Sinotruk: A New Model for Cooperation

Ten years ago, no one would have even considered buying shares in China Heavy Duty Truck. The company was losing money, making small volumes of low technology trucks with know-how from the 1950’s for a China heavy-duty market that had not quite yet developed. Based in Jinan in Shandong Province, China Heavy Duty Truck was part of a three-plant group that had been cobbled together in the early 1980s to form the China Heavy Duty Truck Group.

If you were a major international truck company that wanted a piece of a promising China market, you wouldn’t dream of buying into a state-owned factory like that, replete with its army of redundant employees and a host of other problems. On the other hand, you might consider a joint venture with the company to bring your products to China. In that way, you could benefit from the company’s local presence and the China market, and at the same time, set up a greenfield plant where you could hire just the right amount of workers, establish clean production lines uncluttered with excess inventory, and bring in scores of experts from the home office to implement the latest management techniques. By restricting the technology to use in China in the joint venture agreement, you could guard against competition in your home markets from your China venture.

That’s exactly what Volvo did. In 2004, the Swedish truck maker established a joint venture with China Heavy Duty Truck to assemble Volvo trucks in China. Everyone expected Chinese customers to wait in line to buy the high-technology products produced by the new company. Wasn’t China waiting for the latest in truck technology?

As it turns out, there was just one flaw in the reasoning: price. A senior executive at China Heavy Duty Truck once told me matter-of-factly, “We make Volvo trucks in China, they cost 800,000 yuan. My trucks sell for 200,000 yuan. Which one would you buy?” The high price points of trucks manufactured by foreign-invested companies in China is the reason why 98 percent of the trucks used in China are manufactured by purely local companies. While the market may want the additional features provided by the foreign brands, it simply can’t afford the high price tag. It’s no wonder that the Volvo joint venture is now being dissolved.

In the meantime, the three plants that formed the former China Heavy Duty Truck Group were split into three separate companies: China Heavy Duty Truck with its plant in Jinan; Shaanxi Truck with its plant in Xi’an; and Chongqing Truck with its plant in that city. Over the past five years, business has boomed at all three due to skyrocketing demand in China for large trucks. As China completed building its nationwide highway system, longer, cross-country hauls became possible, and everyone wanted heavy duty trucks that could carry bigger loads.

Moreover, as each of the three companies improved their quality and technology and grew in size, they began to find markets outside China. In 2008, over 600,000 vehicles were exported from China. Approximately one-half were trucks, many of the heavy-duty variety. Apparently, freight companies in countries like Turkey, Russia and the Ukraine, with cost perspectives closer to that of China’s than to those in more developed countries, were coming to the same conclusion as their Chinese counterparts.

China Heavy Duty Truck began to transform itself in 2001. With new management at the helm, it strengthened its technology, registered offshore, changed its name to Sinotruk (Hong Kong) Ltd., listed its shares in Hong Kong, and in the process, became China’s largest truck manufacturer by sales volume. In addition, Sinotruk now derives 20 percent of its sales outside China, selling its vehicles to customers in Africa, the Middle East, Southeast Asia and the former Soviet Union. Armed with a $1.2 billion war chest from its Hong Kong listing in 2007, Sinotruk is valued at over $3 billion. Quite a journey for the nearly bankrupt state-owned company of 10 years ago!

MAN, the large German truck maker, apparently sees the handwriting on the wall –future competition in its home markets from low-cost trucks manufactured in China — and has concluded that, “if you can’t beat ‘em, join ‘em.” Last week, it announced that it had agreed to buy a 25 percent equity interest in Sinotruk for 560 million Euros ($796 million). (Daimler tried a similar approach when it attempted to buy a minority equity stake in Beiqi Foton Motor Co., another of China’s major truck producers, in 2007. Unfortunately for Daimler, that deal was turned down by the government and the company had to settle instead for a 50-50 joint venture with Foton to manufacture and sell low-cost Chinese-made trucks to the international markets.)

The deal is a wise defensive move for MAN, and a great offensive move for Sinotruk. With competition from China all but inevitable, MAN at least guarantees itself a share of the profits, as well as a lower-cost truck from China that it can sell alongside its more expensive models. For Sinotruk, the company gets a path to the higher technology required of heavy-duty trucks in the international markets, the same technology that China will ultimately require as emissions standards are raised. As part of the deal, Sinotruk will pay 85 million Euros for an exclusive transfer of technology that will enable it to meet Euro V emission standards. Currently, trucks made by Sinotruk are only Euro III compliant.

In one bold stroke, Sinotruk not only ensured its leadership position in China, but also made itself a formidable international competitor. By having MAN as a minority shareholder and technology provider, not a joint venture partner, Sinotruk is free to run its factories the way it sees fit, ensuring that new technology is absorbed in a way that is affordable for the China market. (Keeping the higher cost perspective of its foreign partner from seeping into its joint venture is a battle that Foton will need to fight.) By combining its global sales force with that of MAN, Sinotruk gets to leverage MAN’s proven sales, distribution and service network around the world.

The end result: A company that can produce the world’s highest-technology trucks at the world’s most competitive cost. That’s an unbeatable combination and just one more illustration of the way in which the center of gravity for the global vehicle industry is rapidly shifting to China.

Prediction: Within 10 years, Sinotruk will acquire its new shareholder.

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