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Qijiang Gear eyes wider market through marriage with ZF

On August 8, the Development Research Center of the State Council (DRC) and Chongqing government co-hosted a signing ceremony for local joint venture projects. ZF Friedrichshafen AG (ZF) and Qijiang Gear Transmission Co., Ltd. (Qijiang Gear), which had been under cooperation talks for over 15 years, signed a letter of intent during the event, to form a commercial vehicle transmission joint venture. Klaus Billetter, vice president of ZF Investment (China), and Xie Huajun, chairman of Chongqing Machinery & Electronics Holding Group, Qijiang Gear’s mother company, presented the signing ceremony. The German and the Chinese are expected to ink the official joint venture contract by the end of the year.

 According to previous announcement from Chongqing Municipal Development and Reform Commission (CMDRC), the new JV, based in Qijiang County of Chongqing, will have annual production capacity of 300,000 transmissions with output value of ¥5 billion ($735 million). By joining hands with ZF, Qijiang Gear hopes to become a leader in China’s commercial vehicle transmission market. No further details were disclosed during the signing ceremony.

 

Klaus Billetter (second from left) and Xie Huajun (second from right) toasted during the ceremony.

Initial technology collaboration between the two companies dates back to 25 years ago. Qijiang Gear, established in 1928, was brought into China Heavy-Duty Automobile United Company in 1984, together with another transmission maker, Shaanxi Fast Gear Co., Ltd. (Fast Gear), as part of a government project to develop heavy-duty vehicles with international technology cooperatives. In the second year of collaboration, the Chongqing-based transmission maker introduced design and manufacturing technologies from ZF, while Fast Gear adopted a 9-speed transmission model from U.S. auto supplier Eaton.

Qijiang Gear recently published its mid-year sales report. In the first six months of 2010, the company sold over 34,000 transmissions, which is 8,000 units, or 30 percent, more than it sold over the same period in 2009. Qijiang Gear’s total market share in the bus transmission segment surged 6.5 percentage points to 52.3 percent, strengthening the company’s top position in the market. Apart from its own bus transmissions, Qijiang Gear also produces 16-speed transmissions, the QJ16 series, for heavy-duty trucks under ZF technologies.

 

Concerns over the joint venture

Qijiang Gear supplies over 90 percent of transmissions for 10-meter and larger buses in the domestic market at present, but with little market share in the heavy-duty truck business. The company hopes to explore the truck market with technology support from ZF. However, even before the letter of intent was signed, industry analysts had already shown concerns over the two companies’ collaboration.

Fast Gear, the largest transmission maker in the world by volume, formed a joint venture in Xi’an with technology partner Eaton in January 2004. Earlier, by adopting the Fuller RT-11509 transmission through technology transfer with the American auto supplier, Fast Gear laid the foundation for its current dominance in the domestic heavy-duty truck transmission market. The joint venture ended with failure due to “conflict of interests between shareholders,” according to an announcement from Eaton. Li Shengqi, secretary general of China Gear Manufacturers Association, told CBU that the core disagreement between Fast Gear and Eaton was on product R&D. “Fast Gear intended to strengthen self-development abilities through tie-up with Eaton, while Eaton preferred to introduce mature products into the new firm for manufacturing, which eventually led to the divorce,” Li explained.

It is believed that ZF and Qijiang Gear’s marathon negotiation is due to the same issue. For many years the indigenous bus transmission builder reportedly refused ZF’s request to give up its independent R&D in talks with the Germans. The JV negotiations were also bogged down by the repeated change in shareholding structure of Qijiang Gear to the point that a ZF senior executive said “we did not know who to talk to.”

Chongqing municipal government’s determination to bring in foreign investment helped to jumpstart the Sino-German JV negotiations. Industry analysts pointed out that homegrown suppliers should keep their votes and develop independent R&D abilities in international collaborations. For Qijiang Gear’s future development, Li said that the final agreement between the two companies has not been set, so it is hard to tell whether there can be a happy marriage.

 

Market Perspective

In a telephone interview by CBU, She Zhenqing, deputy secretary general of China Highway Transportation Society Bus Sub-Society, was optimistic on the future market of the joint venture. “For decades, Qijiang Gear has dominated domestic bus transmission market, especially the lower and mid-end segments, with incomparable advantages on client resources. ZF, on the other hand, has achieved success in supplying transmission products for high-end tourist and public transportation buses in the Chinese market with technology advantages. The collaboration between the two companies, if with solid integration of their individual supply chain and sales network, can further monopolize China’s bus transmission market,” She noted.

Li pointed out that the current commercial vehicle market atmosphere has created a better environment for joint ventures than a few years ago. The domestic commercial vehicle market, especially the heavy-duty sector, used to be price-oriented in the past. Joint ventures lacked a competitive edge because of high product pricing, in spite of technological advantages. As a result, commercial vehicle joint ventures over the last 10 years have not faired well. However, since the government has implemented stricter emission requirements on vehicles, commercial vehicle users are beginning to consider longer-term factors in their purchase plans, such as fuel efficiency, brand image, maintenance cost, quality and dependability, as well as aftersales service, instead of one-time purchase cost. The trend of going higher-end and more advanced technologies has granted a more comfortable development environment for joint ventures.

Meanwhile, industry analysts also believe that it is crucial for the planned joint venture to maintain Qijiang Gear’s current client base. With ZF’s technology upgrade, Qijiang Gear should try to maintain competitive product prices, so as not to lose its existing bus OEM clients.

While the Chongqing-based transmission provider has teamed up with ZF and is preparing for a breakthrough in the heavy-duty truck transmission market, Fast Gear has already laid its eyes on Qijiang Gear’s market share, by signing supply contracts with leading bus makers including Yutong, Ankai and Zonda. A fiercer round of competition in the commercial vehicle transmission market seems to be imminent.

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