SINA Interview: China Adopts Euro III Emission Standards

Although lagging those in the United States, Western Europe and Japan, China has taken another step forward in implementing increasingly higher emission standards across the country. On July 1, 2008, China formally adopted Euro III standards for six-cylinder diesel engines used in trucks and busses, and is scheduled to apply the same standards to four-cylinder diesel engines on July 1, 2009.

China’s implementation of the higher emission standards indicates the seriousness with which the government is addressing the environmental issues created by the rapid industrialization of the country. In order to comply with Euro III emission standards, the system that feeds fuel into the combustion chamber of a diesel engine must switch from a purely mechanical system to one that is controlled electronically. Furthermore, to achieve a “cleaner burn,” the pressures under which the whole system must operate also increase significantly.

The introduction of electronics and the greater precision required to handle higher pressures significantly increases the technological complexity—and therefore, the cost—of the fuel system and all of the other components used to produce an engine. It’s estimated that a truck with Euro III technology may cost as much as 10 to 15 percent more than one that only meets Euro II standards. Facing record high oil prices and its first serious bout of inflation in 10 years, the country’s willingness to raise transportation costs even further by adopting Euro III represents a serious commitment to a cleaner environment.

As a major producer of many of the key components used in the production of a diesel engine in China—fuel systems, piston rings, camshafts, engine blocks and heads, compressors, starters and alternators—ASIMCO is at the cutting edge of these developments. Over the past three years, ASIMCO’s engineers have been working closely with our key customers and several leading universities to develop an Electronic Unit Pump (EUP) that enables our fuel system to meet Euro III requirements. Because it is self-developed, it meets China’s affordability standards and has been widely accepted in the marketplace, ASIMCO’s head of Global Sales and Marketing, Wilson Ni, and I were invited by SINA.com to discuss our new EUP product, as well as other developments in the commercial vehicle industry, with the SINA Auto editor and journalists from four leading Chinese automotive publications.

The interview is part of a Commercial Vehicle Interview Series that SINA Auto has been running and is available in Chinese on the SINA Finance and SINA Auto sites.

SINA Corporation (NASDAQ: SINA) is a leading online media company in China. With more than 280 million registered users worldwide and over 900 million daily page views, SINA is the most recognized Internet brand name in China and among Chinese communities globally. SINA Finance is a recognized financial media platform, providing coverage, spanning from business news to personal finance columns. SINA Finance also offers stock quotes from the U.S., Shanghai, Shenzhen, Hong Kong and Taiwan stock exchanges as well as breaking news from individually listed companies and market trends analysis. SINA Auto posts more than 1000 pieces of the latest automobile related news and service information to provide car buyers and automobile enthusiasts with the most current news on automobile pricings, reviews and featured guides.

With the permission of SINA, we have translated the interview in its entirety into English and have provided it below. In addition to offering some interesting insights into the inner workings of the Chinese commercial vehicle industry, the interview provides a first hand glimpse into many of the complexities of doing business in China. As suggested by the title, SINA picked up on the “self-development” theme. Developing products that meet the unique requirements of the China market, including those that revolve around the issue of affordability, is one of the keys to success in today’s China market.

“Self-development is the Trend For Future Growth”

Interview with Jack Perkowski, Founder of ASIMCO

http://www.Sina.com.cn?18:20, July 25, 2008 Sina Auto

Preface: Fifteen years ago, Jack Perkowski, the founder, chairman and CEO of ASIMCO Technologies Limited, established ASIMCO. Fifteen years later, Jack has developed ASIMCO into a major domestic auto components company with 17 factories and 12,000 employees in eight provinces and cities. How does Jack, a successful entrepreneur who has accomplished a great deal in this industry, look at the development of the domestic commercial vehicle components industry? Today, the Sina Auto – Commercial Vehicle Interview Series invited Jack to share his views on the industry with us, and in particular, the Euro III engine solution developed by ASIMCO.

Host: Today we are honored to invite Jack Perkowski, chairman of ASIMCO, and Wilson Ni, vice president of ASIMCO, to do an interview with us. Also present today are Zhao Sanming, chief journalist of China Industry News – Auto Weekly; Bai Jie from Commercial Vehicle Magazine; Ying Yuzhou, director of Commercial Vehicle and Parts of Auto World – Auto Business Report; and Zheng Man’ning, reporter of Commercial Vehicle News.

Welcome all of you to the Commercial Vehicle Interview Series hosted by SINA Auto. Today we will talk about the implementation of Euro III. We have made a series of interviews on the theme of engines and the implementation of Euro III. Today we are very happy to invite executives from ASIMCO, which is developing National III engine solutions, to share and discuss with us the technological solutions that ASIMCO are providing and their results.

First we’ll invite Jack to introduce himself and ASIMCO. Personally speaking, I have attended Jack’s launch for his new book – “Managing the Dragon, How I’m Building a Billion-dollar Business in China,” and I have read the book, so I am somewhat acquainted with Jack and ASIMCO. But I do hope you can introduce yourself to our cyber friends.

Jack: First of all, let me say that it’s our pleasure to be invited to share our views and suggestions concerning Euro III with SINA and all of its cyber friends.
Building a components company in the Chinese auto industry is actually a second career for me, my first being on Wall Street, where I worked for over 20 years. In 1990, I decided to start a totally different business, and decided to do it in Asia, which I believed would be one of the fastest-growing areas in the world well into the 21 century. I moved to Hong Kong in 1991, conducted some preliminary investigations there, but quickly concluded that China would continue to prosper and drive growth throughout the region. I made my first trip to China in 1992 and was impressed with the sheer size of the country and the significant economic development that had already occurred. As a result, I decided to take root and focus on China. Considering the economic scale and the transportation conditions in the country, I thought that China’s auto industry represented a particularly promising sector.

After further investigation, I found that few of the leading global players had focused their attention on the auto components industry in China, a segment of the industry that I believed offered great potential and an opportunity for future growth. I made my on-site survey in 1993, visiting over 100 plants in more than 40 cities throughout China, and then returned to Wall Street to raise funds to start the company. In February 1994, I established ASIMCO Technologies Limited.

Fifteen years later, ASIMCO has become one of the best-known and largest auto components companies in China. Currently, ASIMCO has 17 plants in eight provinces and cities in China, and approximately12,000 employees. The most important thing I have learned in China is the need to develop a strong, local management team. In the Best Employers in China Program organized by Hewitt Associates, ASIMCO ranked fifth in 2001, and third in 2005. I am very proud of what we have accomplished in terms of localizing our management and developing management systems in China.

I am an American, so most people think of ASIMCO as an American company. However, I have lived and worked in China for 15 years now and I think of myself as a Beijinger. It should be noted that 85 percent of ASIMCO sales are made to domestic customers—China is our main market and we consider ASIMCO to be a Chinese company.

Depending on the make and model, up to 25 percent of the components that go into a diesel engine made in China today may come from our factories. ASIMCO’s product lines include piston rings, engine blocks and heads, camshafts, pumps, injectors and nozzles for the fuel system, air compressors, starters, generators, and engine mounts. Among our most important customers are the most famous engine OEMs in China.

Self Development is the Trend for Future Growth

Question: Is ASIMCO Nanyue’s EUP technology an EUP combination pump? Furthermore, is it an independently developed technology or a technology that ASIMCO obtained from other companies?

Wilson Ni: First of all, we can confirm that it is an electronically-controlled combination unit pump; secondly, it is independently developed by us. From Euro II, Euro III and above, all of our technologies are developed by us, together with our key customers, including Yuchai, Dalian Diesel and Weichai. We also have an institutional partner: Shanghai Jiaotong University.

Jack: Self-development of new products and technologies will become the future development trend in China. Products that are designed in more developed countries tend to be too expensive for the China market. Apart from meeting the national standards for emissions and the environment, the most important thing in China is to produce affordable products for domestic consumers. Technologies introduced from other countries may not be suitable in China for this reason.

Question: I have noted that in the engine product bulletins of the National Environmental Protection Bureau, many diesel engine factories have adopted the EUP produced by ASIMCO Nanyue. Although presented in the bulletins, what are the market conditions for these products? Have you reached mass production yet?

Jack: As a matter of fact, we started production of the EUP product last year, although in very small volumes. During the first half of this year, however, we have supplied 4000 to 5000 sets of Euro III products, and our new factory is under construction and will be ready soon. After the change to Euro III on July 1, we have begun to mass produce EUP in our existing facilities. The new plant which we are building specifically for Euro III unit pumps will be put into use in August. Our production scale and output will be significantly increased when it comes on stream.

After-Sales Service is Important

Question: Chengdu WIT is also manufacturing EUP combination pumps, and they declared that they have sold 5,000 sets, and expect to sell 100,000 sets by the year end. Compared to them, what’s your advantage?

Jack: There are many differences between ASIMCO and Chengdu WIT. As far as the product itself is concerned, there may not be a remarkable difference. However, ASIMCO Nanyue has been producing fuel pumps since the 1970s, and the experience and manufacturing practices that have been established over so many years provide a solid foundation for our EUP production. This includes not only manufacturing experience, but also the data that has been gathered and the operating experience of the pumps in the field. Chengdu WIT, on the other hand, started its R&D only in recent years and has little experience in mass production.

The process of introducing a new product must progress from design to testing in labs and then to mass production before it can finally go to market. After the design and lab testing phase is completed, we can say that the product is feasible, but that is only the beginning and there is still a long way to go. A product that has been proven to be feasible through lab tests is totally different from a product that has been tested in practice for many years. After the R&D is completed, taking the next step to mass production is not an easy one and should not be underestimated.

Wilson Ni is quick to point out the differences in customer issues. Apart from having the ability of production, testing, and economies of scale, we started the pump business in 1970s, and have established close relationships with OEM customers. ASIMCO has more advantages than Chengdu WIT in terms of cooperation with customers in product R&D, manufacture and application of new products.

Benefiting from several decades of experience producing pumps, we have developed a comprehensive after-sales service network nationwide, extending to all provinces of China. I think after-sales service is a very important factor, and because of ASIMCO’s long experience in this business, we are able to service our products and customers as the product goes into use.

ASIMCO is Focused on the Development of Both Common Rail and EUP

Question: We all know that there are several technologies for Euro III; for example, the already sophisticated foreign technologies of common rail, EUP and EGR, and several electronically-controlled pump solutions in the domestic market. My question is, now ASIMCO is focusing on EUP, but as to the sustainable development of EURO III, IV and above, do you think EUP is one of the best technologies? Or do you have any evaluations of other technologies?

Jack: ASIMCO is seeking a long-term development path on this issue. Beginning with Euro II, China’s level of emissions until July 1, our goal is to achieve Euro III, IV and V emission standards with our products. We believe it requires far-reaching solutions, and EGR, for example, is only a solution for the short term. Common rail and EUP are important sustainable technologies for ASIMCO. So far, there are both disadvantages and advantages to the two technologies, but we think they are the must-have technologies that require our long-term focus.

Wilson Ni: There has been a great debate around whether EUP could meet Euro V standards. I learned from the experience of European truck companies that the EUP solution can in fact support Euro III, IV, and even V. It’s a long-term solution for us.

Winning the Market and Customers by Lowering Price is Not a Good Strategy

Question: Now, ASIMCO Nanyue has launched its product using electronic unit pump technology. Did the announcement of the EGR product developed by Sinotruck cause you to change your immediate or future plans for the EUP product?

Jack: I look at the issue of competing technologies from this perspective: China is a very large market as far as commercial vehicle engines are concerned. There are more than 2 million four-cylinder and six-cylinder diesel engines produced every year for the commercial vehicle market. This does not include, of course, the millions of small diesel engines produced for other applications. Being launched at this time, EGR has certain price advantages, and may achieve strong sales for this reason. From a long-term view of development, however, EGR will not have any impact on the market positioning and future development planning of ASIMCO. We view it as only a short-term solution that may win market share with a low price. It is not a long-term product that can meet environmental standards beyond Euro III, so from the point of view of long-term competition, I do not believe that EGR will pose a special threat for our EUP product.

As I mentioned previously, the results of lab research and the results generated by actual practices are different. You may obtain favorable lab data through a long testing period, but that’s totally different from the results generated by the practices on the road. EGR meets the government’s requirements in the lab, but can it meet those requirements in the field? Which products and technologies are more suitable for the future market and the requirements of our end-users? That can only be determined after the products have been put into the field. Then the customers will decide.

Question: As far as I know, your price has no competitive advantages compared to EGR. Chinese consumers are more price-sensitive than those in other areas. Will you consider getting market share in the short-term through, for example, lowering prices?

Jack: As you have said, consumers in China are very sensitive about price. Price is an important factor that gets the attention of all customers and is an important factor for determining who will be the market leader. There are various ways to lower costs and prices once mass production has begun, but the key is whether or not you can provide quality products to customers at an affordable price. If the customers are satisfied with the performance of your products, orders will increase and costs will go down as volume increases. To try and win the market and customers by simply lowering price is only a short-sighted and short-term measure.

Question: In terms of pricing, emerging companies like Chengdu WIT may pose a long-term competitive threat to you. Have you any plans to deal with the problem?
Wilson Ni: As to the difference between the price of unit pumps of WIT and ASIMCO, we should note that the price positioning of a product is partly determined by manufacturing cost and raw material cost, and partly determined by its strategic value. We can see (picture), this is the ASIMCO pump, and this is the WIT pump. The two products are almost the same, including production techniques and other aspects. The price is partly determined by its cost and partly determined by the market demand. We all know there is a product curve for new products and products traded between different companies. For example between Bosch and Weichai, and Bosch and Yuchai, the prices are different for every product, and this difference is determined by the strategic cooperative relationship. As a result, I think cost will not make a big difference as far as product price is concerned, but the customer, market and strategy might generate remarkable influences in pricing. ASIMCO products also may have different in prices depending upon the individual circumstances of the customer.

Question: You’re somewhat similar in your customers or partners, so I think you would gain more market share without the competition of WIT. I think you should have a solution in place to deal with the unexpected rival.

Jack: We are not so concerned about Bosch’s price for common-rail, or the price of Chengdu WIT, or how EGR is doing. We are focusing on our customers’ requirements and our close cooperation with them. The customers who order our products will produce engines to meet the demands of their customers. Their customers, in turn, are prepared to pay a certain price for their engines. Our customers then discuss with us what they need in terms of price. Within the limits of the price they need to be competitive, our customers then determine the order volumes they can give to us and the pricing they need. So the adjustment of our pricing is based on the close cooperation with our customers; on this basis we will help them fulfill their commitment to their customers, and to meeting the functional requirements of the products.

As I know well, China is a price-sensitive market, and the market attaches high priority to low price. Apart from purely price considerations, however, our customers also consider many other factors. For example, the relationship between us and the customer; the quality stability of our products, the after-sale services provided by us; our work with them on new products etc. These are also important factors that our customers take into consideration. Of course, price is an important consideration, but it’s certainly not the only one. Our customers are now considering producing Euro III and Euro IV engines in the future—they are depending on us to help them to develop those engines affordably.

Apart from offering competitive prices, we can satisfy our customers in other aspects of our cooperation by providing them with a broad line of components, and this is one of ASIMCO’s most important advantages. One of our customers once told us: “ASIMCO supplies my fuel injection system; you also supply other important components such as my piston rings, camshafts and air compressors – you might say that ASIMCO controls our engine!” So price is an important factor, but our overall relationship with the customer is equally important.

Wilson Ni: The pricing is also related to the warranty cost. The miles and time specified in different warranty requirements will directly influence the price. For example, you and the customer have determined 300,000km as a guaranteed standard, and the price is fixed accordingly; if you want to change the guarantee to 450,000km, the price will also be changed. We negotiate prices directly with customers, this is our pricing principle. In ASIMCO, we insist in our efforts at lean manufacturing to continually lowering our costs and expenditures. We will refer to the prices of other venders, but when pricing we will communicate with the customers, and fix the price according to different business terms, with cost among the pricing factors of course.

Offering A Complete Solution is Our Biggest Advantage

Question: ASIMCO developed many products for powertrains, including pumps, nozzles, piston rings and camshafts. I’m wondering in what way you can give full play to the combined advantages of these products.

Jack: Our customers all hope to produce engines of greater power and higher performance with environmental protection and energy-saving features. We are now engaged in Euro III applications; later we will produce Euro IV products, and every upgrade will involve a great number of engine components. You know we have many products, and one of our most important advantages is our ability to offer a complete solution to our customers. As to the engine, we can help our customers to make all of the key components involved meet Euro III or Euro IV standards, enabling them to find the best, most cost effective solution.

Wilson Ni: ASIMCO is now talking about a very important project with a key domestic customer which is developing a new engine. As a components supplier, ASIMCO boasts more know-how in the components industry than the OEM itself, which has more advantages in the production of engines. As a result, ASIMCO has been invited by this particular customer to participate in the design of the engine. In this case, ASIMCO is no longer a pure provider of a single product; we will offer a full series of products, like the piston ring, EUP and nozzle that we have mentioned above. OEMs need the best parts manufacturers to cooperate with them in engine design. ASIMCO has integrated all of the advantages to provide the first-class products. This also reflects the superiority of ASIMCO.

Question: Jack told us that ASIMCO’s sales to the domestic market account for 85 percent of total sales. What’s the proportion in your international and domestic roadmap?

Jack: Our export strategy has changed somewhat over the years. Our export business started in 1997, when we were eagerly looking forward to entering the international market so that we could prove to ourselves and others that we could supply products to the best of the global players. If we could provide products that met the requirements of the world’s most demanding customers, we believed that all of the markets in the world would be open to us. Also, we believed that developing an export business would enable us to improve our overall production capability.

After more than 10 years of export experience, the production, manufacturing and management capability of ASIMCO has reached international levels. But today, the China market is the fastest growing market in the global auto industry, and I believe that all of you are familiar with the current conditions in the U.S. auto market. Currently, exports account for 15 percent of our sales, but we do not focus on this number, or have any plans to change it dramatically. Given the current growth in the China market, we believe that this ratio is about right. With our increased sales to the China market, our export sales will continue to grow, but it is unlikely that the percentage of export sales to our total sales will change. We believe that we can become a great and large company if we can continue to provide good quality products and service to the Chinese market.

Because of what is happening in China, the center of gravity in the global auto industry is moving to Asia and China. For example, I looked at Dongfeng Motors and General Motors, and compared the stock market values of these two companies. The stock market value of Dongfeng Motors actually exceeds that of GM by about $2 billion. Interestingly, the sales of the two companies are the same: 180 billion. However, GM’s sales are in dollars, but Dongfeng’s sales are in RMB! From the stock market, we can better understand this shift in focus from the American auto industry to the industry in China. Quite simply, the global auto industry is moving to Asia. Because of its size and growth potential, customers, investors and other business groups are shifting their attention away from the U.S. market to the one in China.

Building a Billion-Dollar Business

Question: The total annual sales of ASIMCO is about $500 million. According to domestic statistics, ASIMCO is ranked among higher middle position of the top 100 components companies. It’s a large number indeed; however, as an international company, it’s not big enough to compete with large multinationals. I want to ask this question: What industry and what direction will you take in your future expansion? There are two key factors: one is the product direction, the other is the expansion mode. Will you choose the acquisition mode or independent factory establishment mode?

Jack: Our Five-Year Plan shows that we can build ASIMCO into a $1 billion business by 2012, without making any acquisitions. We have established eight new factories in the last two or three years, and we will realize the sales plan of these factories. We will now focus on the R&D and manufacture of new products in these new sites as well as in our existing facilities. After that, we will not miss any acquisition opportunity, but any acquisition must bring us new technologies and new products.

More Confident of Exporting One Million Vehicles

Question: There are two key numbers in the Chinese auto industry in 2008: the industry is expected to produce 10 million vehicles, and the vehicles exported by China may reach 1 million. In the first half of the year, our auto output has exceeded half of the goal, but many people believe there would be lots of disturbing factors concerning the auto production in the second half of the year. Do you think the goal of 10 million cars could be fulfilled?

Jack: Good question. The price of oil has increased dramatically in the global markets, and China recently increased prices at the pump for both gasoline and diesel by about 20 percent. For this and other reasons, I understand that there are now sizeable inventories of passenger cars in China. At the beginning of the year I was rather confident and believed that China would produce 10 million cars. I wrote so in my blog. But now, I question whether this will happen.

I am more confident about the one million vehicle export number. By May, China had exported over 300,000 vehicles, and I believe that China has a tremendous opportunity to export all types of vehicles. The reason I say this is because the most developed economies in the world are the United States, Japan and the Western European countries, but these parts of the world only account for about 800 million or so of the 6 billion people who live on the planet Earth. The remaining 5.2 billion people live in lesser developed countries that have road conditions and an environment more similar to that in China, as well as a cost perspective that is also more similar to the one in China. Prior to the development of China’s auto industry, the only places where the 5.2 billion segment of the world’s population could buy trucks, buses and passenger cars were from companies in the U.S. China’s auto, truck and bus producers now provide more suitable and cheaper alternatives. As China implements higher emission standards like Euro III and beyond, this will greatly expand the potential market for vehicles made in China. As a result, I’m more confident about the one million exports than the 10 million output prediction for this year.

Assemblers Must Take the Demands of Domestic Customers Into Consideration

Question: If the goal of 10 million outputs is fulfilled, China will be listed as one of the “three giants” of the global auto industry. The U.S. produces about 11 million vehicles and sells over 16 million; China will produce 10 million but export only 1 million; domestic players of Japan produce over 11 million but export more than 5 million. Although a manufacturing giant, China is trying to transform its role for further development. We all know that you have conducted surveys of the domestic and international auto markets. From your view as an investment banker, what efforts must be taken for China to transform from a big manufacturer to a powerful manufacturer?

Jack: I’m not sure about the number of vehicles produced in Japan, but certainly, production of vehicles by Japanese companies is very big when you take into account their production in countries all over the world.

In order for China to transform from a big to a powerful auto manufacturer, Chinese assemblers will need to develop products for the China market. Currently, many cars built in China have been designed in overseas markets, then imported into China or produced in China after the design was completed. But today is another story—the market is changing. The China market has become so large that it now has its own requirements, including energy-saving and environmental protection features, as well as the affordable price factor. These three features—fuel efficiency, environmental friendliness and affordability—may not be quite as important to overseas vehicle assemblers who are designing cars for consumers in more affluent, more developed economies. Taking the U.S. market as an example: U.S. consumers prefer comfortable cars with large fuel consumption. Considering the size and the three features of the Chinese market, vehicle assemblers operating in China must meet these three specific demands. If they can meet the requirements of Chinese customers, Chinese automakers will increase their presence in the international market. In the next five to 10 years, more and more autos made in China will be sold around the world and will have a greater impact on the global market.

Wilson Ni: In 1996 and 1997, Jack encouraged operating companies of ASIMCO to develop the export business, for he hoped these companies to participate in international competition. The only way to enhance our level is to increase our presence on the global market. Now up to 15 percent of the $500 million output of ASIMCO goes to export. There is not any auto giant who can self-supply its market; they all encourage export, including the U.S, Europe and Japan. Even if China achieved the goal of 10 million outputs and 1 million exports, the export ratio is only 10 percent. So to complete the transformation from big to great, I think we should encourage and support export business in terms of national policy and industry policy. Our competitive ability will be enhanced with the increase of exports.

Host: Due to the time limit, we have to end our discussion today. Thanks a lot to Jack, Wilson Ni and the participating journalists.

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