Weichai Power: Creating a Complete Power Solution

Company Name Weichai Power Co., Ltd.

Headman Tan Xuguang

Main business R&D, manufacturing and sales of internal combustion engines

Founding time 2002

★ outstanding performance:

March 11, 2005 listed on the Hong Kong Stock Exchange. Chairman Tan Xuguang was selected for the 2005 CCTV China Economic Year Character Award. Weichai's sales revenue in 2005 has exceeded 10 billion yuan, becoming the first billion-dollar enterprise in China's internal combustion engine industry. On August 12, 2005, Weichai Power Co., Ltd. invested RMB 1.023 billion in a 28.12% stake in the Hunan Torch and officially entered the torch.

★Core Logic:

Although Weichai Power is currently the largest single engine manufacturer in China, due to risks from downstream customers (whole vehicle manufacturers) and upstream suppliers, production capacity, production volume, bidding price, and even the entire economic change from the policy level will be given to Weichai. The future is unknowable. The bigger the firewood, the worse the anti-risk ability.

Through the acquisition of the Hunan Torch, Weichai Power has transformed itself from a single engine manufacturer to a general-purpose engine supplier. It has formed a closed-loop integration in the industry chain as much as possible, making the company's procurement, production, sales, and other industrial chain systems shorter. The maximum synergy effect is effectively achieved within the time.

★ Mode path:



Case study

The predicament of an independent diesel engine

The engine is the heart of automobiles and heavy machinery and looks like a "fat", and Weichai Power's dominance in the high-power engine market is very stable: in the domestic market of heavy-duty trucks and 5-ton loaders of 15 tons and above. The occupancy rate was 73% and 75% respectively. The 6160 and 6170 medium-speed diesel engines accounted for more than 80% of the market share in the industry. Nearly monopolistic market share seems to make Weichai safe.

However, since ancient times there has been a saying that "Fei Shui does not flow outside people's land." Weichai Power currently faces not only the competition among its peers, but more serious is the potential competitive pressure from vehicle manufacturers.

Whether from the international or domestic point of view, fewer and fewer independent diesel engine companies. For domestic use, FAW Xichai invested heavily in the development of Aowei engines with the support of FAW Group. Dongfeng has a Nissan Renault 11-liter engine and Cummins C300 series. Shang Chai joint venture with Hino to start an 11-liter engine, Yuchai Daou III standard YC6113 series heavy-duty engines are also recently put on the market. The three major heavy-duty truck brands in Europe, Volvo, Mercedes-Benz and Renault have signed cooperation agreements with domestic companies. Volvo’s partner, Sinotruk and Mercedes-Benz’s partner Futian, are both Weichai’s major customers. Internationally, heavy-duty truck manufacturers such as Mercedes-Benz and Volvo have their own dedicated engine production plants. They neither supply external engines nor purchase engines from the outside.

As for Weichai Power itself, although it is still a leader in the domestic industry, CNHTC has a 25% stake in Weichai Power - 40% of the sales of Steyr engines produced by Weichai Power. The development is undoubtedly influenced by China National Heavy Duty Truck. In addition, Sinotruk once attempted to cooperate with Volvo in the production of engines, and refused to settle in Weichai. It also secretly plans to build a new engine plant in Jinan. These actions have even increased Weichai's anxiety about future development.

The idea of ​​building a "powertrain"

Internal and external problems have forced Weichai to make changes. Since an independent engine does not work, it is only in the direction of building a complete "powertrain." Therefore, they hope to grow from a single heavy-duty truck engine supplier to an engine supplier for heavy-duty trucks, high-grade buses, large construction machinery and agricultural equipment. The goal is to be the world's largest general-purpose engine manufacturer. To do this, they must expand their products appropriately, and then expand their customer base. But there are several problems that need to be solved before them:

First, the product is single, unable to complete

The powertrain generally includes an engine, a transmission, and a suspension chassis. It is the heart and spine of the car. Although Weichai Power is the world’s largest single-brand 10-litre engine manufacturing base, occupying 80% and 78% of the market share of heavy-duty vehicles and construction machinery and other power supporting industries, it only has a heavy-duty engine, which is medium-sized, especially The market outlook is promising. The diesel engines for light and passenger cars are almost blank. The total capacity of the heavy truck market is small. The current market “blowout” does not guarantee the future; the light diesel engine of Yuchai, an important competitor of Weichai, has been listed on the market. The dieselization of passenger vehicles such as automobiles is almost synchronous, and the growth of this market will be much higher than that of the heavy truck market where Weichai depends.

Although Weichai has continued to hold its treasure on heavy-duty diesel engines, the production scale of a single product is too large. Once the market changes, Weichai has the danger of overcapacity. Not to mention other components such as a complete engine line, gearbox and suspension chassis.

Second, the technology is backward, the assembly is weak

Even the heavy-duty engines on which Weichai depends are faced with technological development. The technology used is Steyr's technology in the 1960s and 1970s. It has fallen behind many old-fashioned diesel engines. The problem is not solved by minor repairs. Therefore, heavy trucks equipped with Weichai engines may not be given at all in some cities with high emission requirements, such as Guangzhou and Beijing. Although only heavy diesel engines are relatively mature, once there is a reliable new technology heavy-duty diesel engine on the market, Weichai will not secure the backyard, and it will be even more sluggish to expand into the “powertrain” direction.

Third, the ownership of the system, suppress expansion

China National Heavy Duty Truck is a professional manufacturer of heavy trucks. Weichai is backed by China National Heavy Duty Truck Co., Ltd. is a double-edged sword: On the one hand, Weichai has a fixed customer and has a backing; on the other hand, due to fierce market competition, it enters the buyer. After the market, differentiation will be an inevitable choice. China National Heavy Duty Truck uses Weichai's engine, so the heavy truck manufacturers competing with it may resist Weichai's engine. Now that Weichai is able to control its supporting automobile manufacturers, it is because the heavy engine of other engine manufacturers is not mature enough, and the heavy-duty engine market is in the seller's market.

Although China’s heavy-duty truck exports have been developing rapidly, it is not enough to compete with the leaders of the same industry in the world in terms of each link. It is just that the lower costs make up for the lack of competitiveness. Because of the vicious competition in the Chinese market, the profits of heavy-duty vehicle manufacturing are actually supported by the profit transfer of engine factories.

Layout "Hunan Torch"

Obviously, if Weichai continues to be an independent engine manufacturer, there is bound to be a high degree of risk. So extending up and down is a good choice. The breakthrough bottleneck is to form a closed-loop integration in the industry chain as much as possible. The core is still in the engine: increase the product category, comprehensively enhance the technology, gradually expand the production of products, and get rid of the constraints of China's heavy truck. The strategic thinking of Weichai to create a "powertrain" is thus clear, and what is needed is just an opportunity.

The opportunity comes when you come. In 2004, Deron collapsed and the financial crisis of the Minsk Aircraft Carrier Company affected the Torch, causing the capital chain to break. At this time, Weichai felt that the opportunity had come. At the time, it was initially determined that the Torch was the only one of Delong's pure land and had the highest profitability of heavy truck components in China. Therefore, the acquisition of the Hunan Torch was formally put on the agenda. In March 2004, Weichai Power achieved the listing on the Main Board of Hong Kong and raised 1.16 billion Hong Kong dollars in funds. The capital issue of horizontal integration of the industrial chain was thus resolved and the expansion period began to mature.

Later, Weichai’s research on the Hunan Torch was carried out in full swing. This survey further strengthened the determination of Weichai to acquire the Hunan Torch.

First, it is conducive to a complete product line

Among the five major assets of the Hunan Torch, Weichai is most interested in the gear business and spark plug assets. Shaanxi Provincial Torch Holding Co., Ltd., with 51% of its profits, had a profit of 845 million yuan in 2004, and its profitability even surpassed that of Hong Kong-listed Weichai Power (2004 operating profit was 797.5 million yuan). The gears used by Weichai Power and its various companies that are produced annually by various types of diesel engines are basically purchased from other supporting manufacturers. Weichai Power's reorganization of the Hunan Torch will help both Shaanxi Gear and Weichai Power to pull each other's market advantage to achieve strategic cooperation. Both products have strong complementarity both in production and in the sales of certain products. Reorganization can greatly reduce the production and sales costs of both products and increase the bargaining power of products in the market.

Second, it is conducive to upgrading technology and consolidating the backyard

Weichai had a long-standing understanding of the gap in its own technology, so it collaborated with Austrian AVL to research new heavy-duty engines and launched a blue-engined engine with completely independent intellectual property rights. In the process of M&A of Hunan Torch, Weichai also expressed support for the newly-established engine plant jointly invested by Shaanxi Torch Group and Shaanxi Automobile Group, its second largest shareholder, and Cummins. Because Weichai and Cummins are also likely to work together, the engine produced by the new plant will be dominated by Weichai's relatively weak Euro IV engine, which just makes up for the current shortage of Weichai. Moreover, the cooperation can also enable Weichai to easily access Cummins' Euro IV technology, which will play a fundamental role in the innovation of Weichai's follow-up products that have just independently developed the Euro III.

Third, it is conducive to breaking the bottleneck of property rights and realizing resource integration.

Since the drawbacks of relying on China National Heavy Duty Truck began to appear, so early decision may be a happy solution to both parties, what is missing is only a fuse. Weichai hopes that the acquisition of the Hunan Torch is such a fuse. Hunan Torch owns a 51% stake in Shaanxi Zhongqi, which is its best quality asset, and Weichai hopes to enter the vehicle field with a clear intention. This is exactly what CNHTC did not want to see. Therefore, Sinotruk's opposition to Weichai's acquisition of the Hunan Torch became the direct cause of the two parties' separation from pro-parents to tearing the skin.

Decisiveness

At the same time as Weichai conducted intense investigations, Wanxiang Group had firstly signed a “stake” with the three parties of Xinjiang Delong, Guangzhou Chuangbao Investment Co., Ltd. and Shaanxi Zhongkeyuan New Technology Development Co., Ltd. on July 21, 2004. Transfer Agreement. The original management who led the reorganization of the Hunan Torch also expressed its intention to transfer equity and credit rights to Wanxiang.

Despite the substantial negotiations with Huarong on the acquisition of the Hunan Torch, there were also eight companies including Weichai, Yutong, FAW Group and Sanyi Group. However, Weichai believes that if Wanxiang succeeds, it is very likely that Wanxiang and Shanghai Electric will join forces to become Weichai’s powerful opponent.

In the entire China National Heavy Duty Truck market, it is divided into four worlds (China National Heavy Duty Truck, Shaanxi Heavy Duty Truck, Chongqing Heavy Duty Truck and Foton); gear market is dominated by "double oligopoly", and Shaanxi Dental is a decisive factor (the other is the Xiangjiang Gear Factory, originally Torch Holdings is now purchased by the Shanghai Electric Group. Once Wanxiang has acquired the torch, it will inevitably form an alliance with Shanghai Electric Group. Among the five major assets of the Hunan Torch (Shaanxi Gear, Shaanxi Heavy Duty Truck, Hunan Spark Plug, Mudanjiang Air-conditioner, Off-road Vehicle), Shaanxi Gear is in the upstream of the Weichai industrial chain, and Shaanxi Heavy Duty Truck is in the downstream of the Weichai Industrial Chain. Wan Xiang succeeded. Weichai is not only aspirational to become a nation. It means that survival will also face pressure from top to bottom.

The strategic deployment of Weichai is to form a closed-loop industrial chain with the engine as its core. This not only refers to the Chinese market, but Jianfeng refers to the international market. The biggest danger of Weichai lies in the fact that many years old customers want to establish a joint venture engine plant with Cummins, an old rival in the international market. Cummins has been negotiating with Shaanxi Zhongqi for more than three years. After Shansteel's replacement of heavy trucks in Steyr, Weichai will lose its advantages in supporting Shaanxi Automobile. The launch of the Cummins project will undoubtedly pose a greater threat to Weichai. Weichai's acquisition of the Hunan Torch can be the first step to control Shaanxi Heavy Duty Truck to stabilize its market and ultimately complete its industrial layout.

Weichai Power attaches great importance to this acquisition, and the company's top executives are all on the list, and they also organize lean teams and professional investment banks to conduct serious research and analysis. On November 24, 2005, Weichai Power announced the acquisition of the Hunan Torch with RMB 1.023 billion, making it the largest M&A in the industry.

Weichai Power acquired the torch of Hunan as an industrial investor. And put forward the following strategic arrangements:

First, to maximize the synergies between the Weichai Power and the closely related business of the Hunan Torch, integrate the resource system, and establish the business of forming three major industrial chains whose power is always the core, vehicle and auto parts as important components. The framework will quickly increase the profitability of the company and become the largest powertrain production base in the world. It will also build a highly competitive automotive industry chain in the world.

Secondly, with regard to the auto parts resources owned by the Hunan Torch, it will rely on the rapid development of the Chinese auto industry and heavy equipment industry to realize the integration of its product resources for mechanical parts and Weichai Power, with a view to enterprises’ procurement, production and sales. Industrial chain systems such as these effectively perform their maximum synergies in a relatively short period of time. In particular, with regard to the gearbox business with a leading position in the domestic industry, under the premise of giving full play to their respective advantages, the company will achieve integration with Weichai's power engine business in technology, branding and marketing policies for domestic heavy-duty vehicles, passenger cars and projects. The company provides resources and services in various fields such as machinery, and quickly develops it into the company's core business content, becoming China's largest and most influential assembly supplier.

[Analyst Reviews]

Bai Lixin, Principal Consultant, IBM Global Services Business Consulting Services Business Strategy

In the Chinese engine industry, Weichai Power is undoubtedly eye-catching. It not only launched the first “blue engine” engine with completely independent intellectual property rights, but also spent huge sums of money to acquire the Hunan Torch, aiming to integrate the upstream and downstream engines. Industry, to create a complete universal power solution.

However, equity integration is by no means equal to industrial integration. The relationship between China's Sinotruk and Weichai Power's natural father and son may still be broken, and who can ensure that Weichai's power and the Hunan Torch and the indirectly-owned Sha Zhong Heavy Steam Co., Ltd. achieve harmonious coexistence?

Fortunately, at the same time of equity integration, Weichai Power also put forward the concept of "chain innovation", formed a "chain innovation" strategic alliance with hundreds of suppliers, and established a three-nation four-party cooperation alliance with key partners ( Weichai, Futian, Bosch, AVL).

The core of "linked innovation" is the process integration between companies. Weichai Power will use an inter-departmental collaboration team to connect with customers' R&D, supply, production, and customer service departments to ensure that the customer's individual needs are accurately understood and ensure that customers are finally presented with low-energy and high-efficiency power solutions. For those companies that do not have process integration capabilities, whenever a customer's needs change, a series of pushes and wranglings are triggered within the company, and customers can only get helplessness and disappointment.

Supporting the “chain-innovation” process capability is the performance appraisal and incentive program, which encourages employees to step out of their respective departments or even companies to achieve more extensive collaboration and innovation. "Chain Innovation" is both an examination room and a stage for training new leaders. Only those leaders with a broader perspective and strong coordination ability will be able to compete in the future "chain-chain competition."
View related topics: Weichai Power: Expanding Auto Parts Gold Industry Chain

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