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Why FAW Jiefang outperforms (I)

FAW Jiefang is the leading heavy-duty truck manufacturer in China and an important subsidiary of FAW Group, the “cradle” of China’s auto industry. Hu Hanjie, president of FAW Jiefang and a lifer at FAW, recently shared his insights into the auto industry and philosophies of running the country’s leading heavy-duty truck manufacturer in an exclusive interview with Auto Business Review (ABR) on July 15, shortly after he drove the 700,000th Jiefang J6 truck off the assembly line. Editor

 

SIDEBAR

Hu Hanjie bio

Hu was appointed president of FAW Jiefang in July 2016, a year after he was appointed executive vice president of the company after serving as president of FAW-Volkswagen Automotive Sales Co., Ltd. for 17 months.

Prior to that, he served as president of FAW Jilin Automobile Co., Ltd. for five years. He also held senior-level positions at the FAW Interior Parts Factory, FAW Body Works and FAW General Assembly Factory.

 

 

“I always have a sense of crisis”

 

ABR: How do you feel that you drove both the first and now the 700,000th J6 off the same assembly line 10 years apart?

Hu: I was quite excited. We met lots of difficulties in our first attempt to produce the J6. I was in charge of preparing production and initiating mass manufacturing. The whole procedure includes investing in equipment, preparing relevant documents and process files, and personnel training.

We did not acquire advanced technological methods at that time, especially when it came to launching a self-developed, high-end truck. First of all, we have to take the relevant supporting industries into consideration, which puts limitations on the design of the truck. Also, after the initial development stage, we need to draw a detailed plan and guarantee that the truck can be produced according to our original design. Raw materials and components were all very crucial.

As you can imagine, the development and production of the J6 was quite difficult, and efficiency was quite low. One of the troubles we encountered was vibration. That is, the truck body vibrates excessively after reaching a certain speed. We exerted lots of efforts to get it fixed.

The decade after FAW Jiefang J6’s debut witnessed its incessant upgrading. The newest updated version, which was put on the market across China on June 9, had six major innovations on appearance, intelligence, power, fuel economy, safety and comfort, including 72 specific design upgrades. It is much different from the 2007 version.

But the cab design retained its originality. It built up the foundation for future improvement. We have seven cab designs. And the investment of manufacturing molds was huge – more than ¥300 million. It was quite controversial:  should we cooperate with foreign companies or completely produce all molds on our own? It was the first time for our mold division to produce molds for an entire vehicle.

 

ABR: How have you changed over the last decade as someone who has witnessed the rise of the J6?

Hu: The highly competitive J6 should be attributed to the hardworking employees at FAW Jiefang, not just to me.

From 2002 until now, I have worked at various FAW subsidiaries and witnessed the growth of FAW Jiefang and the J6. But I also noticed some problems especially after working at FAW-Volkswagen for nearly two years. There I learned some “tricks” of the passenger vehicle business. That gave me lots of inspiration. Take the managerial and administrative staff for example. FAW-Volkswagen is so well-organized and systematic. Therefore, I suggested that FAW Jiefang also adopt similar process management methods.

Both the Jiefang J6 and I become more powerful over the last decade. But still, when I took the position as president of FAW Jiefang, I felt I lacked the competence to lead the company.

I was not escaping the responsibility. Instead, I was afraid in case that my incompetence could hinder its development. Since Jiefang is the backbone of FAW, its wellbeing would also affect the entire auto industry in China. Everyone knows how prominent it is.

Nevertheless, the only thing I can do is to try my best. In fact, I’m always being grasped by a sense of crisis. Jiefang’s performance is marvelous this year, but can it continue next year? The future is still quite challenging. It is stressful, yet very fulfilling.

 

 

My major concern is the business model

 

ABR: You just came back from a trip to Europe. What did you learn?

Hu: I was there at the end of June, where Deutz (Dalian) Engine Co., Ltd. held a board meeting. Deutz is the originator of engines, and we see its next generation products developed for off-road usage, but can still work for on-road vehicles. Its concept of development and product layout are quite advanced.

The commercial vehicle industry in Europe is comparatively mature, in terms of both finished vehicles and components. FAW Jiefang signed cooperation deals with suppliers VOSS and WABCO, based on mutual principles. We had the demand for finished vehicles, and they are optimistic about the Chinese commercial vehicle market and sought further opportunities.

They treasure FAW Jiefang. The changes in attitude and methods that they used to approach us are noticeable. I guess three factors contributed to these changes. One is our rising competitiveness. With common interest, they are willing to cooperate with us. Another is the rebounding truck market in China. The market capacity for heavy-duty trucks is between 900,000 and 1 million units per year, while the combined volume of the European and North American markets is merely 400,000 units. They definitely will not give up such tremendous business opportunities. Lastly, they anticipate that China’s export of commercial vehicles will continue increasing. Our prices are only one-third of theirs. Despite rising costs due to stricter regulations, we still remain very competitive. They are worried about our potential. 

 

ABR: That is to say, China’s commercial vehicle industry will become more competitive?

Hu: Right. My major aim was to study their business models. The traditional Chinese commercial vehicle industry relies heavily on selling new vehicles for a profit. Aftersales services, used vehicles and relevant intermediary businesses are still under-developed. We need to think about how to do better in those areas in the future.

From another perspective, how could we extend relevant services different from European practices? Like vehicle connectivity services, it is more valuable to commercial vehicles and has a better future outlook. How can we operate better to satisfy end-users’ needs as well as to create new business models?

When communicating with European finished vehicle manufacturers, I noticed that they are also considering those issues. They are the forerunners and have lots of experiences that we can learn from.

 

ABR: FAW Jiefang currently makes diesel engines in-house. Is it possible that foreign capital be utilized in the future?

Hu: We have already cooperated with foreign companies in engine manufacturing for light and medium trucks. But when it comes to heavy-duty ones, we haven’t had such a plan yet, as we are quite a competent player in this arena. The cooperation in the former two happened at specific historic periods, since we did not reach the level of R&D that we have today.

Of course, our current success should be attributed to the mutual learning and helping from joint venture cooperation, and we have the capabilities to produce engines for light and medium trucks independently now.

It is weird that our development of heavy-duty truck engine embraces lots of achievements, but the medium truck engine, which is the foundation that heavy-duty ones are based on, is not that successful. Before 2016, the medium truck occupied a majority of our product portfolio. It is in 2017 that big change occurred in the market structure, with sales of heavy-duty trucks rising tremendously. It is precisely a goal of our structural adjustment, since the latter one requires more advanced technologies, improving our bargaining power.

With regard to medium trucks, Dongfeng has done a good job, particularly when it comes to refitted vehicles. For instance, Dongfeng does much better than Jiefang in providing refitted vehicles for environmental sanitation. Moreover, CNHTC’s cement trucks and engineering vehicles have marvelous performances. Our Jiefang cargo truck also occupies a large market share, including 8x4s and 6x2s. The former takes up to 50 percent of the market.

The 4×2 cargo truck is not that profitable due to its low prices. The medium truck is for short-distance transportation, with a lower demand on overall performance. Our lead-edge technologies may not make huge changes to it.

In the past, the medium truck had a prominent position in our business, accounting for a larger proportion. But from 2016, things started to change. For one thing, we intend to change our business structure. Also, the production capacity reached its limits. Recently, we have been producing 21,000-22,000 trucks per month. If we manufacture more heavy-duty trucks, volume of other vehicles has to decrease.

 

ABR: It is unwise to expand capacity hastily when the market is unstable. So currently, the best way is to keep try to balance and produce more trucks with higher values?

Hu: Yes. We estimate that the overall demand for medium and heavy-duty trucks during the 13th Five-Year Plan period is about 850,000 units a year. Jiefang’s production capacity is enough for it. If we make haste investment to expand, over capacity would be a huge issue to deal with when the market begins to cool down.

On July 14, we held a conference to discuss how to utilize the five assembly lines in our four bases in Changchun, Qingdao, Chengdu and Liuzhou. We made some arrangements to optimize capacity with as little investment as possible.

In the first half of 2017, we lost orders of more than 20,000 trucks due to lack of capacity. But I think it’s only a temporary problem. So we will focus on optimizing the existing manufacturing process instead of building new factories.

(Translated by Shi Shengyuan based on authors’ article in Automotive Business Review)

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