– by Liu Tao
The collapse of the Delong Group in late 2004 triggered a 3rd reshuffle of China’s heavy-duty market and the winner was Tan Xuguang, a little known figure in the industry until most recently.
Of all the contenders for the assets of Delong, Tan and his company, Weifang Diesel Power Group, or Weichai Power, seemed for a time, the least qualified bidder. Many perceive that the 46-year-old chairman, of a State-owned yet public-listed engine maker, has achieved something seemingly impossible: acquiring one of China’s three large heavy-duty truck manufacturers as well as the country’s leading heavy-duty transmission manufacturer.
“The acquisition of Hunan Torch, the public-listed company of the failed Delong Group, was completed on April 30,” Tan told the reporter in a face-to-face interview last August. “This has been the most important milestone in my life. I have accomplished it against all odds and risks, after working toward such a goal over the past 10 years. Nobody else could have done it because of the special environment of China’s heavy-duty market and the historic timing.”
Less than a month after the interview, Weichai Power, listed in both Shenzhen and Hong Kong, published the 2007 mid-year performance. In the first six months of the year, sales reached ¥15.34 billion ($2.05 billion), up 77 percent year-on-year. Net profit was ¥957 million, up 122.8 percent. Dividend paid to shareholders was ¥1.87 per share. Subsidiary Shaanxi Heavy-Duty Truck Corp. (Shaanxi Heavy-Duty Truck) sold 31,000 trucks, up 104.1 percent. Shaanxi Fast Gear Co., Ltd. (Shaanxi Fast Gear), Weichai’s transmission subsidiary, sold 243,700 units of heavy-duty transmissions, up 112.6 percent. Sales of Weichai diesel engines were up 68.8 percent and its market share for engines for heavy-duty trucks of 8 tons and higher was 33.4 percent and for engines for heavy-duty trucks of 15 tons and higher was 62.4 percent.
The ¥1 billion paid by Tan to acquire the assets of the failed Delong was no doubt worth it. But the general consensus at the time of the acquisition was that Tan paid at least ¥200 million more than the worth of the companies. However, the much higher bidding offer, which gave Weichai Power the controlling 28.12 percent of Delong’s most valuable assets under Hunan Torch, helped Tan beat his most formidable contender, China’s leading private automotive parts and components manufacturer, the Wanxiang Group.
“As soon as we learned about the collapse of Delong,” Tan told the reporter, “we knew that opportunity was knocking at our door.” Just about a month before, in the spring of 2004, Weichai Power was successfully listed in the Hong Kong stock exchange, which brought the company ¥1.4 billion in cash. “I wanted our enterprise to grow, but we could not possibly double our sales and revenue by just remaining in the engine business,” added Tan.
At the time Weichai already enjoyed a lion’s share of China’s engine market, supplying 78 percent of the 15-ton and higher heavy-duty trucks and 75 percent of the 5-ton and higher construction trucks. According to a confidential internal report, Weichai believed in 2004 that “Hunan Torch meant a strategic opportunity.” The acquisition of Hunan Torch at whatever cost would be a milestone in the history of China’s heavy-duty truck manufacturing and the heavy-duty landscape could change forever. What Tan saw in Hunan Torch was not the dollar value, but its strategic value. To him, Hunan Torch was a “golden key” that would open the door for a reshuffling of China’s heavy-duty industry.
China’s heavy-duty truck market had already gone through two restructurings. The first was in 2000 when the central government decided to break up the China National Heavy-Duty Truck Corp. (CNHTC) into three separate group companies: Jinan-based heavy-duty truck corporation, which retained the CNHTC name, Shaanxi Heavy-Duty Truck and Chongqing Heavy-Duty Truck Corp. (Chongqing Heavy-Duty Truck), each falling under the administration of respective local provincial governments. The second was when Delong and Hunan Torch in 2002 acquired both Shaanxi Heavy-Duty Truck and Chongqing Heavy-Duty Truck, plus the Shaanxi Fast Gear. Shaanxi Heavy-Duty Truck was the country’s largest producer of military trucks and trucks over 15 tons. Shaanxi Fast Gear controlled 96 percent of China’s transmissions for heavy-duty trucks over 15 tons.
Wanxiang had been working for at least one year trying to purchase Hunan Torch. Wanxiang owner and chairman Lu Guanqiu and his son CEO Lu Weiding were both attracted by the value of Shaanxi Heavy-Duty Truck because it would offer an ideal opportunity to realize their long-sought ambition to move into the OE business. Wanxiang’s opportunity came when State-owned Huarong Assets Management Co., which had taken over all of Delong’s assets, made a decision that all contenders must bid for Hunan Torch. A bidder had to pay a deposit of ¥200 million within 10 days of its registration to bid and the winner was required to make full payment within 10 days after the bid.
Huarong’s decision effectively blocked attempts of half of a dozen other contenders. State-owned companies gave up the bid because they had to go through the process of acquiring lengthy bureaucratic approvals from the government for any investment larger than ¥1 billion. As a public-listed company, Weichai had to call a stockholders’ meeting for approval of such bidding, which would take 30 days. It seemed that Wanxiang would clench the deal.
One week before the bidding, however, Tan was able to convince several large State-owned enterprises in Shandong Province to invest and form the Weichai Power Investment Corp. as the intended buyer of Hunan Torch. With control of 45 percent shares in the new investment company, Tan was able to bypass the shareholders’ meeting and put together a consortium that was ready to compete with the privately owned Wanxiang.
On August 8, 2005, Weichai Power Investment outbid Wanxiang by more than ¥100 million to successfully acquire Hunan Torch. For his successful acquisition, Tan was named one of China’s 2005 National Personalities.
Rebirth of Weichai
Tan entered Weichai as a worker in 1986 when he was 16 and worked his way up as an export manager, assistant general manager, vice president and president.
At the time when Tan was appointed president in 1998, Weichai as a State-owned large enterprise was close to bankruptcy. The engine factory was loaded with inventory and ¥300 million in debt. The 14,000 employees had been without pay for six months.
To tide over the difficulties, Tan was able to convince the local bank for a loan to pay workers’ salaries and in the meantime led a major reshuffle of the company. He and the management separated a large number of subsidiary and non-essential enterprises and they were ordered to develop their own businesses based on the market. He streamlined the factory management by cutting 21 offices out of a total of 34 and removed 3,000 positions in the company. In the meantime, he and the new management team decided to expand their product lines to supply not only heavy-duty trucks but also construction equipment and boats and ships.
Benefiting from this major restructuring, new market positioning as well as China’s expanding fixed assets investment in the early 2000s, the sales figure of Weichai steadily increased from ¥800 million in 1999 to ¥2.7 billion in 2002 and ¥10 billion in 2004. Profit rose from only several million RMB to ¥800 million in 2004.
But in 2001 Weichai was administratively ordered by the central government to become a subsidiary of the new CNHTC in Jinan. Tension gradually rose between the two over whether Weichai should supply other heavy-duty truck manufacturers in China. Despite repeated requests from CNHTC not to supply its competitors, Weichai continued, like it always did, supplying other heavy-duty truck makers. CNHTC was Weichai’s largest OEM customer, but it purchased only 40 percent of Weichai’s engines. Tan was quite independent within the CNHTC group because it was contributing 70 percent of CNHTC’s revenue and profit. In comparison, the parent company was operating in red.
Poised for further expansion Weichai’s operations started basing on the market rather than getting constrained by an inefficient parent company. Weichai invited strategic investors and formed the Weichai Power Co., Ltd. and successfully listed on the Hong Kong Stock Exchange in 2003. The 40 percent of Weichai Power owned by CHNTC was diluted to 23 percent. Seeing that Weichai would most likely become independent one day, CNHTC secretly started building an engine plant in Jinan in 2005. At the end of last year, with intervention from the provincial government, CNHTC and Weichai finally separated their relationship and Weichai became independent.
A new Weichai
Despite the loss of 40 percent of engine sales after losing CHNTC as a customer, Weichai quickly started a strategic alliance with Beiqi-Foton, Bosch and AVL. It also teamed up with FAW, Chongqing Hongyan, China North-Benz, Hualing and Jianghuai as an engine supplier. The company achieved record sales revenue and profit in 2006 unaffected by the separation from CNHTC.
But the real challenge for Weichai was how to reorganize the assets of Hunan Torch and reform its stock structure. Tan and his team spent a better part of 2006 trying to convince both the Hunan provincial government, which would lose a public-listed company, and Shaanxi provincial government, which owned shares of Shaanxi Heavy-Duty Truck that the best solution to benefit all stakeholders was to swap 3.53 Hunan Torch shares for each Weichai Power share.
On April 30, 2007, Hunan Torch was de-listed and Weichai Power was successfully listed in both the H-share and A-share markets in Hong Kong and Shenzhen. The engine manufacturer now owns 51 percent of both Shaanxi Heavy-Duty Truck and Shaanxi Fast Gear.
Now that Tan Xuguang has acquired the most profitable links of the manufacturing chain of heavy-duty trucks from engine through transmission and chassis to assembly, where would he move next? Most of China’s heavy-duty players already own or are developing their own engine plants. How would Tan compete in the future? There is no doubt that Weichai needs a medium to long term plan for the next 5-10 years.
Tan seems to have a ready answer. At the recent bi-annual corporate meeting of the new Weichai Group, Tan gave a talk to senior management titled “Building a new and global group enterprise.” According to his speech, Weichai Holding, which is the name of the new group, has set a goal to realize annual sales of ¥100 billion in five years and strives to become one of the world’s 500 largest companies.
“Our strategic goal is to export 10,000 heavy-duty trucks, 10,000 transmissions, 10,000 engines and 10,000 chassis,” Tan told the reporter. He traveled extensively in Europe and North America earlier this year. “We may have a breakthrough development in the overseas market in two to three months,” he told the reporter. “And that will be a major step for Weichai Holding to grow into a global company.”
Based on the author’s story published in Zhongguo Qiyejia (China Entrepreneur)