer than 500,000 of its $4,000-to-$10,000 subcompacts.
It has fought off allegations that it copied Toyota's logo and that it falsely claimed to use Toyota engine technology. A Beijing court ruled in favor of Geely in the logo case. The technology charge was never brought to court.
Despite his recent admissions, the combative Li had said Toyota made up the charges. "Toyota hopes to use this case to destroy our development," he said at the meeting of China's National People's Congress in 2003.
According to Euromoney magazine, Wei Jianjun, owner of Great Wall Automotive Holding Co., is worth $120 million.
Great Wall's Safe is a key vehicle in China's budget SUV market.
Name: Great Wall Automotive Holding Co.
Location: Baoding, Hebei province
2003 sales: 55,000
Annual capacity: 200,000
Products: Safe, Pegasus SUVs; Sing recreational vehicle; Deer, Sailor and So Cool pickups; Hover SUV; buses; motor homes
Founder and chairman: Wei Jianjun, 40
General manager: Wang Fengying, 37
Ownership structure: Wei Jianjun, 40.4%; Baoding government, 31.8%; Hong Kong-listed stock, 27.7%
"You can't stay in the low end forever," says Geely spokesman Lawrence Ang. "We started there because all successful companies started from the low end. We will move up."
It's a risky strategy - and, as usual, there are naysayers.
"The way Geely can survive is to stick to the low end," says Yale Zhang, head of market forecaster CSM Asia's Shanghai office. "If they want to grow up, they should do it slowly."
But Li and China's other independent auto titans don't want that kind of advice. They are boosting r&d investment, charging into new segments and making plans to export.
All are shipping small numbers of cars to countries with emissions standards less stringent than those of the United States and Europe. Growing exports figure into all their future plans.
Geely says exports will account for up to 40 percent of sales in the future. Great Wall has announced no targets but says foreigners call almost every day to ask about possible distribution deals. Chery plans to export 10,000 units this year and is building an assembly plant in Iran.
'Not a threat'
"These companies are not a threat to traditional competitors in a business sense but in their entire business model," says Graeme Maxton, managing director of Autopolis, a consulting firm in the United Kingdom. "They have broken into a totally scale-driven industry and seem to be doing well. That should worry the boardrooms of Detroit."
He adds: "One of the huge barriers to entry has been scale and brand and cost. If they have a market that is suddenly fragmented, then the bigger companies have a problem."
The cooling off of China's market may give the Young Tigers - with their well-honed survival skills - a chance to prove themselves.
"Let's say this slowdown lasts another six months," says Ashvin Chotai, director of Asian Automotive Industry Research at the consulting firm Global Insight. "If Geely, Chery and the other domestic manufacturers come out of this OK, you've got to take them more seriously."
All three automakers plan to boost production capacity substantially. Geely says it will up its capacity five-fold to 1 million cars annually by 2007, though Li has hinted that may be revised with the market downturn. Great Wall will triple its capacity to 600,000 units by 2008. Chery plans to triple capacity to 750,000 next year.
In the first 10 months of 2004, Geely sold 80,671 subcompacts. Great Wall sold 46,000 SUVs and pickups. Chery sold 73,388 sedans.
Seen hard times
The entrepreneurs behind the Young Tigers have benefited from China's go-go years, but they have seen tough times, too.
Li Shufu founded his refrigerator parts factory in 1986 at age 21, and the timing was right. The Beijing Jihua Electric Refrigerator Factory came into existence just as China's refrigerator market was taking off.
Li began to accumulate capital. But in 1989 the government slapped controls on refrigerator production, and Li's factory was not included in the central plan. He had no choice but to close the factory.
Dispirited, he spent time studying at several universities, eventually graduating from one in Harbin in northern China.
College re-energized Li. He was ready to get back in business. In 1993 he toured China's big state-owned motorcycle manufacturers, offering to make tire rims for them. One factory chief after another laughed him off. How could a private company make such a high-tech product, they asked him.
Li decided to open his own motor scooter factory - a decision that he says caused even members of his own family to mock him. But he persevered. He built a factory in Zhejiang and his scooters quickly overtook Japanese and Taiwanese brands to become the market leader - though only for a short time. He also exported scooters to the United States, Italy and more than 30 other countries and regions.
By 1999 his company was building over 40,000 scooters a year.
Meanwhile, Li's plan to make cars ran into opposition. His application for a license was turned down several times.
"We filed an application with the ministry of machinery to make cars, but the official said if I give you the OK I will probably be sacked," Li said recently. "So we filed an application with the state council to make minicars and commercial vehicles, not sedans. We tried to convince them we were making a minicar. The state council denied us the license - said 'your model is too eye-catching.' "
He finally was able to buy a license from a small commercial van maker in Sichuan that was on the verge of closing down. Li invested $1.7 million of his own money to set up his car manufacturer in Zhejiang.
In 1998, the company turned out its first car - The Haoqing, a small hatchback patterned on the Daihatsu Charade. It sold for the equivalent of $5,800.
The $12,000 Qiyun is Chery's cheapest sedan.
Name: Chery Automobile Co.
Location: Wuhu, Anhui province
2003 sales: 91,000
Annual capacity: 200,000
Products: QQ subcompact; Fengyun, Qiyun and Oriental Sun sedans
Chairman and CEO: Yin Tongyao, Age not available
Ownership structure: Local government, 100%
"The entire lunch, he took phone calls," Dunne says. "He didn't eat."
Those familiar with his working style say Li has a hand in every decision at his company - from what new models to build to reorganizing the sales to cope with the market slowdown.
But he's still angry.
"We had many challenges in the past, an unfriendly environment," said Li. "So unfriendly it can kill private Chinese automakers. When I started doing research into the auto industry, we felt as if we were criminals."
Jumping into the sea
Great Wall's Wei, 40, was among the first to "jump into the sea," the literal translation of the term Chinese use for going into private business.
After graduating from high school, Wei started a water pump factory. In 1991, at age 27, he took over a state-owned vehicle manufacturer under a government program that attempted to save loss-making state-owned enterprises by allowing private individuals to run them. Some of the money came from Wei's father, then the chairman of Taixing Group, a Baoding company that made metal shelving.
Focus on pickups
After visiting auto plants in the United States and Europe in the early 1990s, Wei decided to focus on making pickups. In 1996 he took over ownership of the company, renamed it Great Wall, and began producing the Deer, which was a rough approximation of a Toyota Tacoma. The company prospered, and the government invested more money to modernize the factory.
In mid-2002 Great Wall branched out into inexpensive SUVs, virtually creating China's budget SUV market.
Analysts and suppliers describe Wei as proud, self-confident and aggressive.
"He's very energetic," says one Chinese analyst who recently met with him: "He talks very loud and with an air of confidence. He was abrasive but patient. He explained all the details and even gave many explanations beyond the scope of our questions."
Euromoney says Wei, who never went to college, is worth $120 million. Despite the wealth, Wei is said to lead simple life. He resides in the same Baoding house he has lived in for years. He spends off hours exercising and playing pingpong. He does enjoy driving foreign luxury cars, which he says it helps him to understand technology.
But most of Wei's energy is poured into work.
"I don't belong to myself now," he has said. "I belong to society."
Wei still makes strategic decisions at Great Wall, but last year he passed day-to-day responsibilities to Wang Fengying, a tiny 37-year old woman with curly dark hair who wears pin-striped sits.
Wang is an economist by training, and is all business. She sounds utterly convinced when discussing what it takes to win in China's auto industry.
"Look at which companies are doing the best," she says in an interview. "It is the companies that can develop new products that stick closest to the market."
Wang, a native of Baoding, graduated from Tianjin University and earned a master's degree in industrial business at Hebei University in 1999. That same year she started work at Great Wall and soon was heading both the sales department and the commercial vehicle division. She is now the general manager.
Great Wall has made its name as a maker of SUVs priced at 80,000 yuan, or less than $10,000 at current exchange rates. Now Wang is overseeing the launch of a new series of more expensive, jazzed-up SUVs dubbed "city utility vehicles."
The $20,500 Hover is the first example. Production began at a new plant in August using a platform developed jointly with an Italian company Wang declined to name.
"The Hover is a very risky product for Great Wall," says Guotai Junan Securities analyst Zheng Dong. "Their competitive advantage is their price."
By 2008 Great Wall will also enter the family car segment with a small-engine multipurpose vehicle. Cars also are a possibility.
"MPVs and passenger cars can be made on the same platform, and developing a passenger car is also part of our plan in the next two to three years," says Wang.
No photos, please
State-ownership conjures up visions of long lunch breaks and short workdays. But you won't find that at Chery, the Wuhu government-controlled company that began making sedans in 1997.
Foreign visitors to the company's plant come away impressed by its motivated work force and its strong-willed leader.
If Wei is an extrovert, Chery's Yin is described as an introvert. The secretive former production line manager at Volkswagen's joint venture with First Auto Works in Changchun became Chery's chairman last year. But he has long been the driving force behind the company.
His predecessor, the local Communist Party secretary, resigned under criticism from the central government for ignoring an order for local party officials to stop running businesses.
Yin, who graduated from Hefei Industrial University in 1983 with an engineering degree, lives in Wuhu, a backwater in one of China's poorest provinces. He keeps a remarkably low profile - so much so that photographs of him are rare. He drives modest Chery cars rather than foreign luxury models, and hates to see articles about himself in the press.
Those who have met him say he is 40ish, tall, slim, wears glasses and off-the-rack Chinese suits. Suppliers who have dealt with Yin say he is straightforward and eager to get down to business. But they say he is easy to talk to and can handle himself in both English and German.
'Entrepreneur at heart'
"Yin is an entrepreneur at heart," says Michael Dunne. "He says that in order to be world-class competitive, Chinese companies have to invest in the proper equipment, train (their) people and adopt Japanese manufacturing processes."
Others see Yin as still very much a state-owned enterprise manager. He "is a typical engineer," says CSM's Zhang. "He likes to talk about numbers."
Yin's model expansion plans resemble state-owned enterprises in at least one way: Chery tends to branch out without doing much market research.
The company added a multipurpose vehicle to its four-product line this year. On the drawing board for 2005 are three mid-priced sedans, a luxury sedan and a small car for Europe. China watchers wonder if the company has the management resources and marketing know-how for such rapid growth.
"Chery is trying to sell everything to everybody," says a sales manager at a Tier 1 U.S. supplier.
Others think Chery has the best shot of all the Tigers.
"Chery has very fresh ideas for China," says John Jones, TRW Automotive's vice president of operations in Asia Pacific. "They are coming at the problem from a different approach, not the usual state-run company that just says, 'Let's do a joint venture to learn the technology.' "
But, like Geely, Chery has been accused of copying designs. GM Chairman Rick Wagoner said in May that his executives have noted a "certain similarity" between Chery's QQ subcompact and GM's Chevrolet Spark, which is made at SAIC-Wuling-GM Automobile Co.
Chery says it bought the design from Daewoo before General Motors acquired Daewoo Motor Co. in 2002. Either way, Yin sounds defiant and unworried about the charge.
"They'll sell their cars and I'll sell ours," he told the visiting managing director of a North American Tier 1 supplier.
Most western suppliers would like to see the Tigers survive.
"In the future we will see Chinese national car companies," says Daniel Collins, commercial director for Asia Pacific at Trico Products, a Rochester Hills, Mich., maker of wiper systems and electronics. "I'm constantly looking for the next Honda or Toyota and Hyundai of China. One or more of these companies will develop into a global brand or Chinese national champion."
Critics and admirers
The critics remain. After Li admitted paying short shrift to intellectual property rights, he was sharply criticized by Jean-Claude Germain, head of the European Chamber of Commerce's automotive working group in Beijing.
"We shouldn't do business like that," he said. "It is not fair to the people who invest in China."
But the Tigers have their admirers. Dunne is a fan of both Geely's Li Shufu and Chery's Yin.
"I'm impressed with both of them. One's a visionary, with guts and boldness. The other is a pragmatic engineer, with enough vision and gumption to go for the dream of building a car company right smack in the middle of one of China's poorest provinces."
Says Maxton: "As a rational western thinker, you would think these companies would be crushed. But in China that is unlikely to happen. They are changing the model, forcing the big companies to realize their technology is not as precious as they think it is.
"They have succeeded so far against the economic and legal odds," he says. "They have clear ambition, a huge amount of support for exports - they could be serious rivals at some point in the future."
Their fresh approach may be the ticket. As Li Shufu says: "Old-time thinking is our biggest barrier."
You may e-mail Alysha Webb at firstname.lastname@example.org