By Chan Ming Lih
The growing e-commerce market and availability of upgraded and new truck models are anticipated to stimulate new truck sales in China. The country offers optimistic market opportunity for global commercial truck makers and components suppliers.
China is one of the most attractive commercial truck markets in the world. It has progressed into an automotive manufacturing base driven by advanced technology and a capital-intensive industry. Although the commercial truck market was down by 11 percent from 2013 to 2014, market growth is expected to be back on the agenda in the medium to long-term (3-8 years).
China’s commercial truck sales are likely to increase by 1 million units during 2014-2022 at a compound annual growth rate (CAGR) of four percent, from 2.65 million units in 2014 to 3.63 million units by 2022. This region symbolises an optimistic market opportunity for global commercial truck makers and components suppliers.
Commercial truck market demand in China is expected to accelerate further mainly driven by stable and continuous growth of the e-commerce market. This will lead to a surge in demand for road transportation, regulations on commercial truck emission standards, and the expansion of road network in China.
The overall Chinese e-commerce market is on an upward trend with high rate of penetration of internet use. The success of Alibaba e-commerce and Alipay transaction platform are emerging in the e-commerce activities in China. The growing number of businesses and the e-commerce trend sweeping the country are creating new opportunities for postal delivery and logistics services in primary and secondary industries. Close to 38 billion tonnes of high volume road and port logistics are demand generators for the commercial truck industry in China.
Subsequently, the revision of emission standards has lined up a slew of new truck launches going into 2022. Several models are expected to be introduced during 2015-2022, including new offerings from China National Heavy Duty Truck Company’s (CNHTC) new Howo, Shaanxi’s new Delong, Dongfeng’s new Chenlong, Foton’s new Aumark, and so on. Availability of upgraded and new truck models is anticipated to stimulate new truck sales.
There is also a rise in construction of cross border and on national expressways. The continued roadways expansion in the country which is at a 2.5- 4 percent year-on-year growth rate, is driving a more feasible logistics solution. The Chinese Government is likely to link Chinese cities to the neighbouring countries and increase inland construction concentration. The Government is also connecting inland areas with key trading cities through expressways, such as from Beijing to Lhasa.
Local OEMs To Lead
Meanwhile, the Chinese commercial truck industry has nearly 50 truckmakers, of which 20 percent are active OEMs. Local OEMs, including Foton, Dongfeng, First Automobile Works (FAW), and CNHTC, are dominating the commercial truck market in China. This trend is likely to continue in the long-term. Several of the OEMs are only concentrating on the light-duty truck segment. Nevertheless, Foton and Dongfeng are well represented in the three truck segments, light, medium, and heavy-duty hauls.
At the same time, foreign OEMs have entered China through the joint-venture business model. Several joint-venture OEMs such as Naveco, SAIC-Iveco Hongyan, and Sichuan Hyundai are well-operated in China.
Nonetheless, weak innovative design ideas, long product life cycles, and GDP slowdown are likely to be the main restraining factors for the Chinese commercial truck market in the medium to long-term. To reform market growth in the long-term, domestic truck OEMs are required to prioritise both design and engine technology development. Also, greater value in terms of better truck features, ‘value’ prices, and good aftersales services are expected to lead a rising on commercial truck market demands.
The Chinese heavy-duty truck (HDT) segment touched 0.74 million unit sales in 2014 with top five OEMs holding 81.7 percent, which include Dongfeng, CNHTC, FAW, Foton, and Shaanxi Automobile Group. The market share of these top five leaders will be further consolidated to achieve nearly 86 percent joint market share by 2022.
The market entry barrier for HDT segment is high. Top market share leadership will remain unchanged during 2014-2022. However, Foton (the fourth HDT market leader) is likely to close the gap on FAW through full utilisation of Daimler’s advanced technology.
The demand for medium-duty trucks (MDT) is low as it is the least attractive market segment in China. It only accounted for less than 10 percent of market share in total truck sales in 2014. Key market leaders are Dongfeng, FAW, CNHTC, Lifan, and Qingling. Meanwhile, Dongfeng and FAW are forecast to further their joint domination of the MDT segment, exceeding 45 percent of the combined market share during 2014-2022.
However, due to the increased penetration of broadband Internet, mobile Internet, and rising e-commerce, the demand for MDT is skewing toward light-duty trucks which are used for final door-to-door delivery services.
Comparatively, the light-duty truck (LDT) market is the most competitive segment due to the sheer sales volume plausible in China. It gained larger market attractiveness in China over the last few years, and reached 62.6 percent of sales market share in 2014. A multitude of OEMs with little product differentiation has resulted in a highly fragmented market.
The key market participants include Foton, Jiangling Motors Corporation (JMC), Jianghuai Automobile Company (JAC), Dongfeng, and Jinbei. Alongside, market concentration is expected to continue to be low due to high competitiveness and rivalry. This will lead to a revolution of preferences of buyers, fleets, and automakers.
Revolution in Preferences
The adoption of long-haul delivery heavy-duty trucks and last-mile delivery light-duty trucks is on the rise. Long-haul delivery trucks offer express delivery services through main connection roads across large-and-medium sized cities. In contrast, last-mile delivery trucks are in charge of final delivery of services through connection roads of residential and rural areas. Besides, both 6X4 tractors and 4X2 trucks are growing very fast in China year-on-year. A 4X2 truck is the leading type that contributed close to half of the market share on total miles used on China’s expressways.
Furthermore, there is a significant growth in cross-border road transportation. Logistics service providers will gradually expand their business coverage, from intercity to rural areas and across national borders such as those with Russia, Vietnam, and Laos. Delivery service period will be shortened due to completion and enlargement of new expressways.
Larger road expansion is resulting in new logistics dynamics. Third-party logistics (construction and intermodal transit carriers), manufacturing and retail supply chain, and agricultural delivery fleets are likely to face weak tendency from 50.6 percent of combined market share in the logistics industry in 2014 to 49.1 percent by 2022. However, the market share of primary resource-based, e-commerce, rural delivery, and recycle material carriers is expected to grow from 47.8 percent in 2014 to 49.5 percent by 2022. Rapid growth of the e-commerce industry has led to a developed well-organized delivery network, which includes factory-to-business (F2B), business-to-business (B2B), business-to-consumer (B2C) and customer-to-customer (C2C) platforms. Meanwhile, rising environmental awareness leads to an increase in logistics demand due to the recycling industry’s need.
OEMs are moving away from the traditional frugal engineering strategy to component rationalisation strategy. Leading domestic OEMs are able to supply their own key components production facilities, and exhibit high level of vertical integration. Frost & Sullivan finds that joint-venture activities will be a key force in reshaping commercial truck landscape and competitiveness in China as they are integrating high-value advanced technology and design improvements, such as braking, clutch, transmission, and safety systems.
As purchasing power goes up, end-users, fleets and leasing enterprises in China are increasingly demanding commercial trucks incorporated with sophisticated features. This indicates an increase in purchase of alternatives from low-cost to high-value commercial trucks in the near to long-term. Hence, dealers are targeting a premium revenue growth on safety and convenience enhancement. The need for value-added solutions will be positioned on vehicle service and maintenance, financing, insurance, and telematics-based fleet management, instead of traditional new truck sales.
The next would be the truck value-chain segment, which will gradually transform. Fleets will increasingly demand higher individual comfort. They are more likely to seek value-added services on extended warranty, contract hire, number plate, licensing, and cross-border support services. Hence, profit margin will decrease, due to the high degree competitive substitute and new entrant rivalry in the Chinese commercial truck market.
Besides general diesel powertrain solutions, natural gas is a leading alternative fuel solution in China. It is at an early maturity phase with the rising market demand for liquefied natural gas (LNG) trucks. Nevertheless, medium-high natural gas retro-fit installations are growing in the aftermarket in China. By meeting the Natural Gas Utilisation Policy and emission standard regulation in China, the natural gas segment will continue to grow rapidly, especially in Tier-I cities.
On the other hand, the adoption of hybrid and electric powertrains is restrained by nascent technology and low customer preference in China. But adoption of electric powertrain commercial truck technology is expected to grow from 2022 onward with the completion of several road infrastructure projects.
The overall Chinese commercial truck market is targeted to enter into an early maturity stage by 2022. This market is likely to be developed from the basic original equipment sales and financing model to a higher market concentration, advanced technology integration, and progressive logistics solutions entity.
Key domestic OEMs will continue their domination in the Chinese commercial truck market by integrating advanced joint-venture partnership technology, as well as further expanding production capacity. Greater market fragmentation is expected in the Chinese commercial truck market, buoyed by demand expansion and opportunities for growth on the back of superior technology for foreign OEMs, especially in heavy-duty and light-duty truck segments.
(The author is Research Analyst, Automotive and Transportation Practice, Frost & Sullivan. Views expressed are personal.)