Emerald Emerging Markets Case Studies

Chang'an Automobile and the Chinese automotive industry

Michael Roberto Grace Chun Guo Crystal X. Jiang
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 Chang’an Automobile and the Chinese
automotive industry
Michael Roberto, Grace Chun Guo and Crystal X. Jiang
Michael Roberto is a
Trustee Professor of
Management at Bryant
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University, Smithfield,
Rhode Island, USA.
Grace Chun Guo is an
Assistant Professor of
Management at
John F. Welch College of
Business, Sacred Heart
University, Fairfield,
Connecticut, USA.
Crystal X. Jiang is an
Assistant Professor of
Management at Bryant
University, Smithfield,
Rhode Island, USA.
Disclaimer. This case is written
solely for educational purposes
and is not intended to represent
successful or unsuccessful
managerial decision making.
The author/s may have
disguised names; financial and
other recognizable information
to protect confidentiality.
DOI 10.1108/20450621111187380
February 2011 proved to a good month for automakers. In the USA, General Motors (GM)
sold more than 200,000 passenger vehicles, a 46 percent improvement from the same
month a year earlier. Toyota’s sales rose over 40 percent as well. Overall, US auto sales
increased 27 percent during the month. Emerging markets provided strong growth as well.
Global auto production topped 72 million units in 2010, bouncing back to levels not seen
since 2007 (Hirsch, 2011).
These results provided a ray of hope for an industry that had tremendous upheaval over the
past several years. GM had experienced a bankruptcy and government takeover, a
remarkable demise for a firm that once commanded 50 percent market share in the USA. Fiat
took over Chrysler after it went bankrupt as well. The combined firms sold 3.8 million cars
globally in 2001. Fiat CEO Sergio Marchionne believed that the Chrysler bankruptcy
represented a key opportunity for his firm to expand and achieve global scale. He believed
that the global auto industry would consolidate further in the years ahead. Marchionne
assumed that a manufacturer would have to produce six million vehicles per year to have a
competitive cost structure. He pointed out that research and development costs alone
exceeded $1 billion for many new vehicles, a figure that many smaller firms could not afford.
If Fiat achieved these growth goals, only a few global giants such as Toyota and GM would
exceed it in size. Toyota, the world’s largest automaker, produced 7.6 million cars in 2010
(Taylor, 2010).
Marchionne’s predictions of industry consolidation echoed the forecasts of automotive
executives in the 1990s. At that time, many CEOs believed that consolidation had to occur.
High-profile cross-border mergers and acquisitions took place including the
Daimler-Chrysler deal, GM’s investments in Fiat and Saab, and Ford’s acquisitions of
Volvo, Jaguar, and Land Rover. Interestingly, the large automakers had divested these units
recently, taking huge losses in the process.
Ford avoided the need for government assistance in 2008-2009. Under the leadership of
Alan Mulally, Ford experienced a remarkable turnaround after huge losses. In 2009, Ford
reported its first positive annual net income in four years (see Table I for recent financial
data). As part of that transformation, Mulally shut down the Mercury brand and sold Volvo to
a Chinese company. He sold the Jaguar and Land Rover brands to Tata Motors of India.
Tata attracted a great deal of attention with this move, as well as the launch of the so-called
‘‘people’s car’’ – the Tata Nano, a low-priced car designed to serve lower income citizens in
emerging markets. Nano had not lived up to the hype, however, in terms of sales. Concerns
over safety have plagued the $2,500 car. Customer satisfaction surveys ranked the Nano
extremely low relative to other auto brands (France-Presse, 2011).
Meanwhile, Toyota faced serious questions about its quality and reliability during the past
two years. Those concerns stunned the company, which nearly everyone considered the
indisputable quality leader in the global auto industry. Nissan surpassed Honda as Japan’s
VOL. 1 NO. 4 2011, pp. 1-17, Q Emerald Group Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1
 Table I Ford Motor Company financial performance, 2009-2010
2010 2009

Sales and revenues

Automotive sales 119,280 103,868
Financial services revenues 9,674 12,415
Total sales and revenues 128,954 116,283
Costs and expenses
Automotive cost of sales 104,451 98,866
Selling, administrative and other expenses 11,909 13,029
Interest expense 6,152 6,790
Financial services provision for credit and insurance losses (216) 1,030
Total costs and expenses 122,296 119,715
Automotive interest income and other non-operating (362) 5,284
income/(expense), net
Financial Services other income/(loss), net (Note 20) 315 552
Equity in net income/(loss) of affiliated companies 538 195
Income/(loss) before income taxes 7,149 2,599
Provision for/(benefit from) income taxes (Note 23) 592 (113)
Income/(loss) from continuing operations 6,557 2,712
Income/(loss) from discontinued operations (Note 24) 5
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Net income/(loss) 6,557 2,717

Less: Income/(loss) attributable to non-controlling interests (4)
Net income/(loss) attributable to Ford Motor Company 6,561 2,717
Income/(loss) from continuing operations 6,561 2,712
Income/(loss) from discontinued operations (Note 24) 5
Net income/(loss) 6,561 2,717
Total auto assets 64,606 79,118
Total financial services assets 103,270 119,112
Grand total assets 165,793 195,006
Total auto liabilities 74,904 96,918
Total financial services liabilities 91,531 105,870
Total liabilities 166,435 202,788
Total equity (642) (7,782)

Source: Ford 2010 Annual Report

second largest automaker in 2010, though Honda retained a larger market share in the USA.
Nissan generated a great deal of buzz in 2010 with the launch of its Leaf all-electric car (sold
at dealers for a suggested retail price of $28,000-$35,000). Some experts believed that the
Leaf cost approximately $6 billion to develop and launch (Loveday, 2010). Early sales of the
Leaf, as well as the Chevy Volt electric car, had been underwhelming in the USA.

Throughout this upheaval, the Chinese auto industry experienced a massive boom. By 2009,
China had become the world’s largest automobile producer, surpassing the USA and Japan.
Through joint ventures, many global automakers such as GM and Volkswagen had
established a large presence in China and generated strong profits. In 2010, GM sold more
cars in China than in the USA.

Global automakers partnered with, and competed against, many domestic automakers in
China including Chang’an Automobile Group Ltd, Chery, and BYD. Chang’an had partnered
with well-known global auto makers such as Ford, Mazda, and Isuzu (see Table II: Chang’an
History). Now, Chang’an hoped to develop more independence from its foreign partners,
including the production and distribution of self-branded cars. That desire raised many
interesting questions for senior management at the firm. How could Chang’an strive for
independence, while managing its existing joint ventures? Could it compete with foreign
automakers that benefited from global scale economies? How should it position itself amidst
a possible consolidation within the Chinese industry?

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PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
 Table II History of Chang’an
Time period Major events/products

1862 Shanghai Cannon Manufacturing Bureau was founded

1938 Relocated in Chongqing and changed the name to the 21 ordnance factory
1958 The first Jeep ‘‘Changjiang’’ for military use was produced
1983 The first mini-van model ‘‘Chang’an’’ was developed successfully
1984 Started collaboration with Suzuki in developing mini-car models for Chinese market
1993 Chang’an-Suzuki joint venture was established in Chongqing to manufacture Suzuki
brand cars and engines
1996 Chang’an Automobile Co., Ltd was established in Chongqing
1998 Chang’an’s first mini-van ‘‘Chang’an star’’ was lauched into the market
2001 Chang’an-Ford joint venture was established in Chingqing to manufacture Ford brand
cars and engines
2004-2005 Chang’an-Ford-Mazda joint venture was established in Nanjing to manufacture Mazda
brand cars and engines
2006 First self-brand mini-car ‘‘Benben’’ was launched in Chinese market
2007 First self-brand MPV ‘‘Jiexun’’ was launched
2008 Chang’an’s first self-brand C-class ‘‘CV8/Zhixiang’’ was launched in the market

Source: Chang’an company web site

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The evolution of the Chinese automotive industry

The Chinese auto industry began in the 1950s with the establishment of the First Automotive
Works (FAW), a state-owned enterprise, in the city of Changchun. The central government
played a key role in the founding of the industry, with assistance from the former Soviet
Union. FAW began as a truck manufacturer and then branched out into bus and passenger
car production as well. Few Chinese citizens had the income required to purchase a car in
the early days of the industry. FAW and other state-owned automakers relied on low-end
technology and labor-intensive manufacturing methods (FAW Web site, n.d.).

In the 1980s and 1990s, the Chinese auto industry began to undergo dramatic changes with
the influx of foreign automakers. The government named the automobile industry as one of
its ‘‘pillar’’ industries in 1985, and it began to provide financial support to help the
automakers grow. Meanwhile, the government encouraged foreign direct investment and set
up relevant laws, which required global manufacturers to establish joint ventures with
domestic automakers to produce cars in China. Therefore, firms such as Volkswagen,
Citroën, General Motors and Ford partnered with domestic automakers. Foreign firms could
have a maximum ownership stake of 50 percent in these joint ventures. Chinese automakers
tried to use these joint ventures to develop their technological knowledge and manufacturing
capabilities. In the early years, the central government strictly monitored the types of cars
that these joint ventures could manufacture. During the past decade, however, the
government had granted the joint ventures more autonomy over product development,
enabling the firms to launch a series of popular and affordable small car models. Foreign
direct investment from world famous automakers facilitated technology transfer to domestic
automakers (Society for Anglo-Chinese Understanding Web site, n.d.).

The major Chinese auto firms did not form exclusive relationships with foreign automakers.
For example, large firms such as Shanghai Automotive Industry Corporation (SAIC)
operated multiple joint ventures, including Shanghai-Volkswagen, Shanghai-General
Motors, etc. The nature of these multiple relationships, coupled with concerns about the
lack of intellectual property protection in China, impeded technology transfer in these joint
ventures. Foreign automakers were reluctant to openly share the full knowledge of car
manufacturing with their domestic partners. Consequently, domestic automakers felt that
they did not achieve as many benefits as the foreign firms did from these joint ventures.
Moreover, some Chinese firms believed that their partnerships with global carmakers had
constrained their ability to cultivate a strong export market for Chinese brands of cars.

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VOL. 1 NO. 4 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3
 Chinese automobile production reached one million units by 1992, and it grew by
approximately 10 percent per year throughout the remainder of the decade. The growth rate
accelerated rapidly after China’s entry into the World Trade Organization in 2001, after which
many more foreign automakers entered the country. Several factors drove the growth in the
market over the past decade, beginning with rapid national economic growth and rising
household incomes. As more firms entered the market over the past decade, the variety of
car models has increased accordingly, providing consumers with more choices. In addition,
the rapid development of the highway and road infrastructure throughout China fueled
consumer demand for automobiles. Experts estimated that the Chinese highway network
had doubled in size since 2002 (Holweg et al., 2005).
In 2009, the Chinese auto industry produced a total number of 10.38 million passenger cars,
surpassing the USA as the world’s largest manufacturer. In response to the global financial
crisis of 2008-2009, the Chinese Government implemented generous incentives to drive the
most recent growth in the Chinese auto market. Those incentives initially only applied to
small car models (engines below 1.6 liters); later the central government expanded the
stimulus package to all passenger cars in 2010. The stimulus measures encouraged
consumers’ auto purchase during the global economic downturn (see Table III: Top 10
Chinese automobile sales in 2009.) Nevertheless, most Chinese citizens still did not own a
car. Many people relied on bicycles for transportation, or various forms of mass transit in the
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major urban centers.

The Chinese Government established a plan in 2010 to make the country the world’s leader
in battery-powered cars and hybrids. The government became increasingly aggressive
about forcing foreign companies to share new technology and intellectual property with
Chinese firms in exchange for access to this booming market. Many foreign firms objected to
these demands. One executive complained about ‘‘China strong-arming foreign
automakers to give up battery, electric motor, and control technology for market access.
We don’t like it’’ (Shirouzu, 2010).
By 2010, the Chinese auto industry consisted of three types of automakers: state-owned
enterprises, such as FAW Group Corporation, Sino-foreign joint ventures, such as
Guangzhou Toyota Automobile Company, and privately-owned domestic firms such as
Geely and BYD. Foreign brands dominated the passenger car market in China historically.
However, Chinese firms had begun to launch an increasing number of self-branded
automobiles. By the end of 2009, self-branded cars represented 29 percent of the market.
Chery Automobile, a state-owned enterprise founded in 1997, had become the largest
producer of self-branded passenger cars in China by 2010. The central government aimed
for that share to grow to 40 percent by 2015 (Jin, 2010).
China did not export or import many vehicles, although it did export more than $5 billion
worth of automotive parts to the USA alone in 2009. Most of the cars produced in China are
sold domestically. Chinese exports amounted to about only 344,000 vehicles in 2009, and

Table III Top 10 Chinese automobile sales in 2009

Rank Company name Sales volume

1 Shanghai Volkswagen Automotive Co. 708,100

2 FAW-VW Automobile Co. Ltd 669,200
3 Shanghai General Motors Co. Ltd 668,200
4 Beijing Hyundai Motor Co 521,000
5 Dongfeng Nissan Ltd 459,300
6 BYD Co. Ltd 448,400
7 Chery Automobile Co. Ltd 409,300
8 Guangqi Honda Automobile Company Co. Ltd 337,200
9 Tianjin FAW Toyota Motor Co. Ltd 334,700
10 Geely Holding Group Co. Ltd 329,100

Source: Chinese Association of Automobile Manufacturers

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PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
 the exports were nearly all to the developing nations. A few firms had experienced some
success marketing their affordable small cars in developing markets. Two independent
Chinese automakers, Chery and Geely, produced most of the country’s exports. They
typically sold their vehicles in emerging economies in Southeast Asia, Africa, and the Middle
East. Most of the exported vehicles sold for less than $10,000. Chery, the largest car
exporter in China, first expanded overseas by exporting a few cars to Syria in 2001. By 2010,
the firm operated factories in Russia, Ukraine, Iran, Egypt, Indonesia, Uruguay, Malaysia,
and Thailand. Chery believed strongly in the importance of having a global reach, stressing
the motto: ‘‘No stable without domestic market, no strong without foreign market’’ (Chery
Web site, n.d.).

Efforts to sell Chinese automobiles in developed nations had encountered much more
difficulty. The safety regulations in many developed nations prohibited Chinese models from
entering these markets. Moreover, recent concerns about the quality and safety of various
Chinese goods served as an impediment for Chinese automakers trying to establish a
presence in other nations. For instance, Jiangling Motors tried to export a sport utility vehicle
(SUV) to Europe in 2006, but a German automobile club sought to ban the SUV after it
performed very poorly in crash tests (Shobert, 2006). Another Chinese automaker, Brilliance,
encountered severe backlash when that same German automobile club reported that the
Chinese car had received the worst crash test score in the club’s history (Kurczewski, 2010).
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Several major multinational automakers had begun to export from China in recent years.
Honda, for instance, had experienced some success exporting its Jazz subcompact,
produced in Guangzhou, to the European market. SAIC-General Motors began to export
mini-vehicles to Latin America in 2009, with plans to sell those same vehicles in Africa and
the Middle East as well. General Motors had hoped to also export small cars to the USA
beginning in 2011, but it scrapped those plans due to political pressure after the federal
government took over the bankrupt automaker.

The Chinese automobile industry remained highly fragmented in 2011. Approximately,

150 firms manufactured cars in China, more than the USA, Europe, and Japan combined.
Tim Dunne, director of global automotive operations at J.D. Power and Associates, an
automobile industry market research firm, described the Chinese auto industry as ‘‘one of
the most competitive markets in the world’’ (Barboza and Bunkley, 2010). In the first half of
2010, the top 4 firms accounted for 33.9 percent market share in China, as compared to 61.
8 percent in the USA (see Figure 1: Chinese Automaker’s Passenger Car Market Share in
2008). The top 10 firms produced 64.0 percent of the cars in China, as opposed to over
90 percent in the USA (see Table IV for 2010 US market share data). Most experts estimated
the minimum efficient scale for an automobile assembly plant to be approximately 200,000
units (Holweg and Oliver, 2005). However, many Chinese manufacturers produced less than
10,000 cars per year.

The Chinese Association of Automobile Manufacturers predicted that domestic annual

production would grow to 18.4 million passenger cars by 2014 (Table V). J.D. Power and
Associates characterized the Chinese market as hyper-competitive, with hundreds of new
models being introduced each year. J.D. Power Senior Vice President John Humphrey
commented that, ‘‘China’s rapid growth makes the automotive market highly attractive and
almost irresistible to any automaker. However, for many brands, achieving their profit
aspirations in China in the coming years will be far more challenging’’ (J.D. Power and
Associates, 2010).

Chinese officials worried that capacity growth would out-strip demand in the coming years.
Experts believed that the manufacturing capacity utilization rate might be only 66 percent in
2015 as companies planned to bring new plants on-line at a rapid pace. Humphrey
estimated that many firms could not cover their fixed costs unless they operated at
80 percent utilization rate or higher (J.D. Power and Associates, 2010). At the annual auto
show in Geneva in February 2011, accounting firm KPMG revealed survey results showing
that many industry executives believed the Chinese market would suffer from substantial

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VOL. 1 NO. 4 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5
 Figure 1 Chinese passenger car market share in 2008
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Source: Chinese Association of Automobile Manufacturers

Table IV 2010 market share data for the USA

Firm 2010 market share (%)

GM 19.4
Ford 16.9
Toyota 13.4
Honda 10.0
Chrysler 9.6
Nissan 9.0
Subtotal – top 6 firms 78.3

Source: www.wsj.com

overcapacity in the next five years. Bain & Co. consultants reported that Chinese factory
capacity might exceed domestic demand by as much as 35 percent in 2015 (Ewing, 2011).

The Chinese Government had issued a new development outline for the automobile industry
in 2009. That plan called for substantial industry consolidation, primarily through mergers
and acquisitions. The government hoped that the coming shakeout would yield a powerful
group of the top 10 automakers in the country. The outline actually named eight of the ten
firms that it expected to survive the consolidation wave. That group would consist of at least
four Tier 1 firms with capacity in excess of two million units, and at least four Tier 2 firms with
annual capacity of one million units. The government’s plan identified four Tier 1 companies
(SAIC, FAW, Dongfeng, and Chang’An) and four Tier 2 automakers (Beijing Automotive,
Guangzhou Auto, Chery, and China Heavy Duty Truck).

The Chinese Government did not specifically name the other two firms that it expected to be
in the top 10, although many speculated that it could be two of the largest privately owned
automakers, Geely and BYD. While the central government sought to encourage industry
consolidation, provincial authorities served as major roadblocks to this plan. Many provincial

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PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
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Table V Production and sales in Chinese auto sector

2007 2008 2009 2010f 2011f 2012f 2013f 2014f

Total production value (value, US$ billion)a 119.3 133.8 165.3 185.5 212.3 241.3 271 304.1
Total production value (value, CNYbillion) 872.3 978.2 1,131 1,248 1,369 1,496 1,626 1,763
Total production (CBUs, million) 8.881 9.345 13.79 15.53 17.461 19.388 21.421 23.567
Cars (million) 6.38 6.738 10.38 11.888 13.454 15.015 16.663 18.402
Commercial vechicles (million) 2.5 2.607 3.41 3.641 4.008 4.373 4.759 5.165

j
Sales (value, US$ billion) 108 118.6 151.8 167.7 191.2 216.7 242.7 271.3
Sales (value, CNY billion) 917.1 1,007.3 1,038 1,127 1,233 1,343 1,456 1,573
Sales (CBUs, million) 8.796 9.38 13.64 15.317 17.058 18.795 20.627 22.561

Note: aEstimate
Source: China Association of Automobile Manufacturers, Organisation Internationale des Constructeurs d’Automobiles

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VOL. 1 NO. 4 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7
 governments subsidized automakers in their regions, and they were ‘‘eager for the prestige,
employment, and tax revenue provided by the automakers’’ (Tang, 2009). These regional
governments worried that consolidation could mean factory closures in their regions.
The Chinese Government’s plan also encouraged the development of alternative fuel
vehicles through various very large subsidy programs. Regional and municipal
governments also had implemented subsidy programs, hoping to assist local firms in
their regions to develop alternative fuel technologies. BYD, a private automaker in which
Warren Buffett owned a 10 percent stake, hoped to become a leader in electric vehicles.
Established in 1996, BYD sold 450,000 cars in 2009, more than double the cars it sold in the
previous year. BYD had moved into the automobile manufacturing business after having
established itself as a successful battery-maker. BYD – which stood for ‘‘beyond your
dreams’’ – had grand ambitions to become a global auto industry leader, not simply a
successful Chinese automaker.
BYD has developed an electric vehicle to compete with the Chevy Volt, Nissan Leaf, and
other new hybrid and electric cars coming to market. BYD launched its electric car into the
Chinese marketplace in May 2010, with the first 30 of its e6 sedans becoming part of the taxi
fleet in the city of Shenzhen. BYD had announced plans to introduce its e6 electric car in the
USA in late 2010, though the firm failed to meet this ambitious goal. In China, BYD had failed
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to meet its sales goals as well. The firm had aimed to sell 800,000 cars in China in 2010, but
actual numbers barely exceeded 500,000. BYD slashed prices in early 2011 in hopes of
stimulating higher sales growth. Some observers wondered whether other domestic
automakers would follow suit, sparking a price war (Tianyang, 2011).
The Chinese market had become incredibly important to foreign automakers, because of the
explosive growth in the market and the sharp downturn in consumer demand in many
developed nations during the 2007-2010 period. For instance, General Motors, through its
joint ventures, had become China’s largest automaker by 2010. The firm had 32,000
employees at ten factories in China. Analysts estimated that GM’s China business might
account for 30 percent of the firm’s value. GM now sold more vehicles in China than in the
USA (Muller, 2010). Buick served as the firm’s top selling brand in China. The brand had a
reputation for being ‘‘sumptuous and stylish’’ – quite different than in the USA, where the
brand appealed mostly to older Americans (Barboza and Bunkley, 2010).
Low wages remained one of the main incentives for many foreign automakers to invest in
China. Chinese factory worker wages naturally fell far below their counterparts in the USA. In
2007, prior to GM’s bankruptcy, the firm reported average wages for assembly line workers
of slightly less than $28 per hour plus very generous health care and pension benefits that
took the total hourly labor rate over $70. For Toyota’s US workers the hourly labor rate,
including benefits, did not reach $50. Meanwhile, in China, the typical automobile assembly
line worker earned a monthly income of less than 2,500 renminbi (RMB), or approximately
$370 per month. Labor unrest had begun to emerge in Chinese automobile plants though.
In 2010, for instance, Honda faced strikes at parts factories in China that forced a shutdown
of their automobile assembly plants. At a transmission plant in Foshan, workers demanded a
50 percent increase in wages and benefits. The company eventually agreed to a 24 percent
raise for the employees. These workers included many 19-year-old trainees who earned
RMB 1,544 per month prior to the labor dispute (Reuters, 2010).
For many years, GM and other foreign automakers pursued a product development strategy
in China that involved adapting vehicles and technology that had been launched years
earlier in developed nations. More recently, however, GM had introduced some vehicles in
developing nations before bringing them to market in the USA. For instance, the Chevrolet
Cruze, a compact car with a 1.6-liter engine, went for sale first in South Korea at a base price
of $7,600 in the fall of 2008. Soon thereafter, the Cruze launched in China, as well as many
other countries in Asia and Europe. The Cruze finally went for sale in the USA in the summer
of 2010 (Reed, 2010).
Global automakers also had begun to launch low-priced brands specifically for the Chinese
market. The automakers used older technology on these cars – no automatic transmissions,

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PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
 antilock brakes, etc. John Zeng, from J.D. Power and Associates, explained: ‘‘It’s a win-win
situation. Consumers pay a lower price for foreign-brand technology, and the foreign makers
benefit from an increase in sales volume without hurting their brand image’’ (Lin, 2001). At the
moment, local Chinese brands from firms such as Geely, BYD, and Chery accounted for
75 percent of the cars sold at a price below $7,500. Jin Yibo, assistant general manager at
Chery, commented on the global automakers’ plans: ‘‘I’m not worried about these new
brands at all. Chinese cars offer better value for money, and we understand the local market
and consumer very well’’ (Lin, 2001).

Chang’an Automobile Group

We learned this lesson the hard way: it is of utmost importance to develop independent
technology and have control power of operation. The ultimate goal of collaborating with
foreign partners should be to enhance our autonomous innovation capability in developing
self-branded cars – Senior executive of Chang’an Automobile (World Marketing Forum,
2006).

Company history
Chang’an traces its origins to one of China’s first ordnance factories – Shanghai Cannon
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Manufacturing Bureau – established in 1862 by a minister of the last Qin Dynasty,

Hongzhang Li. During China’s civil war in the 1930s, the bureau relocated to Chongqing.
Since then, the factory shifted from ordnance manufacturing to automobile production.
In 1957, it successfully developed China’s first Jeep model, ‘‘Changjiang’’, for military use.
In 1981, two years after China’s open door policy, many Chinese people started launching
their own businesses. After a four-month market survey in major cities and provinces, a team
of Chang’an managers discovered that mini-vehicles with small tonnage, low-oil
consumption, and high reliability were in great need. Hence, they decided to pursue the
development of mini-vehicles. The team purchased a mini-car from Isuzu, a Japanese car
manufacturing company, and it conducted intensive research on 13 mini-car models
manufactured in Europe. Managers decided to use Isuzu’s ST90K as a prototype to develop
its own mini-vehicles. By the end of 1983, Chang’an had manufactured eight sample models
and road tested them successfully. Starting in 1984, the factory also invested in developing
auto engines, and its sample engines passed ignition tests on December 31, 1984.
Between 1984 and 1990, the factory collaborated closely with Isuzu to develop 14 different
mini-vehicle models under the brand name of ‘‘Chang’an’’. In 1993, with a total investment of
$17 million, managers established Chang’an-Isuzu Automobile Co., Ltd At the time,
Chang’an-Isuzu became the biggest Sino-Japan joint venture in mini-vehicle manufacturing.
The joint venture’s signature mini-car soon became the most popular vehicle model in China.
On October 31, 1996, Chongqing Chang’an Automotive Co., Ltd was established. The
company established four major production bases in Chongqing, Hebei, Jiangsu, and
Jiangxi Provinces across China. It operated 11 complete vehicle plants and two engine
plants that can manufacture a series of engine platforms ranging from 0.8-liter engines to
2.5-liter engines. Chang’an also has six production bases in Asia, America, Africa, and
Europe, and it has established joint ventures with Suzuki, Ford, and Mazda. With over 40,000
employees and an annual production capacity of 1.5 million vehicles and 1.5 million auto
engines, Chang’an now has become the largest mini-car and automobile engine
manufacturer in China (see Table VI: World Motor Vehicle Production by Manufacturer
2008). Chang’an currently has six major business units under the company’s direct control,
ten wholly owned subsidiaries, three joint ventures, and one jointly owned company
(Chang’an Web site, n.d.).

Joint ventures with Western Multinational Companies

By the mid-1990s, with the support from the Chinese Government, Chang’an began to look
to joint ventures with large multinationals as a strategic opportunity. Chang’an aimed to
cultivate its manufacturing capabilities by working with global automakers. After the Isuzu

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VOL. 1 NO. 4 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 9
 Table VI Top auto manufacturers of 2008
Rank Group Total Cars LCV HCV Heavy bus

Total industry 69,561,356 55,846,163 10,652,432 2,598,495 464,266

1 TOYOTA 9,237,780 7,768,633 1,102,502 251,768 114,877
2 GM 8,282,803 6,015,257 2,229,833 24,842 12,871
3 VOLKSWAGEN 6,437,414 6,110,115 271,273 46,186 9,840
4 FORD 5,407,000 3,346,561 1,991,724 68,715
5 HONDA 3,912,700 3,878,940 33,760
6 NISSAN 3,395,065 2,788,632 463,984 134,033 8,416
7 PSA 3,325,407 2,840,884 484,523
8 HYUNDAI 2,777,137 2,435,471 85,133 151,759 104,774
9 SUZUKI 2,623,567 2,306,435 317,132
10 FIAT 2,524,325 1,849,200 516,164 135,658 23,303
11 RENAULT 2,417,351 2,048,422 368,929
12 DAIMLER AG 2,174,299 1,380,091 330,507 395,123 68,578
13 CHRYSLER 1,893,068 529,458 1,356,610 7,000
14 B.M.W. 1,439,918 1,439,918
15 KIA 1,395,324 1,310,821 83,159 1,344

Source: OICA Correspondents Survey, 2008, http://oica.net/wp-content/uploads/world-ranking-2008.

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partnership, Chang’an established joint ventures with Ford, Mazda, and Volvo. It developed
its manufacturing capabilities by producing well-known car models such as Mondeo, Focus,
S-MAX, Mazda 3, and Volvo S40. Soon it became one of the largest automobile manufacturing
companies in China. Through establishing joint ventures and strategic alliances with global
business partners, Chang’an successfully enhanced their technological knowledge as well
as manufacturing capabilities. One senior executive commented on the technology transfer
aspect to these joint ventures (World Marketing Forum, 2006):
Through 20 years of collaboration with foreign partners, we realized that collaboration did not
bring us core technologies; it is of utmost importance (for us) to develop independent technology
and have control power of operation.

Chang’an also garnered government support by participating in national technology

development projects and applying for national innovation funding. The firm used
government support to upgrading R&D facilities and equipment, develop new products, and
conduct new technology research. In the past several years, Chang’an has participated in
more than 40 national-level technology development projects and received grants totaling
$14.3 million from governments at all levels for research on hybrid cars[1] (Zhang, 2008).
A recent government initiative created a special fund of $1.4 billion to support research and
development related to alternative fuel vehicles. The government also has encouraged
Chang’an to explore mergers and acquisitions to enhance its new product development
capabilities. Senior executives acknowledge that government protection provides access to
invaluable resources, but they believe it restricts firms’ independent innovation activities at
times (Automotive Business Review, 2009).

Self-branded passenger car models

At the turn of the century, Chang’an began to realize that it needed to improve its in-house
design and engineering capabilities. The company hoped to build self-branded passenger
automobiles, but that would require higher-order technological capabilities. Developing
self-branded car models became the company’s primary objective (Yang, 2010). By the end
of 2010 Chang’an manufactured a range of self-branded passenger car models in China:
Benni (Love, Sport, Mini), Jiexun HEV, Z-Shine, Alsvin, and Alsvin Hatchback. Each model
targeted a distinct segment of the market. The firm launched Benni (Benben in Chinese) in
2006 as an economical passenger car designed for the younger population. The first Benni
model, designed in Italy, came equipped with 1.3-liter engine and sold for RMB 39,800.

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PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
 Alsvin (Yuexiang in Chinese) competes in the compact car segment. Chang’an took
advantage of global resources in developing this model. Engineers and designers from
Toyota, BMW, Ford, and Mazda, as well as thousands of local engineers, participated in the
development process. Dambrosio Luciano designed the car with a blend of Italian and Asian
aesthetic elements. Alsvin came equipped with a 1.5-liter engine. It sold at prices ranging
from RMB 55,900 to RMB 71,900.
Z-Shine (Zhixiang in Chinese), a mid-class passenger car model, came to market in 2008.
The Z-Shine offered an automatic transmission, ample interior space, intelligent cruise
control, and entertainment control on the steering wheel. The sales price ranged from RMB
96,800 to RMB 115,800. Jiexun HEV became Chang’an’s first self-branded, hybrid multiple
purpose vehicle (MPV). With support from the Ministry of Science and Technology as well as
the Chongqing Municipal Government, Chang’an developers spent six years creating this
vehicle. It came to market in late 2007. The sales price for HEV ranges from RMB 104,800 to
RMB 149,800 (Chang’an Web site, n.d.).

Commercial car models

Chang’an developed two self-branded commercial car models over the past 20 years. The
CM5 Star, launched in 1998, became the company’s first self-branded mini-van model. It
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served as the best-selling minivan in China for many years after its inception. By July 2007,
the sales volume of CM5 Star reached 4.3 million. Based on this initial success, Chang’an
launched CM5 Star II in March 2007, drawing on new innovations in the Chinese mini-van
industry. The launch of CM Star II represents a milestone in the company’s minivan
development process. CM5 Star II came equipped with a shock-absorbing rear suspension
system, spacious interior design, and complete optimization of electronic devices.
StarLight 4500 represented a newer generation of high-quality minivan for businesses and
urban logistic operations. StarLight 4500 adopted an active and passive safety protection
system popular in Europe and America. Even though developed as a commercial minivan,
Starlight had the same passenger capacity as a light passenger bus with less-fuel
consumption (Chang’an Web site, n.d.).

Corporate culture, human resource management programs, and R&D systems

According to Chang’an CEO Xu Liuping, ‘‘The mission of Chang’an is independent
innovation. Currently, China lacks independent branding in the auto industry, which is not
commensurate with the status of the Chinese auto market’’ (Yang, 2010). To support the
firm’s innovation and new product development efforts, Chang’an leaders cultivated a ‘‘dual-
care’’ culture – caring aimed at organizational development and employee development.
The ‘‘dual-care’’ philosophy emerged from the belief that the growth of the enterprise
depends on employees’ continued personal development. Managers tried to use various
communication channels to constantly collect opinions and views from employees. The
company provided various rewards, such as cars, laptops, and high-definition televisions, to
those employees who made innovative suggestions that had a large impact at the firm. The
firm set aside RMB 3-6 million per year for executives to reward outstanding researchers and
developers. The company also designed ‘‘ladder training programs’’ to provide different
training opportunities for employees, mid-level, and senior managers (Dai et al., 2010).
To support its new product development capability, Chang’an established strategic
alliances with six Chinese universities, such as Chongqing University and Tongji University,
as well as two research institutes. The firm established six University Research Institute
engineering innovation centers to educate and train talented people, transfer knowledge
between academia and the firm, and share research resources effectively (Qiu, 2008). In
addition, Chang’an tried to take full advantage of the design capabilities of local designers
around the world. To that end, Chang’an operated two design centers outside of China:
Torino, Italy and Yokohama, Japan. The firm also established extensive partnerships
with well-known auto parts suppliers from Germany, the UK, Japan, and Korea (Automotive
Business Review, 2009).

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VOL. 1 NO. 4 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 11
 Marketing and distribution strategies
To further advance product development efforts, Chang’an focused on enhancing its
marketing and customer service capabilities. Chang’an regularly sent its marketing research
teams to different geographic locations to collect updated information about customers’
changing purchasing and consumption habits. Chang’an placed an increasing emphasis on
providing high-quality post-sale service. They did so in an effort to build brand loyalty. By the
end of 2008, the firm had established over 800 service centers across the nation (Chang’an
Web site, n.d.; see Table VII for financial performance data).

Other major domestic automakers in China

Dongfeng Motor Group Co
Dongfeng Motor Group Company, a state-owned enterprise, manufactured buses, trucks,
cars, and spare parts. The company operated joint ventures with foreign partners such as
Nissan, Honda, Kia Motors, and Peugeot-Citroen. It ranked second among domestic
automakers in China, selling over one million vehicles per year. Dongfeng served as the
market leader in the medium/heavy-truck, van, and sport utility vehicle segments. It also sold
many passenger cars and light trucks.
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Established in June 2003, the Dongfeng-Nissan joint venture became the largest joint
venture automobile manufacturer in China. Recently, Nissan had allowed Dongfeng to use

Table VII Chang’an major financial indicators

Date/year December 31, 2007 December 31, 2008 December 20, 2009 June 30, 2010
Net profit (in yuan 10,000) 66,689 2,438 107,845 136,656
Net profit growth rate (%) 28.39 296.34 4,323.27 161.29
Return on equity (%) 8.81 0.32 12.26 13.79
Debt/asset ratio (%) 46.44 49.84 63.65 63.19
Date/year December 31, 2007 December 31, 2008 December 31, 2009 June 30, 2010
Total assets (in yuan 10,000) 1,435,291.77 1,536,782.48 2,447,141.69 2,726,302.86
Total liability (in yuan 10,000) 666,520.18 765,920.32 1,557,686.27 1,722,965.33
Cash and cash equivalents 158,370.65 162,416.42 346,050.01 611,175.14
Accounts receivables 6,938.66 39,866.59 13,978.03 81,231.19
Other receivables 15,073.00 9,452.26 7,191.19 12,530.03
Stockholder equity 757,306.87 759,652.48 880,012.04 990,792.26
Date/year December 31, 2007 December 31, 2008 December 31, 2009 June 30, 2010
Inventory turnover ratio (%) 6.39 6.58 9.68 5.79
Accounts receivable turnover ratio (%) 23.17 24.38 93.62 33.41
Total assets turnover ratio (%) 0.95 0.90 1.27 0.63
Operating revenue growth ratio (%) 12.91 22.53 88.43 44.57
Operating profit growth ratio (%) 37.64 293.36 2,295.42 182.85
Net profit growth rati (%) 28.39 296.34 4,323.37 161.29
Net assets growth ratio (%) 8.61 0.31 15.84 11.37
Total assets growth ratio (%) 20.73 7.07 59.24 8.00
Date/year December 31, 2007 December 31, 2008 December 31, 2009 June 30, 2010
Income from main operations (in yuan 1,000) 1,372,229.91 1,337,545.84 2,520,369.31 1,662,745.49
Operating expenses (in yuan 10,000) 124,636.86 113,655.77 246,677.44 181,097.87
G&A expenses (in yuan 10,000) 67,349.20 85,274.24 119,398.88 72,161.53
Financial expenses (in yuan 10,000) 4,710.59 4,954.45 2422.77 256.57
Total expense growth rate (%) 19.38 3.65 79.34 48.50
Operating profit (in yuan 10,000) 68,691.37 4,562.40 109,288.58 137,474.24
Investment gains/losses (in yuan 10,000) 93,218.32 56,084.50 80,415.60 100,349.57
Profit from other operations (in yuan 10,000) 23,297.46 21,159.67 2390.09 2311.39
Total profit (in yuan 10,000) 65,393.91 3,402.73 108,898.49 137,162.85
Income tax (in yuan 10,000) 1,996.63 1,609.62 322.79 2,265.09
Net profit (in yuan 10,000) 66,689.40 2,438.10 107,845.89 136,656.54
Gross profit margin (%) 15.32 15.00 20.01 19.48
Return on equity (%) 8.81 0.32 12.26 13.79

Source: Chang’an Company Web site

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PAGE 12 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
 the popular Nissan Tiida platform to build a self-branded model. Dongfeng established joint
venture relationships with Honda in 2003. Donfeng-Honda manufactured Honda-branded
SUVs and automobiles for the Chinese-market. Dongfeng Yueda Kia was established in
2002. It produced Kia-branded automobiles (Kia Optima, Kia Carnival, Kia Cerato) for the
Chinese market (Dongfeng Web site, n.d.).

Shanghai Automotive Industry Corporation

SAIC sold more than one million passenger cars per year and over 700,000 commercial
vehicles. SAIC had developed joint venture relationships with Volkswagen, General Motors,
Volvo, and others. The firm had emphasized cooperation with foreign manufacturers on the
one hand, while pushing for simultaneous development of its own brands. It tried to absorb
as much foreign technology as possible to enhance its own path of development. It had
intensified strategic alliances with research institutes and universities, as it tried to create
successful self-branded cars. SAIC developed a complete range of businesses to
complement its manufacturing operations. It created an extensive sales and service
network, an automotive parts and components business, and a financial services unit to help
finance consumer purchases (SAIC Web site, n.d.).

Shanghai Volkswagen Automotive Co

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Shanghai Volkswagen (SVW) constituted a joint venture between SAIC and Volkswagen.
Established in October 1984, this joint venture helped Volkswagen achieve a first mover
advantage and eventually become the largest brand in China. SVW had earned a
prestigious award as the ‘‘Model of Successful Cooperation between China and German’’.
In 2004, SVW extended its joint venture contract with Volkswagen for 20 years (SAIC Motor
Corporation Limited, 2008).
SVW passed the two million vehicle mark in production in 2002 and the five million car
milestone in 2009. SVW sold 708,100 vehicles in China during 2009. SVW operated four
vehicle production facilities, one engine plant, a technology center, and a design center in
China. The SVW product range included a total of eleven models from the Volkswagen and
Škoda brands. SVW’s Santana model was one of the best-selling sedans in China.
Since its inception, SVW made great efforts to assimilate and absorb advanced
manufacturing technology as part of its joint product development efforts with Volkswagen.
After years of cooperation with Volkswagen, the company started its constructive period of
independent vehicle development in 2003. In 2004, Santana 3000, a car that SVW developed
on its own, launched in the market. In 2008, SVW launched its first entirely homegrown car
under the model name Lavida (SAIC Web site, n.d.).
SVW had cultivated a network of local suppliers in China. More than 400 local suppliers now
provide auto parts to SVW. SVW also established more than 1,000 distributors and
authorized service providers around the country, with 70 percent coverage nationwide. SVW
also achieved ISO 9001 certification in 2005. It became the first car-maker to receive the
‘‘National Quality Management Award’’ issued by China’s Quality Management Association.
In recent years, SVW began to lose market share to firms such as GM and Toyota.
Volkswagen began investing heavily in new products and production capacity in 2009 to
further extend the company’s market leadership in China. The firm planned further
investments in 2011 (Shafer, 2010).

Shanghai General Motors Co. Ltd

Founded in June 1997, Shanghai General Motors Company operates as a 50-50 joint
venture between General Motors and SAIC. Shanghai GM manufactures and sells
automobiles such as Chevrolet, Buick, and Cadillac in mainland China. In 2010, SAIC
acquired an additional 1 percent stake for $85 million to boost its total share of Shanghai GM
to 51 percent (Gao, 2010).
When GM formed a $1.5 billion joint venture with SAIC, it became the country’s largest
automobile project. During that period of time, foreign-invested enterprises accounted for

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VOL. 1 NO. 4 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 13
 21 percent of the total net worth of the Chinese auto industry. Currently GM makes vehicles
including the Buick Excelle and Regal cars as well as Chevrolet Lova compacts with its
Chinese joint venture partner.
In 2010, GM and SAIC decided to team up to enter the Indian market with a low-cost car.
The two companies set up a 50-50 venture to manufacture vehicles in India including the
Chevrolet Spark. The cooperative relationship allowed GM to expand in India’s growing auto
market with additional resources made available by the cash-rich, state-owned Chinese auto
maker. For SAIC, the move allowed it to extend its reach beyond China (Lin, 2010).
GM has continually strengthened its research and development investments in the Chinese
market and introduced new product lines. It also supported China’s new initiative toward
sustainability by sharing fuel cell technology with its Chinese partners. Engineers from both
companies collaborated extensively and learned from each other. SAIC engineers worked at
GM facilities in Germany, and GM engineers worked at SAIC facilities in China (GM Press
Release, 2009).

Chery Automobile
Chery Automobile, founded in Anhui Province in 1997, is the largest independent Chinese
automaker and one of the fastest growing automakers in the world. It manufactured its first
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car in December 1999. In 2002, Chery sold 50,000 cars. That number increased nearly
eightfold by 2007. Chery became a major exporter of vehicles to emerging economies by
2011 (Chery Web site, n.d.).
Chery began in a region of China which had experienced little industrial development in the
1990s. The municipal government of Wuhu founded Chery to stimulate economic
development. Chery purchased used machines and engine technologies from Ford
Europe for $25 million and purchased chassis technology from a Spanish passenger car
company. In 1999, it started automobile production without an official license granted by the
central government. In 2001, SAIC bought a 20 percent stake of the company, and Chery
began to promote its products using SAIC’s national retail sales license.
Like many domestic rivals, Chery tended to make far less profit per vehicle than foreign
automakers operating in China. By some estimates, foreign automakers in China made ten to
forty times as much profit per car as Chery. The firm tended to set higher prices in its
overseas markets (e.g. Russia) than in China, even after accounting for customs and
shipping costs. According to some experts, Chery made six to eight times as much profit per
car in Russia as compared to China (Jiong, 2009).
To begin penetrating foreign markets, Chery signed an alliance relationship with Iran SKT in
2003, thus establishing China’s first automobile manufacturing facility in a foreign country.
Further, to gain access to advanced manufacturing technology, Chery signed an agreement
with Chrysler in 2007 and created a joint venture with an Israeli company to produce cars
and sport utility vehicles together. In 2008, Chery agreed to sell engines to Fiat, and it formed
a joint venture with the Italian automaker to manufacture Fiat and Chery models together. In
addition, Chery established a partnership with a Thai company to assemble Chery’s QQ and
SUV Tiggo models in Thailand and sell them across Southeast Asia (Chery Web site, n.d.).
By 2011, Chery had become the most successful domestically branded auto company in
China with a strong innovation and new product development capability of its own. Chery
exported tens of thousands of vehicles to emerging markets too and had become the
number one auto exporter in China. The company also extended its reach to South America
by opening an assembly plant there to produce its Tigo-brand sport-utility (Peng, 2008).

Geely Automobile Holdings

Geely Automobile was the first independent automaker in China. Established as an
independent firm in 1986, Geely started manufacturing refrigerators, then decorative
materials in 1989, motorcycle parts in 1992, and motorcycles in 1994. Geely launched auto
production in 1998 and exported its first cars in 2003. Geely conducted an initial public
offering in 2004 and became listed on the Hong Kong Stock Exchange the following year.

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PAGE 14 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 4 2011
 The company’s research and development function included new car model design, engine
development, gearbox, and electronic components. The company typically launched four to
five models per year (Geely Web site, n.d.). In August 2010, Geely completed a $1.8 billion
acquisition of Volvo from Ford. The deal marked the first complete purchase of a foreign rival
by a Chinese automaker in history. The firm planned to expand Volvo’s operations in China
and to export Volvos manufactured in Geely’s Chinese factories (Nicholson, 2010).

The road ahead

As Chinese gross domestic product continued to grow rapidly 2011, the automobile market
experienced torrid growth. Consumers became more sophisticated as the market grew, with
increased attention to issues such as fuel economy, maneuverability, safety, and after-sales
service. Overcapacity became a major concern though, and many automakers worried
about the potential for intensified competition and major price wars.
Chang’an senior executives acknowledged that, ‘‘The only way to catch up with the global
auto maker is to focus on self-brand models and independent development capabilities’’
(Yang, 2010). At present, their brand name remained clouded by their relationships with
foreign partners, mainly well-known global auto makers such as Ford, Mazda, and Isuzu.
The firm wanted to promote its brand more prominently.
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Chang’an had invested enormous amounts of resources in developing its own product
development capabilities. However, managers worried about whether the company could
compete effectively against multinationals with deep pockets and long histories in
automobile design and manufacturing. Some managers wondered whether the company
should continue its cooperation with its foreign partners, or branch out on its own. Others
remained convinced that industry consolidation should take place in China. How would
Keywords: Chang’an position itself to survive a possible industry shakeout?
China,
Automotive industry,
Industry analysis, Note
Joint ventures, 1. This effort constituted part of the China 863 program, a government program designed to fund the
Consolidation development of advanced technologies in a range of industries.

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 Zhang, N. (2008), ‘‘The completeness of Chang’an’’, Automotive Business Review, April 8, available at:
www.autobizreview.com/ArticleView.aspx?id¼357

Further reading
Da, X., Fan, Z. and Ma, J. (2010), ‘‘Chan’an Auto: developing ladder training programs’’, China Human
Resource Development Net, available at: www.chinahrd.net/case/info/59378
Lin, L. (2011), ‘‘Foreign carmakers try brands just for China’’, Business Week, March 3.

Corresponding author
Michael Roberto can be contacted at: mroberto@bryant.edu
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