Motorcycle Enterprises looking to other industries for profit
David McMullan talks with Mr. Li Bin, Secretary General of China Association of Automobile Manufactures (CAAM) Motorcycle Section
In recent years, many listed motorcycle companies have suffered business slumps and net profit decline. Rural markets continue to prefer cheap cars to motorcycles, while the motorcycle ban in most cities continues to drive down sales figures. Many of the companies affected have sought plans for a diversified business development strategy by business transformation or reorientation; with this in mind I interviewed Mr. Li Bin, Secretary General of CAAM Motorcycle Section.
What are the differences in terms of market supply and demand in China's motorcycle industry currently, compared with its prime period particularly when considering the domestic industry?
Li: In its prime period, rural markets took up about 80% to 90% of the motorcycle market share. As the economy develops, more and more mini cars and mini vans enter the rural market and take part of the motorcycle market share, while demand for recreational and commuting models rise in the urban market, mainly of which are high-end large-displacement motorcycles and scooters. For recent three years, the rural market declines gradually, while the urban market grows. The motorcycle output is now dropping at the rate of 10% yearly, while that of scooters and high-end models are doubling, with both sales and profits rising.
How did this happen?
Li: The motorcycle industry is under structural adjustment. The profits rise along with the added value of products. Compared with a general price of three to five thousand RMB per motorcycle in the past, profit per unit is far greater nowadays at a price tenfold of that.
However, in terms of enterprise output, sales and profit growth, motorcycle industry remains in a downturn.
Li: A downturn, or what we would call a product structural adjustment, is good for the whole industry. While the industry aggregate shrinks, the structure is optimized. If most of our motorcycle enterprises continued their low-price competition strategy in the rural market, the output will be great, and yet there are no profits, making it all meaningless. Therefore, such an adjustment is inevitable, and is beneficial to the industry.
Are low innovation capacity, homogeneity, and price competition common problems faced by Chinese motorcycle enterprises at present?
Li: At present, there are many industries pursuing only production volume and low costs. China's industry-wide motorcycle profit in the last year (2012) is 2.5 billion RMB, while Harley-Davidson made 5 billion RMB profit in the same period, which is twice of the profit made by all Chinese motorcycle enterprises. China's motorcycle output and sales have ranked first in the world for 19 consecutive years, and yet the profit margin remains low. The exporting price is averaged out at 500 US dollars per unit. While Harley-Davidson makes a yearly profit out of 5 billion with an annual production of 200,000 to 300,000 motorcycles, Chinese enterprises makes half of its profit with 20 to 30 million motorcycles. The major problem of motorcycle industry development is that the urban motorcycle market is restrained, which means, the high-end market is restrained. That is to say, Chinese motorcycles are faced with great difficulties in exerting added values to their
That means motorcycle bans are adverse to the motorcycle industry?
Li: China is the only country that bans motorcycles in the world. In many Southeast Asian countries, motorcycles are the major transport vehicle, and European countries are encouraging motorcycle commuting. Motorcycles possess advantages of low fuel consumption and small space occupation. A packing lot for one car can provide sufficient parking space for three to four motorcycles. In addition, its small size helps relieve traffic conjunction. Though it does not mean that the motorcycle is the most important means of transport, it is a complementary to urban transport. The motorcycle ban, however, totally hindered the development of the motorcycle industry.
Industry-wide adjustment and national policy on motorcycles caused many motorcycle enterprises turn to transformation or cross-industry development. What's your opinion about it?
Li: China has more than 200 motorcycle enterprises, while USA has three, Japan has four, and Europe has a dozen. These 200 enterprises will gradually experience the story of survival of the fittest. At the transitional period of the whole industry, involved enterprises will choose transformation, product structure adjustment, and production innovation. Some enterprises may encounter a fall in motorcycle business and simply turn to other businesses. Therefore, for motorcycle enterprises, to survive this transformation, they have to put efforts in to R&D and develop their own technologies. However, expending efforts in R&D does not promise anything. Enterprises vary in capability and the industry competition is severe. In this case, some turn to transformation while some seek to change their business models.
Some motorcycle enterprises turned to the automobile industry, some to the electrical industries some to financial and real estate. What's your opinion on this diversification?
Li: If the enterprise doesn’t live up to expectation in the motorcycle business, it'll experience the same difficulties in other businesses as well. Should the enterprise do well in motorcycle business, it'll have capabilities to invest in other businesses. Some motorcycle enterprises located in Chongqing started their real-estate business at their prime period rather than at the downturn of the motorcycle business. That is successful group development. In addition, these enterprises did not give up motorcycle business, because it is a good practice of accumulating cash flow. They can seek diversified development only when money is sufficient.
What's your suggestion for motorcycle enterprises seeking transformation or diversified development?
Li: Running enterprises requires patience, practicality, and steadiness. They have to develop their inner power, and improve product technology step by step; sometimes this project might require bringing in experts in selected fields from foreign countries. Changing the business field does not simply mean purchasing other companies for millions of dollars: product experience must be accumulated; neither does it mean turning to real estate business while the cash flow is sufficient now and then turning to another business impetuously next year. The most important thing is that companies develop their own inner power. They can develop other related business after the main business of motorcycle sales is fully reinforced and ready to evolve.