In China, a “sub-brand” is a brand under a foreign-Chinese joint venture. Examples: Venucia under Dongfeng-Nissan, or Everus under Guangzhou-Honda. (Bertel insists that “sub-brand” is a misnomer, but TIC, This Is China, and he better get used to it.)
The Chinese central government ordered the joint ventures to start the sub-brands. “Order” is maybe too harsh a word, let’s call it strong recommendation. Resistance by the foreign partner is futile. If the foreign partner would ignore the wishes of the Chinese government, life would suddenly become very difficult. Applications for new factories, new cars, new permits, new visa for employees, etc etc, would suddenly be delayed or outright refused.
Why does the Chinese government want the sub-brands? Two words: intellectual property (IP). In a joint venture, the IP stays with the foreign partner. The Chinese partner sure can learn from the foreign partner’s knowledge, but cannot use the IP without permission from the foreign partner. If the Chinese partner wants to use platforms or engines for their own cars, like FAW for the Besturn B90 based on the Mazda 6, it has to pay the foreign partner.
This greatly annoys the central Chinese government who wants its mostly state-owned companies to have their own IP so they can make cars that can compete on the world market. The whole joint venture rules were created by the central Chinese government to do just that: learn from the foreigners >> built your own cars >> compete with the foreigners.
But, thanks to IP-regulations and the fact that Chinese state-owned companies have been terribly slow to learn anything, the scheme did not work out. The central Chinese government had to force things around and that is were the sub-brand come into play.
The sub-brand is legally considered to be 100% Chinese. That means all the IP that is pumped into the sub-brand is 100% Chinese as well. It is now owned by the joint venture. Also, there are no more license fees for the brand and the model. The joint-venture plan was about learning and didn’t work, the sub-brand plan is basically a legalized way of taking – at least half.
The foreign makers however are not stupid. They don’t want to annoy the Chinese government, and they also don’t want to hand over their newest IP’s. But they don’t mind to hand over some old IP is that is good enough to make everybody happy.
It seems good enough, for now. Let’s have a look. The Dongfeng-Nissan Venucia D60 is an old Nissan Tiida. Guangzhou-Honda Everus S1 is an old Honda City. The upcoming FAW-Volkswagen Kaili is based on the New Bora which is noting more than an ancient old Bora in new clothes. The upcoming Dongfeng-Honda Ciimo is based on the old Honda Civic. The yet nameless sub-brand from Chang’an-Mazda will use an old Mazda 3. The planned and yet nameless sub-brand from the Chang’an-Ford joint venture will use the old Ford Focus as its first car. The only exception might be Shouwang from Beijing-Hyundai which came up with a fancy concept car at the Guangzhou Auto Show. It is however very unlikely that their real car will be anything but an old Elantra.
So what do we have?
A bunch of old cars that have to be sold under brand-new brand-names. Who will buy? Nobody will, especially because the sub-brand cars are not exactly cheap. The only one on the market right now is the Everus S1. It costs 69.800 yuan, a new Fit costs only 91.300 yuan. It will be mostly the same story with the other sub-brands. Furthermore, Chinese car buyers don’t know the brands, there aren’t many dealers yet, people are unsure about service and in general unsure how long all those new brands will stay on the market. All taken together: hopeless.
The joint ventures will make no money with the sub-brands. Fortunately, their direct investments were not very high, basically not much more than designing a new logo, the cars and factories were already there. Still, the whole exercise takes a lot of time, resources and factory space that all could have been used to make new cars that do sell.
The Chinese government will only get some old IP out of it. Sure, better than nothing, but hardly good enough to ‘compete in the world market’. For now and the near future, the sub-brand scheme seems doomed;.
Things depend on the next step of the central Chinese government. Will they leave it here and give up? In that case, the sub-brands will die quickly. Or, will they give it another shot and force the foreign partners again, this time to inject newer IP in the sub-brands? In that case, it can get very messy because it seems sure the foreign partners think they have gone far enough already.
To be continued …
Dutchman Tycho de Feyter runs Carnewschina, a blog about cars in China, from Beijing, China. He also collects die-cast models of Chinese cars.
Thank you for explaining what this sub-brand policy is all about. BTW, IP is just a starting point, even if they get the latest and greatest IP, it will be obsolete before long. Only lasted until the next all new model debuted. Many other car makers started with this obsolete IP things, Hyundai, Nissan, etc. But they learned from it, and was then able to create IP of their own. If the Chinese can only copy and not eventually create IP themselves, they will never be an auto-manufacturing country. I doubt this is the case, however. So yes, IP of an older model is still (much) better than nothing, so long as it enables the Chinese to learn.
Plus the automotive industry has reached the zenith of its development, there’s really no “great leap forward” anymore today. Each new model was just an incremental upgrade over the old one. The Tiida and Fit is great cars for its time, I’m sure there is still a lot of the old Fit and Tiida in the current model, it’s not as if Honda is giving them the IP of a CCVC Civic or Nissan a Datsun 510. It’s not like Hindustan Motors’ IP of Morris Oxford…
From my humble experience I can say that even with the sub brands, the Chinese government won’t fully achieve their objective. Yet.
Granted, the sub-brand will be the owner of the design, but many parts of the donor platform can still be (and I would bet into that) subject to licensing.
It’s a step toward what they want, however.
The contracts and paperwork behind those new brands would make a very interesting reading.
Another interesting exercise would be to see what happens when they set up a CKD operation in another country and start localizing parts.
You are right. When you open the hood of the Baojun for instance, you see a lot of GM stickers.
Given that most of the components and their IP comes from suppliers, I wonder how the chn govt is going to get the suppliers to play ball if the suppliers themselves are not providing the parts.
Difference between 90k and 60k cited above is still 30%.
Could viewing subs thru lense of job creation and cheaper proven cars for the masses and driving the small players to consolidate be the answer?
One area where sub-brands seem to be getting lots foreign technology is in on the EV. There is a rush by foreign automakers to make EVs with their sub-brands: Toyota-FAW, VW-FAW, BMW-Brilliance, PSA-Changan,GM-SAIC, BYD-Daimler, etc.
There obviously isn’t any EV market to speak of in China, nor much in the else of the world for that matter. But China is going to spend $15 billion of EV subsidies in China to get 5 million EVs on the Chinese roads by 2015 (Obama has thus far spent $5B on the US EV push).
China’s goal is to become the world’s largest EV component manufacturer in the world, as the market for components is expected to reach $100B by 2012. And it makes sense as China does control the world’s rare earth deposits, have large lithium deposits to make batteries, and the manufacturing prowess to actually commoditize those natural resources into products. The vision is that while the West may not drive BYD EVs, that EV, PHEV, Hybrid, parts will be sourced from China. A lot more Chinese made parts in your Volt, Leaf, and your BMW i3.
So then, foreign manufacturers in China are willing to hand over technologies to these sub-brands. As long as there is money involved.
I think the Chinese government is being a bit more subtle.
Before any Chinese companies launch brands in new markets it is good practice launching a new brand in a preexisting market. How much of the original effort/knowledge to set up the brands of the joint ventures came from the foreign companies and how much of that knowledge did the Chinese companies absorb? If the new brands are 100% controlled locally and all of the work and experience of setting up the supply chain, dealerships, repair facilities are done by the locals, it’s a good first step in doing it somewhere else.
Those “sub-brands” are still owned by the joint venture. I.e. (usually) 50% local, 50% foreign. They are being handled the same way as a foreign joint venture brand. Sure, a lot of the heavy lifting real branding has been done abroad and can act as a guideline for local application. A Baojun branding would have to be developed locally. However, it is developed by the same joint venture team, a mix of locals and foreigners. Branding is an alien skill in China, I keep saying that Chinese value brands, but they don’t value the people who know how to create brands. To many Chinese in the business, a brand is a logo. They have no idea how much time, money, and effort has to go into a brand, and most of all, how to stay consistent.
The Chinese are pretty good in setting up distribution systems and in handling dealers.
Bertel,
Is there any kind of market research or focus testing industry in the Chinese domestic market? From here it looks like they just throw stuff against the wall and see what sticks.
@Ronnie
Not really, they don’t do much market research for anything. It’s too much top down control.
“we will do xxxx” and then it’s done, frequently to some absurd failures.
Best examples are look at the empty cities in china. I think a google search of either ghost or empty cities China will show you quite a few examples.
I was working a bit with the Bauer magazine publisher and we talked a bit about marketing in China. She told me how it’s basically not understood by most Chinese.
Whats funny is that reputation (face) is so important here you would think that they should have a nearly psychic grasp of branding. But it’s the exact opposite, definitely one of the bigger conundrums I’ve seen here.
All that considered, I would still like to see the China brands become available in the US market place.
I know that is not a popular point of view to have but I was also in favor of having the brands from South Korea enter the US market. And we all know how well they are selling today, and how many Americans are affiliated with and/or employed by them.
The end result was that more ‘affordable” cars aka ‘cheap’ new cars became available to folks who otherwise would never be able to buy a new car.
The sub-brands may be doomed in China, but there may just be a market for them in the US.
Yet, as long as the US government owns GM and has a vested interest in Ford, it is unlikely that the US government will encourage Chinese cars to come to the US. That would be like cutting off your nose to spite your face.
Just like the US government made Tata’s entry into the US market all but impossible. And there still is a market for a little rugged, diesel-powered pickup truck. There is also a market for cars even cheaper than the cheapest from Hyundai, Kia, Nissan and Toyota.
“Before any Chinese companies launch brands in new markets it is good practice launching a new brand in a preexisting market.”
A car is much more complex that simply a brand or the badge it has on the bonnet. I mentioned the example of the CKD operation on purpose.
Auto companies usually sell previous gen models in the third world (or emerging markets is it suits better the PC BS) or cars based on not so fresh architectures.
Many of those markets require a certain degree of localization. There, the thin ice on which the big OEMs are skating in China will become thinner, because they will probably have a competitor selling a car with the same platform as their local one and will have to supply authorization to localize parts to the “generic” model, which openly contradicts the Chinese brand = 100% Chinese IP.
Again, having a read of those contracts would be highly instructive.
Of the various ways around this matter I see 2 that are pretty much obvious:-
1) Buy a discontinued (out of production) platform and develop a new hat on top of it. A corollary of this is that they agree with the foreigners to buy a platform they’re already producing but is bound to be discontinued.
They have already done this with Saab, Jeep and others.
On BAIC’s case, I don’t understand why they haven’t already started selling at least a facelifted version of the 9-3 and 9-5 cars they got.
That would give them the insight on how to design, something I suspect they already have anyway.
I’ve seen and driven the humble outcome of “part I” of this scenario, and the folks were good enough to design a whole new car (don’t know if platform), which would be part II.
2) They already have some “native” platforms, done mostly by the private Chinese automakers, one of which also owns an established one and could easily tap that know how.
I bet they’re not going to help their own private manufacturers because that makes them gain influence and probably make the government-owned enterprises (and the commisars behind them) to “lose face” with the higher levels of the nomenklatura. Not good for someone who aspires to go further up in the scale. And that is without putting in the money an auto company would make in a country like China. We are talking about money printing machines, if properly managed.
I’m curious, when these sub brands advertise, do they point out the who the parent (or donor) company is? Getting a disguised Honda for 30% off could be attractive to some people.
In Shanghai, I’ve seen nearly zero advertising for the sub-brands. I’m a car nut so I go out of my way to look for this stuff.
I have seen in the subways a very very short campaign for GM’s Baojun brand but nothing since then.
Let the Chinese get cocky. Companies that outsourced to China over the past decade are re-evaluating their relationship with Chinese suppliers. There are other sources of cheap labor waiting to be exploited. Every economy has it’s day. America’s was the forties and fifties. Remember how unstoppable Japan was in the 70’s and 80’s ? Look at them now.