In 2023, Chinese companies have sparked a strong wave of going global. From electric vehicles to home projectors, coffee and milk tea, and beyond, an increasing number of Chinese brands are accelerating their global expansion, with some even declaring that “if you don’t go global, you’ll be left behind.”
Amidst the diverse global expansion tracks, the question arises: which industry is more likely to stand out? Within the community of companies that have expanded overseas, there is seemingly a prevailing answer: Chinese companies are most likely to succeed in industries that have already experienced significant developments domestically.
Achieving a certain level of development domestically implies that the industry’s supply chain, quality control, operational systems, and more have become relatively well-established. The penalties for product quality issues in European and American markets can be severe. Stringent product recalls can lead to cash flow stress or even bankruptcy for companies.
This is especially the case when a market is experiencing explosive growth, relegating management issues to the back seat while aggressively pursuing growth. In Western markets, the ramifications of product quality issues can be severe. For example, a recent European case involving safety issues with portable energy storage resulted in product recalls and losses of nearly EUR 100 million (USD 110 million), while the initial profits were only a few hundred million RMB.
From an investment perspective, if an industry is nascent in China, there are more risks to consider when going global.
A cautionary tale rooted in history is the introduction of Chinese motorcycles to Southeast Asia. Before fully dominating the domestic market, Chinese companies rushed to import various motorcycle models into the region, resulting in a price war to seize over 80% of the market share from Japanese brands. However, due to the price war and product quality issues, they quickly lost market share, ultimately retaining only 1%.
“China shock” in Southeast Asia
In Southeast Asia, motorcycles are a crucial means of transportation, with an ownership rate of nearly one-third of the population. The region’s mountainous terrain, coupled with relatively low-income levels and insufficient infrastructure, especially in urban areas, creates a vast market for motorcycle companies.
Before 1998, the Southeast Asian market was primarily dominated by Japanese motorcycle brands such as Honda, Yamaha, Suzuki, and Kawasaki. In Vietnam, for example, Japanese motorcycles make up 98% of the market, having initially become the preferred option for Japanese residents due to their fuel efficiency and high performance.
Around the same time, Chinese motorcycle brands like Loncin, Lifan, Zongshen, and Jialing began to emerge. Chongqing, in particular, was developing into a major hub for Chinese manufacturers, capitalizing on the wave of military-civilian transition after various reforms and policies. Some joint ventures were also established, contributing to the swift rise of Chongqing-produced motorcycles.
However, in the late 1990s, several Chinese cities implemented restrictions on motorcycles, leading to a decline in industry sales. Going global became a necessary option.
In early 1998, a vice general manager of Jialing went on a business trip to Vietnam. He observed that motorcycles were the primary mode of transportation for the Vietnamese, but almost all of these vehicles originated from Japan. A few years earlier, Japanese motorcycles had entered the market with prices ranging USD 2,000–3,000, while the average monthly income of the urban working class in Vietnam was less than USD 80. Determined to tap into the Vietnamese market, the Jialing executive decided to lower prices.
Since the domestic motorcycle market had yet to peak and there was an absence of brand or technological barriers, numerous Chinese brands soon entered Southeast Asia.
Jialing entered the Vietnamese market with a retail price of about USD 800 per motorcycle, less than half the average price of Japanese motorcycles at that time. Price was an effective strategy in the early stages of their market entry. Although Chinese motorcycles had long-term performance issues compared to Japanese ones, motorcycles are ultimately consumer goods, and price proved to be a significant factor in consumer decisions.
In 1999, over 20 brands from Chongqing and across China rushed into the Vietnamese market, and dozens of original equipment manufacturer (OEM) companies operated secretly. At that time, the average retail price of a 100 CC motorcycle from Japanese brands was USD 2100, while Chinese motorcycles were generally priced between USD 700–800. Some lower-tier models even went as low as USD 500. This price differential helped Chinese brands quickly gain over 80% of the market share, making it difficult for Japanese products to compete.
Gains and losses
If starting the initial price war was a tactical and rational move, the price war that ensued between Chinese brands after defeating their Japanese counterparts seemed irrational in comparison.
For example, a small manufacturer engaged in a price war in November 1999, aggressively lowering prices by USD 200 per motorcycle to clear stagnant inventory that was not sellable in China. As a result, this manufacturer sold thousands of motorcycles, earning more than USD 3 million. However, the manufacturer disappeared after clearing its inventory, ignoring after-sales service.
This “market myth” inspired many speculators which subsequently disrupted the entire market environment. More Vietnamese motorcycle dealers aggressively lowered the import prices of Chinese motorcycles, inducing numerous Chinese miscellaneous brand factories and small workshops to assemble ostensibly substandard motorcycles at low prices for the market, in pursuit of extra profit.
This situation eventually affected well-known large factories, forcing them to reduce prices and compete, kicking off an “internal price war” among Chinese motorcycle companies in the Vietnamese market.
To what extent did this “price internal war” affect Chinese motorcycles in 1999? In 1997, the average selling price of Chinese motorcycles was USD 746, but by 2001, the average selling price had dropped to USD 268. A 110 CC motorcycle sold for about USD 700 in Vietnam in 1999, dropping to USD 600 by early 2000. During the peak of the price war, the price of a motorcycle dropped by an average of over USD 70 per month, with prices reaching the low point of USD 300 by the end of 2000. Meanwhile, the lowest price of Japanese motorcycles at that time remained close to USD 1200.
This had a devastating impact on industry profits. In 1995, the total industry profit was RMB 2.2 billion (USD 308 million), but by 2000, it had dropped to RMB 430 million (USD 60 million). By the end of the year, many exporters and export factories found that, despite their hard work in the Southeast Asian market they hardly made any profits.
The brutal outcome was that, while a small number of speculators profited in the short term, most brands lost money. They had to compromise on product quality, cut back on after-sales services, and slow down R&D, losing the ability to innovate.
Most importantly, it led to a continuous decline in the quality of Chinese motorcycles. Firstly, the repair rate of Chinese motorcycles was very high, and in terms of fuel consumption, Chinese motorcycles were less efficient than Japanese motorcycles. In Vietnam, where motorcycle overloading and excessive use were common, frequent minor failures led to the need for major repairs in less than three years, and scrapping in four or five years. The cost savings of purchasing a motorcycle was diminished by fuel and repair costs, notwithstanding the incessant delays.
This marked the period when Japanese motorcycles made a comeback by introducing new models with lower prices while maintaining reasonable and consistent quality standards. The tides soon shifted, and the market share that was initially seized was regained by Japanese motorcycle brands.
In 2016, the total sales of motorcycles in the Vietnamese market were about 3.1 million units. Honda and Yamaha accounted for approximately 69% and 25% respectively, and the market share of Japanese motorcycles returned to 95%, while the market share of Chinese motorcycles was less than 1%.
What triggered the internal price war?
Looking back now, the early stage of China’s motorcycle industry going global did achieve some success by seizing a significant market share from Japanese manufacturers. However, these initial achievements did not translate into long-term advantages, such as higher profit margins, superior quality, or brand value. Instead, the focus on competing based on price led to a vicious cycle with few victors.
One core reason for this outcome is that the Chinese motorcycle market had not yet matured domestically. Market participants were typically too scattered in organization and lacked the coordination needed to agree on a pricing structure. This allowed short-sighted actions by speculators to influence the market, resulting in low profits while leaving little emphasis on quality and brand.
Quality, service, and innovation are indispensable attributes to succeed in international markets. Starting with quality, when price wars reach a certain intensity, consumers become less sensitive to prices and begin to focus on product quality. While price wars can provide an initial advantage, they are not a competitive advantage. To cultivate overseas markets successfully, solid quality is crucial.
Quality and service are also intertwined. Many Chinese motorcycle speculators engaged in “guerrilla warfare” in Southeast Asia, selling a batch and moving on to another location, neglecting the construction of an after-sales service system. In contrast, Japanese manufacturers had a complete system in place and offered financial services like loans, which contributed to the eventual recovery of lost ground.
Investing in R&D and pursuing innovation is essential for long-term success as well. This historical period illustrates that, due to a lack of innovation, most products were similar—only covering the low-end overseas market with low concentration, therefore resulting in an overseas “price internal war.”
In summary, while the “internal price war” was seemingly the major factor that led to the downfall of Chinese motorcycle brands in international markets like Vietnam, an alternative perspective attributes the relatively immature state of the Chinese motorcycle industry (at that time) as the more significant factor. As concentration was low and quality upgrades seemed like a leap too far to take, the only viable strategy that Chinese brands could rely on was to compete based on price.
Today, as another wave of Chinese companies is set to go global, the conditions appear to have significantly changed. However, it’s crucial to differentiate between going global as a response to the domestic situation and grabbing a “lifesaving straw.” The lessons from the history of the Chinese motorcycle industry suggest that truly successful Chinese brands will be those that have already established strong capabilities in industrial operations as well as technological innovation and possess the means to gain an edge by harnessing these competencies.
This article was adapted based on a feature originally written and published on Matrix Partners (WeChat ID: matrixpartnerschina). KrASIA is authorized to translate, adapt, and publish its contents.