Serving the World's Largest Emerging Automobile Market
Home > Heavy Duty > Weichai Power’s uphill battle in controlling Shaanxi Heavy-Duty Automobile

Weichai Power’s uphill battle in controlling Shaanxi Heavy-Duty Automobile

On May 10, 2010, China Business reported that the provincial government of Shaanxi unofficially approved for engine manufacturer Weichai Power Group (Weichai) to acquire 100 percent of Shaanxi Heavy-Duty Automobile (Shaanxi Heavy- Duty).

According to the report, which was based on an anonymous source from the State-owned Assets Supervision and Administration Commission (SASAC) in Shaanxi Province, Weichai’s acquisition of Shaanxi Heavy-Duty is expected to yield improved development potential for the truck maker. Weichai currently holds 51 percent of Shaanxi Heavy-Duty’s shares, and Shaanxi Automobile Group (Shaanxi Auto) possesses the remaining 49 percent. Once the acquisition occurs, Weichai will pursue its ambition to fully compete in the OEM sector of truck making in China.

If confirmed, it would also mean that Shaanxi Auto, which originally planned to include Shaanxi Heavy-Duty as a subsidiary to go public, might postpone such a planning.

 

Weichai’s acquisition of Hunan Torch

Even before the company’s separation from China National Heavy-Duty Truck Group Co., Ltd. (CNHTC or Sinotruk), Weichai had shown its determination that it would not be satisfied only as a leading diesel engine supplier. Its growth vision lies on the entire heavy-duty truck industry chain.

On August 12, 2005, Weichai purchased the failed Hunan Torch Automobile Group (Hunan Torch) with ¥1.02 billion (then worth $125.9 million) and as a result became a controlling shareholder of Shaanxi Heavy-Duty, one of China’s leading heavy-duty truck makers, with 51 percent ownership. The 49 percent stake remained under the control of the Shaanxi government and Weichai has so far performed as an outsider investor rather than a primary decision-maker.

On June 12, 2007, Weichai and Shaanxi Auto announced their plans to invest ¥416 million and ¥400 million, respectively, in Shaanxi Heavy-Duty according to their share ratio. However, the proposed funding scheme proved insufficient for the truck maker to develop in the competitive heavy-duty market. Since then, the two shareholders had engaged in a seemingly-endless negotiation of investment quota but no further financial back-up was given to Shaanxi Heavy-Duty. Many analysts believed that Weichai would be able to ensure a better future for the truck manufacturer once it is in full control.

In an effort to exercise more control over Shaanxi Heavy-Duty, Weichai has spent the last few months soliciting the support of the Shaanxi government, the minority shareholder. On April 7, 2010, Tan Xuguang, president and CEO of Weichai Power Group, visited Yuan Chunqing, governor of Shaanxi Province, along with officials from SASAC, senior executives from Shaanxi Auto and Shaanxi Fast Gear (Fast Gear). During the meeting, Yuan reportedly expressed support for Weichai’s business development plans in Shaanxi. On the same day, Tan announced Weichai’s investment of ¥5 billion for new production facilities within the next 3-5 years in Shaanxi. Meanwhile, the Shaanxi government announced that it will include Weichai Power’s investment as part of the province’s “12th Five-Year Plan” (2011-2015).

According to local media report quoting an anonymous source from Shaanxi Heavy-Duty, the Shaanxi government endorsed Weichai’s plan to fully acquire Shaanxi Heavy-Duty. “For Weichai to hold 100 percent of Shaanxi Heavy-Duty’s equity has become a staged target both for the engine maker and the Shaanxi government,” the source said. Analysts believe that Weichai’s full holding of Shaanxi Heavy-Duty will promise the truck maker increased business development opportunity.

 

Wrestling for control

Entering truck OEM has been Weichai’s goal for many years. To increase its business scope and financial capability, Weichai merged on June 18, 2009 with the Shandong Construction Machinery Group and Shandong Automobile Industry Group to form the Shandong Heavy-Duty Group. As the dominant shareholder, Tan became president of the newly formed Shandong Heavy-Duty Group.

Shaanxi Auto and the Shaanxi government, however, have a different agenda for Shaanxi Heavy-Duty. During an internal conference in August 2009, Shaanxi Auto announced its plan for an IPO supported by the Shaanxi government. The Shaanxi government wanted to explore the possibility of getting back Weichai’s 51 percent equity share in Shaanxi Heavy-Duty, which generates over 80 percent of Shaanxi Auto’s revenue.

Following its acquisition of Hunan Torch, Weichai not only became the majority shareholder of Shaanxi Heavy-Duty, but also 51-percent owner of Fast Gear and Hande Axle, China’s monopolistic suppliers of heavy-duty transmissions and heavy-duty axles, respectively. These acquisitions, plus Weichai’s dominating role as an advanced heavy-duty engine manufacturer, have enabled the Weifang, Shandong-based company to form a “golden chain” in the heavy-duty truck industry. The Shaanxi government, however, was not satisfied to have all three key local automotive corporations under the control of a Shandong-based company. Obtaining full control of Shaanxi Heavy-Duty seems a mandatory goal for Shaanxi Auto to go public. Shaanxi Fast Group, which owns 49 percent of Fast Gear, also expects to go public in three years, which means Weichai’s 51 percent ownership may stand in the way.

Weichai, which does not want to break its “golden chain,” responded immediately to Shaanxi Auto’s announcement. On October 29, 2009, Weichai held its technology renovation conference in Xi’an, capital of Shaanxi and announced its strategy to further invest in Shaanxi and set the 2012 sales target for Shaanxi Heavy-Duty at 150,000 units of heavy-duty trucks, and for Fast Gear at one million units of transmissions.

The conference served as the Weichai’s consolidation effort in its Shaanxi subsidiaries. At the conclusion of the congress, Shaanxi deputy governor Wu Dengchang expressed the government’s firm endorsement of Weichai’s plans. “Weichai has shown its vision, and the government will provide full support for its development in Shaanxi,” Wu said.

 

New round of competition with CNHTC

Once Shaanxi Heavy-Duty is fully acquired, Weichai will be well-positioned to increase its competition with CNHTC, its ex-parent. Weichai’s sales target for Shaanxi Heavy-Duty is 100,000 units this year, narrowing the gap with CNHTC’s goal of 140,000 units. Weichai’s goal is to surpass CNHTC beyond 2010.

Analysts have raised concerns regarding Weichai’s ambition in the OEM sector. The company currently supplies heavy-duty engines to many heavy-duty truck makers including Beiqi-Foton (Foton), Baotou Bei Ben Heavy-Duty, and Jianghuai Automobile Group. By fully obtaining Shaanxi Heavy-Duty, Weichai risks becoming a competitor to, rather than a partner of, its existing OEM clients.

Foton signed two strategic agreements in April 2006 and May 2010 with Weichai as its prioritized engine supplier for its Auman and Rowor trucks. Although Pan Linbo, vice president of Foto’s Changsha plant, denied that Weichai’s ambition to become an OEM would affect its partnership with Foton, others fear that Weichai might favor its own subsidiary in engine supplies.

 

Latest update

On May 21, 2010, Shaanxi government officials confirmed to Economic Observer that they do not intend to change the equity holdings of Shaanxi Heavy-Duty in future negotiations with Weichai. Although Tan Xuguang’s announcement of Weichai’s ¥5 billion scheduled investment in Shaanxi was interpreted by the media as the engine maker’s bid to take over full control of Shaanxi Heavy-Duty, an official from Shaanxi SASAC explained that the provincial government would funnel further investment in Shaanxi Heavy-Duty and match Weichai’s investment.

The two sides also agreed that Weichai will remain the major engine supplier for Shaanxi Heavy-Duty in the future instead of sourcing from Shaanxi’s engine joint venture with Cummins, the Xi’an Cummins Engine Co. Shaanxi Auto will remain a 49 percent shareholder of Shaanxi Heavy-Duty.

| | |

Leave a Reply