After finishing high school at 17, Li Changlu began working in the truck business, first as a mechanic, then a driver and later as a transport supervisor. Today, 35-year-old Li owns a small, private transport company called DaXing.
DaXing, on the outskirts of Beijing, often hauls gravel to construction sites in the city. Li's truck fleet includes nine heavy trucks purchased from First Auto Works, China's top truckmaker. When it came to selecting his fleet, the choice was easy: Price was the top factor. First Auto Works delivers a sturdy hauler with a 9-ton payload for just $20,000, even if it is not as well-built as foreign trucks. 'I used to buy (heavy trucks) for $50,000,' Li says. 'But that kind of price is too expensive now.'
In China, sales of heavy trucks are soaring as the government builds highways, expands ports and privatizes state-owned businesses. In 2000, heavy-truck sales totaled a record 75,000 units, up 81 percent from 1999. Foreign truckmakers such as Volvo, Scania, Hino, Nissan Diesel and Mercedes are hungry for a share of the fast-growing market. But for now, Chinese trucks dominate the field. China's big three heavy truckmakers - First Auto Works, Dongfeng Motors and China National Heavy Truck Corp. - account for 98 percent of sales. Among these heavyweights, First Auto Works is the clear leader with 64 percent of the market.
Trucks produced by these companies are bare-bones workhorses, stripped of features such as comfortable cab space, antilock brakes and low-emission engines found in the West. China classifies these rigs, all priced around $20,000, as heavy trucks.
It is a startling contrast to China's market for passenger cars. Domestic carmakers are unable to compete against foreign automakers such as Volkswagen, General Motors, Toyota or Citroen. To remain competitive in the car market, Chinese automakers have formed joint ventures with foreign rivals.
Price, price, price
What is the secret to the Chinese truckmakers' success? Price. A typical Chinese buyer pays cash for his heavy truck. He wants to make a return on his investment within 18 to 24 months. At a construction site outside Beijing, Li talks about the benefits of the cheaper trucks. 'I can make my money back quickly,' he says.
While Li and other Chinese entrepreneurs may recognize that Mercedes and Hino trucks offer much better quality, the sticker prices of foreign brands are simply out of reach. Prices of imported tractor-trailers range from $80,000 to $100,000. That is four times the price of the 9-ton trucks offered by First Auto Works and Dongfeng Motors.
Moreover, heavy trucks generally are used for short hauls in China. If they break down, it is easier for the owner to make repairs. Overall transport efficiency, a key measure for sophisticated transport companies, comes second to finding a quick way to make money. 'Chinese transporters run only about 80,000 kilometers a year and they stay within one province,' says Jan Van Setten, general manager of Volvo Truck operations in China. 'In Europe, the standard is at least 150,000 kilometers.'
Two factors are driving exceptionally strong demand for heavy trucks. First, Beijing is investing heavily in infrastructure, especially new-road construction. In 1995, China had only 2,000 kilometers of superhighways. This year, the government has authorized construction of 10,000 kilometers of new highways linking key ports with inland cities. Road construction boosts demand for gravel haulers. Once completed, the roads also enable heavy trucks to haul goods to distant markets.
Second, China is changing the way it collects money from truckers. In the past, fees were levied based on the vehicles' truck classification. The heavier the truck, the higher the fee.
Starting this month, Beijing will abandon the fee in favor of fuel taxes. This reform has prompted owners of lighter trucks to switch to heavy trucks. Evidence of this switch is clear: Medium-truck sales in 2000 dropped an estimated 20,000 units.
According to Chinese standards, medium trucks have 5- to 8-ton payloads, while heavy trucks start at 9-ton payloads.
But not all Chinese truckmakers are prospering. China National Heavy Truck has struggled to sell its 15-ton trucks, which it makes under license from Steyr. Unlike the fast-growing market for 9-ton trucks, demand for the bigger trucks has flattened at 10,000 units since 1997.
Observers attribute China National's poor performance to its obsolete product (the Steyr truck was designed in the early 1980s) and to poor management. The state enterprise is officially bankrupt. More significantly, China National makes a product for which its core customers - state-owned enterprises and the government - are slowly dwindling.
The growth of private enterprises may give foreign truckmakers an opening. Replacing stodgy state enterprises is a new class of sophisticated transport companies that value reliability, efficiency and quality. Some of these companies are Chinese, and others are foreign-owned. 'We are being approached by a lot of Western transport companies that have operations in China because they are not happy with the fuel consumption of the Chinese trucks,' says Volvo's Van Setten. 'They make about three trips in a Chinese truck when they can make up to eight in ours.'
Demand for high-quality foreign-made heavy trucks this year is up 70 percent, albeit from a much smaller base. These heavy-truck buyers are mainly foreign transport companies or joint ventures. Volvo Truck, for one, reports a tripling of sales in 2000 to 400 units. Norinco, an industrial organization affiliated with the Chinese military, will produce and sell 560 heavy trucks under license from Mercedes-Benz.
While Chinese truckmakers enjoy a stranglehold on cheap heavy trucks, foreign manufacturers are aiming their imports at the high-priced end of the market. Will foreign brands ever be price-competitive enough to compete with the domestic makers? It is possible. 'But not without some form of cooperation with the Chinese,' says Peter Hartzell, general manager of East Asia for Cummins Engine Co., which has operated in China since the early 1980s.
To move a step closer to high-volume segments, Volvo, Mercedes and Nissan Diesel each have pursued cooperation with China's top truckmakers. Nissan Diesel formed a joint venture with Dongfeng Motors in 1996 to produce 12- to 15-ton heavy trucks. The venture has a capacity to build 5,000 trucks a year. But sales have hovered below 400 units annually.
'The concept and the product are right. But good ideas get into trouble when they meet with (Dongfeng Motors') state enterprise mentality,' says the director of one supplier to the joint venture.
Volvo is involved in talks with China National to jointly build a modestly priced truck. Those negotiations, initiated in 1997, are bogged down by China National's financial mess. The company, which formerly was owned by the central government, has transferred ownership and management to the city of Jinan. The vice mayor has been appointed chief executive. Neither the old owner nor the new is willing to accept responsibility for the company's debts, which are reported to total tens of millions of dollars.
Meanwhile, Mercedes-Benz has spent the past year negotiating with First Auto Works to form a joint venture to produce heavy trucks. The planned venture nearly collapsed in November when First Auto Works accused the German company of 'too much arrogance.' According to sources inside First Auto Works, company Chairman Zhu Yanfeng has demanded that future talks be held directly with a member of DaimlerChrysler's board of management in Germany rather than through the company's executives in Beijing.
Getting access to the market for high-volume trucks will be a big challenge for foreign companies. Existing joint ventures and licensing agreements have achieved disappointingly small volumes. And the global heavy-truck leaders, Volvo and Mercedes, patiently pursue agreements despite misgivings and financial chaos.
For now, foreign makers do what they can. Volvo reports strong sales of its imported FL6 truck to American and European companies, such as McDonald's and Ericsson, which do business in China. The FL6, which retails for 350,000 yuan, or $42,000, costs nearly twice as much as Chinese trucks in that segment. Hino and Mitsubishi sell small numbers of trucks and tractor-trailers to companies operating in China's major ports.
Truck transport to and from Chinese ports is beginning to look attractive to Mercedes, Hino and Volvo. To carry the containers used on oceangoing transport vessels, truckers need world-class tractor-trailers. Construction of additional container ports along China's coastline will pave the way for even more imports and exports. By 2005, superhighways connecting these ports to inland cities will double to 20,000 kilometers. By then, heavy-truck sales will approach 200,000 units per year and demand for foreign-built trucks will climb accordingly. China's accession to the World Trade Organization will boost sales as financing becomes more widely available. When that happens, look for 'an even more impressive boom' in China's heavy-truck market, says Hartzell of Cummins.
Still unknown is which companies will capture that growth. If Japan and Korea are any indicators, look for the Chinese to wear down the foreign competition through deep price discounts in the volume segments, then gradually move up in quality.
You can e-mail writer Michael J. Dunne at [email protected]