Annals of Business Administrative Science 9 (2010) 13–32
Available at www.gbrc.jp

Online ISSN 1347-4456 Print ISSN 1347-4464©2010 Global Business Research Center

Future International Business Strategy of Chinese
Automotive Manufacturers: A Case Study on Their Overseas
Operations in the Russian Market
Zejian LI

Abstract: Since 1955, when new China began to reconstruct its automotive industry, and for along time after, Chinese car exports consisted mainly of commercial automobile products(chassis and finished vehicles, etc.) which were exported in small quantities by state-owned
manufacturers. Since 2000, however, with the emergence of independent automobile
manufacturers, the number of vehicles exported has increased rapidly, and the makeup ofexports has shifted gradually from a focus on commercial vehicles to a focus on passenger
vehicles. With regard to overseas expansion, manufacturers’ market access strategy has led
to the rapid transition from parts trade to local knock-down manufacturing. However, despite
the rapid progress of foreign expansion, problems have arisen due to insufficient risk
management know-how with regard to foreign expansion on the part of independent Chinese
manufacturers, and the fact that their experience acquired from domestic markets is notapplicable to overseas markets. For these reasons, following a period of prosperous
overseas expansion, some Chinese automobile manufacturers have been forced to withdraw
from one market or have chosen to switch to another market. This entire process, from rapid
prosperity to quick decline in Chinese automobile exports, is dramatically observed in thecase of their overseas operations in the Russian market. This paper, then, focuses on the
burst of growth in Chinese automobile exports around the year 2000, taking the Russian
market (the most significant case with regard to the characteristics mentioned above) as acase study to analyse both the domestic and external reasons for this surge, and toinvestigate the mistakes in manufacturers’ overseas expansion strategies which led Chinese
automobile exports from rapid prosperity to quick decline.
Keywords: international business strategy, Chinese automobile industry, overseas expansion,
Chery, Russian market

Introduction
An overview of the history of the Chinese automotive industry reveals, as depicted in Figure 1, that following theReform and Opening policy of 1978, which succeeded the planned economy period, the Chinese automotive industry
experienced a period of takeoff in the 1980s and a period of stable growth in the 1990s. However, since the year 2000,
the industry has undergone abrupt upheaval.
The market for China’s auto production from 2000 to 2007, as a whole, continued to expand at a double-digit growthrate. In the second half of 2008, due to the influence of the ‘Lehman shock’, many assumed that the automotive
industry would enter a recession globally. Although the Chinese market decelerated quickly, it ultimately maintained

Project Research Associate, Manufacturing Management Research Center, The University of Tokyo, Japan,
takuken.ri@mmrc.e.u-tokyo.ac.jp
13Zejian Li

Figure 1. China’s auto production and export (1000 units)

150%
100%
50%
0%
-50%
-100%
Annually productions (1000 units)

2007

2004

2001

1998

1995

1992

1989

1986

1983

1980

1977

1974

1971

1968

1965

1962

10000
8000
6000
4000
2000
0

Comparison with preceding year

Notes:
1) Following the revision of classification criterion in 2001, in addition to the previously existing ‘sedan’ category,
three other types of automobiles are now counted as passenger vehicles: primarily microbuses made to fit nine or
fewer passengers (SUVs, MPVs) and COPVs (Crossover Passenger Vehicles referred to as minivans and lightbuses). The former ‘sedan’ concept corresponds to the ‘basic passenger vehicles’ category under the newpassenger vehicles classification standards.
2) The ‘Total auto export’ from 2002–2007 excludes ‘Unlisted manned vehicles’ with displacement under 1000 cc(China Hs Code: 87039000, golf carts, etc.).
Sources: China Automotive Industry History Compilation and Review Committee; History of the Chinese
Automotive Industry 1901–1990; China Communications Press; all volumes of Automobile Report 2002–2009.
China Automotive Industry Yearbook (1997, 2001–2003 versions), China Automotive Industry Development
Annual Report (2000–2003 versions), China Statistical Yearbook (2001–2008 versions), created by the author.

positive growth of 5.02% over the previous year, passing the United States to become the world’s second biggest
automobile manufacturing country. In 2009, the market dramatically recovered, recording sales of approximately
6,098,800 units in the first half of the year (a 25.62% increase over the previous year), and continuing to grow at sucha fast pace that it is expected to replace Japan in 2009 as the number one automobile manufacturing country.
Another feature of the post-2000 Chinese automotive market is that, aside from its quantitative expansion, it has also
exhibited structural changes. The indicator that demonstrates this is the number of exported automobiles. In 2000, thenumber of Chinese automobile exports topped 20,000 units for the first time, totalling 22,408 units. Following this,
China’s participation in the WTO led to an increase in automobile imports; but at the same time, automobile exports
proliferated at a rate exceeding that of imports. Finally, in 2005, as measured in unit base, China transitioned from an‘excess of imports’ to an ‘excess of exports’ both in automobiles as a whole and in basic passenger vehicles (sedans),
and became a purely automobile-exporting country.
In 2008, Chinese cars (including chassis) were exported to more than 190 countries (regions) around the world,
reaching a record of 680,000 units. The so-called Independent Chinese Automobile Manufacturers took a leading rolein the increase. 1 Here, the term Independent Chinese Automobile Manufacturers (hereinafter abbreviated as

1

In addition to the independent manufacturers as exporters, there is also the foreign-financed, 100% export-only factory, Honda
Motor (China) Co., Ltd. In September 2003, its financing was 55% from Honda Motor Co., Ltd.; 10% from Honda Motor (China)
Investment Co., Ltd.; 25% from Guangzhou Automobile Industry Group Co., Ltd.; and 10% from Dongfeng Motor Group Co.,
Ltd. Operations began in 2005, with approximately 24,600 JAZZ units exported in 2006, 43,100 exported in 2007, and 45,600
exported in 2008. However, credit for the majority of exports belongs to the independent manufacturers.
14International business strategy of Chinese auto in Russia

Table 1. The overseas manufacturing status of independent manufacturers (March 2007)
Company
Yutong Bus
BYD
Shuanghuan
Auto
Xiamen KingLong
Beiqi Foton
Suzhou KingLong
Chang’an
Auto
Geely
Automobile
JAC Motors
Dongfeng
Motor
Great Wall
Motor
FAW
Zhongda Bus
Brilliance
Auto

Chery
Automobile

2005
2006
2005

Expansion (partner)
Country
Iran
Cuba
Malaysia (ALADO)ZK6831HB,ZK6798H buses
ZK6831H type bus
F3

Manufacturingconfiguration
CKD
CKD
Unknown

Unknown

Ukraine, Russia, Egypt

Shuanghuan CEO

SKD,CKD

2002

India (JCBL)

Unknown

Fifty–fifty joint venture

2004

Ukraine, Pakistan

Lightweight trucks

CKD

2006

ThailandHIGER bus

CKD

2004
2005
2005
2006
2006
2004 ~
2005
2003
2005

Vietnam
Pakistan
Malaysia (IGC)
UkraineRussiaVietnam, Malaysia,
Indonesia
Malaysia
IranLightweight trucks
Unknown
Unknown
Unknown
Otaka

Unknown
CKD
CKD
SKD
SKD

2006

Ukraine (BOGDAN)

2006

Russia2005

Ukraine (AIS)

2006
2007
2005

2002

UkraineRussia (AMUR)
UAE（ICP）
Egypt (BAG) Middle East,
North Africa
North Korea (joint venturewith South Korea PMC)
Iran (SKT)

2004

Malaysia (ALADO)

2006
2006
2006

2002
2004
Unknown
2003
2006

Egypt, Indonesia, Ukraine
Iran (IKCO)
Russia (AVTOTOR)
Argentina (Chery Socma
S.A.)
South Korea GMDATSouth Korea SsangYong
South America, North Africa
Middle East
Russia

2006
2006
2006
2007
2005
2006

Year

2005
2007

2007
Saic Motor
ZX Auto
Hafei
Automobile
Lifan
Automobile
Sinotruk

Vehicle type plannedLightweight truck

CKD

Lightweight trucks
Lightweight trucks
Lightweight commercial
vehicles

CKD
CKD

CUV,SUV,MPV

Fully owned *CKDLightweight commercial
vehiclesTianjin FAW Xiali Veizi
Midsized Jiefang truck
6 types of 6–12 metre buses

Unknown
New enterprise
CKD

Zhonghua

CKD

CKD

Jinbei Awing seriesKD

Unknown
Six types of Chery brandvehiclesUnknown
QQ6, Cowin
Fulwin

CKD

Tiggo

Joint venture

GMDAT
SsangYong
Pick-up trucks
Pick-up trucks
Pick-up trucks

10% stock acquisition
BuyoutCKD
CKD
CKD

Malaysia (NAZA)

Lobo

CKD

Vietnam
Egypt
RussiaMozambique
Mozambique

Lifan 520
Lifan 520
Lifan 520
Golden Prince
Golden Prince

CKD
CKD
CKD
CKD
CKD

CKD
CKD
CKD
SKD

Note: * indicates a plan to implement SKD manufacturing at the end of 2007 and CKD manufacturing at the end of
2009 with full ownership and capital of $70 million, which was rejected by the Russian government.
Source: Chen Xiaoyun, ‘Automotive Industry Sees Trend toward Overseas Factories’, China Automobile Report (15April 2007).

independent manufacturers) refers to the manufacturers of completed cars which have embraced independent
management systems and independent brands by using Chinese capital, with the aim of making cars throughindependent research and development. With regard to the introduction of products, there are no products introduced
By joint venture with foreign capital (Li, 2007b, 2008, 2009b). Chery Automobile and Geely Automobile arerepresentative of such manufacturers. Following these two companies, Brilliance Auto, BYD Auto, Hafei Automobile,
JAC Motors, Chongqing Lifan Automobile, Great Wall Motor, and Yutong Bus have also distinguished themselves in15

Zejian Li

Figure 2. Overseas expansion sites (partial expansion included) of independent manufacturers—number of
Foreign-producing manufacturers by country (unit: companies)

Notes:
1) The number of importing/exporting manufacturers in each country includes exports and onsite manufacturing
through the first half of 2008.
2) In keeping with the Chinese statistical standards, microbuses, SUV passenger vehicles, and pickup trucks arecounted as lightweight trucks. 3) The number of importing/exporting manufacturers includes both export brands
and locally assembled brands (indicated by *).
Source: Created by the author from various news media and reports.

recent years.2
Beginning with the establishment of Chery Automobile’s Iran KD manufacturing base in 2002, the overseas
production of Chinese cars rapidly changed from finished car exports to onsite KD assembly, and as Table 1 shows,independent manufacturers led state-owned manufacturers with lengthy operational experience (such as FAW,
Dongfeng Motor, SAIC Motor, and Sinotruk), assuming the vanguard in cultivating overseas markets for Chinese cars.
In comparison with the production of state-owned manufacturers, whose focus is on commercial vehicles, theforeign production of independent manufacturers, whose focus is on passenger vehicles, must be carefully analysed asa new trend indicating structural changes within the history of the Chinese automotive industry. Also, the emergence ofindependent manufacturers, along with the initiating of exports and overseas KD manufacture of passenger vehicle
products, seems to suggest that China will compete in the future with the major manufacturers of the world on a global
level (including Japanese manufacturers), and that they have a latent potential to battle for a foothold in themarket. Therefore, to understand the current changes in the Chinese automotive industry, and to predict the forms it
will take in the future, we must grasp the foreign expansion strategies of independent manufacturers.
Next, I would like to observe in detail the distribution of Chinese cars throughout the world. Figure 2 displays talliesof the total number of Chinese automobile manufacturers, which have expanded into a country’s markets by either
manufacturing completed cars or conducting KD manufacturing. As shown in the graph, the three regions of the Near
East (primarily Egypt), Southeast Asia (primarily the Philippines), and the Commonwealth of Independent States(CIS) (primarily Russia) are important expansion regions for Chinese automobiles. At a glance, activity seems to beflourishing, but in fact, only a small number of vehicles are sporadically exported to the majority of export
destinations; one special characteristic of this situation is that markets, which truly make their presence felt, are few.
2

Other than the manufacturers of finished cars described above, there are also modified car (body) manufacturers which receive
outside supplies of engines and chassis and perform body construction and assembly within the company, or which create uniquevehicles through modifications. As they do not possess manufacturing rights for finished cars, these modified car (body)manufacturers are not treated as independent manufacturers in this paper. However, to better grasp the whole picture, we treat
them as subjects for analysis together with independent manufacturers. Tianma Auto, Dadi Auto, and Hongxing/Shuanghuan
Auto are representative examples.
16

International business strategy of Chinese auto in Russia

Table 2. Top ten export records by country from 2000–2009 and exports to Russia (unit: vehicles)
2000
2001
2002
Total
22408 Total
15481 Total
21914 Total
Bangladesh
3830 Bangladesh 10431 Bangladesh
3664 Libya
North Korea

2721

Myanmar

2109

Iraq

2354

North Korea 1304

Japan
America

1894
1675

India
Japan

397
388

Myanmar1564

Hong Kong 295

Sudan
Hong Kong
Indonesia

1531
1366
630

Mongolia
CyprusDjibouti

Turkey412

Philippines 22

245
231
25

Libya

2003

2004
42224 Total
7092 Syria

75999
18508

2079

Myanmar6064

Algeria

11144

Vietnam

1951

Algeria

4154

Vietnam

6607

Hong Kong
Algeria

1330
1172

Syria
Vietnam

3745
3291

Pakistan
Libya

3578
3275

Philippines

1073

Pakistan

1882

Kazakhstan

2435

North Korea
Sudan
Syria

998
797
709

North Korea
Hong Kong
USA

1515
1383
1045

North Korea
Myanmar
UAE

2425
2148
1704

Myanmar

655

Bangladesh

966

Kuwait

1686

CR10
80.23% CR10
Russia (rank 60) 12-

99.78% CR10
65.84% CR10
73.74% CR10
70.41%
Russia (rank 38) 77
Russia (rank 44) 77
Russia (rank 23) 543

2005
Total
Syria

2006
165830 Total
30459 Syria

2007
332502 Total
50811 Russia

2008607430 Total
107744 Russia

2009(1-8)
668692 Total
85091 Algeria

213327
32269

Algeria

18016 Russia

36809 Syria

52226 Ukraine

60263 Vietnam

20860

Vietnam

12196 Algeria

19768 Ukraine

46989 Vietnam

52774 Syria

15412

USA

8338

USA

19533 South Africa

38652 Algeria

44820 Germany

11409

Belgium
Russia7740
7730

Belgium
Vietnam

18144 Vietnam
14386 Algeria

35727 Iran
34138 Syria

32632 Egypt
32101 Iraq

11406
10315

Pakistan
Ukraine
Iran
Egypt

6773
4902
4535
3434

Iraq
Malaysia
Libya
Iran

13434
13105
11000
10451

30667
26368
19698
16842

28659
24583
23075
16243

9739
7255
5587
4533

CR10
-

62.79% CR10-

Iran
Venezuela
England
Kazakhstan

62.39% CR10-

Egypt
South Africa
Chile
Germany

67.34% CR10
-

Libya
Iran
AngolaNigeria59.85% CR10
60.37%
Russia (Rank 26) 1834

Note: Chassis are included in the total number of vehicles exported in each year; however, non-completed cars such as‘trailers and semi-trailers’, ‘tractors’, off-road ‘other passenger vehicles’, and ‘other’ are not included.
Source: CATARC.

The Russian market was expected to emerge as the single exception that would change the aforementioned state ofaffairs. The Chinese forces began entering the Russian market in 2003. In 2007, exports to Russia had increased 189%
over the previous year (for a total record of approximately 107,700 units), suddenly putting Russia into the position of
the most significant target of Chinese automobile exports. However, in 2008, the number of Chinese cars sold, which
had until then continued to increase at a steady rate, suddenly began falling, and in 2009 showed a significant decline(see Table 2).
What exactly happened in the Russian market? In addition, what does the sudden change in exports to Russia tell us
about the foreign expansion strategies of independent manufacturers? These questions define the starting point for thispaper. As previously described, when seen from the viewpoint of either the number of foreign expansion enterprises orexport achievements, the Russian market is the most significant site of Chinese automobile expansion, and when
considering foreign expansion strategies, it is a representative market, which demands recognition. Therefore, thechallenge undertaken by this paper is to shed light on one aspect of the role of enterprise management and on thestrategies employed in the overseas expansion of Chinese automobile products. This paper also focuses on explaining
the factors behind the sudden increase in Chinese automobile exports since 2001 through a case study of the expansionof independent manufacturers into Russia.
Firstly, this paper investigates the reasons for the sudden increase in exports to Russia on both the Chinese andRussian sides. Secondly, in order to understand the status of the expansion of independent manufacturers into Russia,
17

Zejian Li

the status of the expansion of Chinese cars into Russia will be explained with regard to separate groups. Finally, thoseportions linked to the overseas expansion of independent manufacturers will be singled out from among the factors
leading to the sudden drop in exports to Russia, followed by a conclusion of this assessment.

2. Analysis of the factors behind the sudden increase in automobile exports to Russia(1) Factors on the demand side (Russia)
To analyse factors on the demand side, we will look into the special characteristics of the Russian market. Firstly,since 2001, in the wake of the 1998 financial crisis, the Russian economy has consistently maintained an economic
growth rate of around 5%. The per-capita GDP (PPP) was $4,086 in 2004, but in just three years it approximately
doubled, reaching $8,612. 3 This sustained economic growth provided support for the increased demand forautomobiles. Secondly, under the transitional economy which followed the collapse of the Soviet Union, the averageage of cars increased due to the worsening economic situation and a drastic increase in used car imports, with the
majority of cars more than ten years old still retained by owners. As of October 2008, in Vladivostok (the city with thehighest number of retained passenger vehicles), vehicles more than ten years old comprised 80% of the total number ofretained vehicles, with the statistic for Moscow and Saint Petersburg reaching a plateau at 37% and 38%, respectively.4
There was strong potential demand for replacements. Therefore, along with the gradual increase in personal incomes inrecent years, motorisation made rapid progress5 in the Russian market, which came to be regarded as the mostpromising and the one in which automobile manufacturers worldwide planned to participate.

(2) Factors on the supply side (China)
Factors related to manufacturing—liquidation policies regarding overproduction caused by the cooling of the Chinese market
The scale, techniques, products, and sales networks of the independent manufacturers which emerged around 2001
are all inferior to those of the foreign capital joint-venture manufacturers which preceded them. Fortunately,motorisation began in China in 2002, and the country has been favoured by a rapidly expanding market (Figure 1) inwhich new car sales have increased by one million units each year. Thus, independent manufacturers were able totemporarily stabilise operational systems, and the scale of manufacturing continued to increase rapidly. However, themarket cooled drastically in 2004 due to monetary tightening policies, and it suddenly became clear that those facilities
enlarged during the boom period represented excessive capacity. As a result, independent manufacturers began paying
serious attention to exports as a measure for stabilising operational systems. Also, foreign capital joint-venture
automobile manufacturers had already included the Chinese market in their global strategies, and their focus lay
mainly in responding to local needs. Consequently, there was a lack of incentive to export vehicles from China to Third
World countries.6 Thus, the drastic increase in exports since 2004 was caused mainly by exports from independent
manufacturers.
Above, I have explained the process by which the distress immediately following the emergence of independent
manufacturers increased their motivation to export, but the question of why so many independent manufacturers wereable to expand quickly into Russia still remains. To preview the conclusion, this occurred because powerful firms withwide-ranging personal connections in both China and Russia emerged, specialising in automobile exports andsimultaneously bringing into play transactional functionality, transportation functionality, and information
functionality, conforming well to the needs of both China and Russia.
3

IMF Database, Russia: Gross domestic product per capita, current prices (U.S. dollars). The figure for 2007 is aprediction. Incidentally, the figure was $6,897 for 2006.
42008 Russian Automobile Retention Statistics by Region (http://auto.gasgoo.com/News/2008/10/100751295129.shtml), Retrieved
20 October 2008.
5
In 2001, roughly 1,598,000 vehicles were sold in the Russian market, and in 2007, sales doubled to roughly 3,131,000
units. Renaissance Capital (2008), Sector report,(http://www.rencap.com/eng/research/MorningMonitors/Attachments/Auto-Feb_22.pdf). Retrieved October 15, 2008.
6
Honda Motor (China) Co., Ltd., is an exception. For details, see Footnote 2.
18

International business strategy of Chinese auto in Russia

Factors related to international exchange—the emergence of companies specialising in Chinese automobile exports
Firstly, we will examine the process by which these specialized export companies were established.
When Zhu Jingcheng, a Chinese diplomat stationed in Russia, became involved in the Russian expansion of a
Chinese telecommunications company while in office in 2002, he received a proposal from the Russian side and began
paying attention to the business of exporting automobiles to Russia. In the same year, he became aware of roughly
100,000 RMB pickup trucks manufactured by ZX Auto in Beijing, sensed the possibility of exporting them to Russia,
and began seriously considering this. In 2004, he established a company specialising in automobile exports known as
Siberian (Сибирь) Automobile Export (Beijing) Co., Ltd. 7 (abbreviated below as ‘Siberian’), immediately appealed
to a Russian dealer (Company A) which had been handling used Japanese and German-made cars for many years, andbegan working with them on exporting Chinese cars to Russia. In November 2004, a pickup truck by ZX Auto became
the first Chinese car successfully exported to Russia.8
Secondly, we will examine the role played by Siberian.
At the corporate level, Siberian acted as a bridge and provided many opportunities for interaction between Chineseand Russian automobile manufacturers and related businesses (see Table 3). Although China and Russia have thebenefit of geographical proximity, few independent manufacturers saw the latent attraction and possibilities of theRussian market. In general, the effects of the ideological conflict which occurred between the two countries during theSoviet period still lingered; further, Russian language education had been declining in China since the reform andopening policy, so it would seem that these two countries which were so close geographically were, in fact,
psychologically distant. This state of affairs can also be seen in the low number of automobile exports to Russia until
2003 (see Table 2). However, this state of affairs suddenly changed with the establishment of Siberian. As well as theexports to Russia by ZX Auto, reports from the Russian mass media about the expansion of Chinese cars andinformation about the Russian market reached China en masse through the window of Siberian, at once arousing theinterest of independent manufacturers.
In addition, at the industrial level, Siberian enjoyed a favorable position because of founder Zhu Jingcheng’s
personal connections with the political world and with individuals in the business world in both China andRussia. Other factors favoring it were its familiarity with Russian culture/business customs as well as its numerous
employees proficient in Russian, and, as described later, its having established the certification system for Chinese carsin the Russian market.9 When Siberian facilitated the export of ZX Auto pickup trucks to Russia, the number one
barrier was model certification. As there was no precedent, creating associated rules was the largest obstacle. With
regard to the model certification of imported automobiles, Russia continues to use a multinational agreement approvedin 1958, the ‘Agreement on Uniform Technical Prescriptions for Vehicles’ from the United Nations/Economic
Commission for Europe (UN/ECE). However, as China is not affiliated with this ‘1958 agreement’, as it is popularly
called, the Russian side refused to accept the automobile inspection test approval certificates issued by China, insistingthat when Chinese cars were imported, all certification inspections had to be conducted at the Russian National
Automobile Standards Certification Centre (ГУП НИЦИАМТ). In addition, in Russia, the image of Chinese industrial
development had not changed for decades, and Zhu Jingcheng said that this outdated notion was another main cause of
the obstacles. In Russia, the Chinese continued to be ridiculed with statements such as, ‘The Chinese are going to themoon on a bicycle (since all they can make is bicycles, they have no choice but to use bikes no matter where they go).’For this reason, Russians mistrusted not only the quality of Chinese cars, but also the testing and certification capacityof the Chinese. In order for the pickup trucks made by ZX Auto to receive export certification inspections, Siberianwent to great trouble, providing translated documents, explaining manufacturing conditions and so on, and because of
the exertion of actually going to Russia a number of times, the certification was received after 18 months. Based on the
ZX example, Zhu Jingcheng realized that fully following the process insisted upon by Russia and translating submitted
7This company has established five divisions, exporting Chinese cars to Russia and the CIS countries as well as North Africa.
Before ZX Auto pickup trucks were exported to Russia, sales and purchases of Chinese cars were performed by individuals in theform of a border trade, but these are not counted because the quantities were extremely small.
9
Except in cases of a specific refusal, the description of Siberian here is based on interviews conducted by the author in August
2007 and April 2008.
819

Zejian Li

Table 3. Projects by SAECYear

Cooperative enterprise

Activity details

2003

ZX AutoExports to Russia

2004

Zhongtong Bus

Pioneering the Russian market

Tianma/Dadi

CDK assembly/provision of parts in joint venture with Derways Company

Chery Automobile

Mediating a CKD assembly project in Siberia
Introducing Beijing Automobile and Nanjing Automobile as candidates for

2005

Avtotor

2007

AMUR

Promoting exports by ZX

2008

Rolf and Geely Automobile

Mediating/promoting five-year contract to export 200,000 vehicles

cooperation

Wuzhoulong/Changzheng
Exporting Wuzhoulong buses/Changzheng trucks to Russia
Source: Based upon interviews conducted from 2007 to 2008 with Siberian Automobile Export (Beijing) Co., Ltd.

documents, transporting vehicles for testing, and so on, required enormous time and expense. In addition, the outdated
notions made it necessary to spend an unforeseen amount of effort explaining the situation on the Chinese side, so heconcluded that it would be difficult to change the state of affairs unless he could dissolve the Russians’ mistrust. In July
2004, Zhu Jingcheng extended an invitation for personnel from the Russian National Automobile Standards
Certification Centre to visit ZX Auto and the Chinese National Automobile Quality Supervision and Inspection Testing
Centre. In other words, he began devising tactics to get rid of the outdated notions held by the Russians. As a result, theRussian National Automobile Standards Certification Centre accepted the inspection certification results from the
Chinese National Automobile Quality Supervision and Inspection Testing Centre, and consented to proxy applications
by Siberian. These efforts by Siberian reduced the time required for the certification procedure from the original 18
months to 2–4 months, breaking through the most difficult barrier to exporting Chinese cars to Russia. Also, as a
trading company, Siberian not only mediated transactions but acted as a window for disseminating information,
becoming involved in the Russian domestic distribution business, and performing the inventory and transport functions
needed by independent manufacturers when exporting to Russia. In addition, Siberian made use of the advantageous
position described above, established two assembly bases of its own in the European and Asian regions, and began
conducting KD manufacturing of SUVs branded ‘Siberian-Dadi’.
In general, Siberian overcame the factors behind the information-related, language-related, and distribution-related
obstacles, achieved congruence between Russian needs and independent automakers’ motivation to expand abroad,and initiated the export of Chinese cars to Russia. The same company’s efforts made it possible for numerous
independent manufacturers to enter the Russian market all at once.10

3. Independent manufacturers’ expansion into Russia
In 2003, efforts by Siberian opened the Russian market to Chinese cars, and so far, some twenty manufacturers ofpassenger (commercial) vehicles have expanded into Russia (see Table 4). However, as the abilities, entrance timing,and positioning of products within the Russian market differ for each manufacturer, Russian expansion has taken many
diverse forms. Below, manufacturers are separated into four groups: the early lower ranked group, the early top group,
the late top group, and the late lower ranked group (see Table 5), based on entrance timing and manufacturer scale (seethe number of cars manufactured in 2007 in Table 4). The focus is placed on representative businesses from each group,and the differences in the expansion strategies and special characteristics of each group are presented in order.11
10

Even a manufacturer like Great Wall Motor, which had no direct point of contact with Siberian, certainly indirectly benefited
from Siberian’s activities, such as introductions into the Russian market and the model certification system.
11
Of course, it is difficult to draw absolute lines, and there is much scope for investigation. Here, as is popularly recognized, thequestion of whether a manufacturer has a manufacturing record of 100,000 vehicles a year is used as the standard for recognising
its scale. Similarly, 2006 (the year when the route for expansion into Russia became fairly clear) is used as the standard for20

International business strategy of Chinese auto in Russia

Table 4. Sales records for Chinese cars in the Russian market (unit: vehicles)
Company

2004 2005

2006

2007

2008

Chery
Great Wall
BYD
Hafei
Geely
Brilliance

476
4070
152

12242
4788
1694
1253

37120
6238
2566
2246
3721
339

15728
8324
5341
512
3780
530

4914
2490
1001
7681
-

70480
25910
10754
4011
15182
869

Total production
in 2007387880122605100376
198776216774128270

1780
681
96

2989
710
1303
66*
1097
67
20*
300
25
58807

1643
-

-

6412
1391

92399
-

694

-

4029

40480

FAW Commercial
Derways
ZX Auto (Tianye)

260

1610

2009

Total of left

1466
Dadi
123
246
333
Tianma210
56
425
Xinkai425
0Shuanghuan
2673
7728
Lifan
4755
30362
37
Changfeng
12
25785
18759
149047
Total of above
260 6856 22990
41375
Notes:
1) One portion of the record for 2007 consists of estimates created by doubling the figure for the first half of thesame year, and these are indicated with a * mark.
2) Other than the above manufacturers, Beijing Automobile, Foton, Fuqi Huaxiang, King Long, Nanjing Yuejin,
Southeast Motor, and other manufacturers also export, but are not counted in the Russian statistics.
3) A portion of Derways projects consists of CKDs from Siberian-Dadi, SG, Tianma, Beijing Automobile, and
Huanghai Automobile.
4) Manufacturers in the shaded areas are not manufacturers of completed cars but modified car manufacturers which
receive outside supplies of engines and chassis and produce unique vehicles.
5) Due to in-transit inventory and dealer inventory, there is a disparity between the number of vehicles exported to
Russia from China (the number of vehicles received) each year and the number of vehicles actually sold in
Russia.
Sources: Wa Xia (2007), ‘Chinese vehicles march on into Russia: Past and future’, Automobiles and Parts 2007,
50th Edition, pp. 38–41. Shi Baolin (2007); ‘Chinese Car Business Defeated in Russia Due to Internal Factors
Causing Trouble Abroad’ (21st Century Economic Report, 5 August 2008). AEB Press Release(http://www.aebrus.ru/files/File/CommunicationsFiles/PressReleases/AEB_pr_07_06_eng.pdf;
http://www.aebrus.ru/application/views/aebrus/files/pages_files/AEB_pr_07_06_eng_filess_2008_06_19_17_57_
09.pdf;http://www.aebrus.ru/application/views/aebrus/files/pages_files/AEB_pr_6mnths_08_eng_filess_2008_07_11_12_44_41.pdf). ‘SALES OF FOREIGN* BRANDS IN RUSSIA IN NOVEMBER/12 MONTHS 2008/2007’,
http://www.abiz.ru/content_Download.php?rn=Sales_car_12mon2008.pdf&f=1205__Sales_car_12mon2008.pdf.
Retrieved 24 September 2008. Created by the author

Table 5. Group divisions among independent manufacturers in the Russian market

Entranceyear

2006 andbeforeMore than 100,000 units
Early top-ranked group(Chery, Great Wall Motor, BYD,
Hafei Automobile)

Late top-ranked group
After 2006 (Geely, Brilliance )Manufacturer scale
Less than 100,000 units
Early lower-ranked group(Body manufacturers such as Dadi Auto, Tianma Auto,
Xinkai Auto, Derways, and ShuGuang Automotive;commercial vehicle manufacturers such as ZX Autoand FAW Commercial Auto)
Late lower-ranked group(Shuanghuan Auto, Lifan Automobile, Changfeng
Motors, etc.)

Source: Created by the author.

distinguishing entrance timing. Table 4 displays these groupings divided by horizontal and vertical lines.
21

Zejian Li(1) The early lower-ranked group—the expansion of ZX Auto
This group includes manufacturers who entered the market in 2006 or before with a production of fewer than
100,000 units per year. It includes ZX Auto and FAW Commercial Auto as well as modified automobile manufacturers
Dadi Auto, Tianma Auto, and SG Automotive, which provided CKD parts to Xinkai Auto and Derways. In terms of its
environment, FAW Commercial Auto, which focused on commercial vehicles, differed from passenger vehicle
manufacturers in that its production was generally on a smaller scale than that of other manufacturers. Other companies
in this group concentrated on producing pickups and supplying the low end of the SUV market, in which vehicles soldfor less than 100,000 RMB. Moreover, many of these products were reconfigured copies of pre-existing products witha high degree of resemblance to the originals. ZX Auto is a representative example.
ZX Auto’s expansion into Russia12
For ZX Auto, the first Chinese automobile manufacturer to successfully expand into Russia, this opportunity aroseby chance. In 1999, Zhu Jingcheng, who had been living in Russia for approximately ten years, transferred to the China
Institute of International Affairs International Business Inquiry Centre, continuing his involvement in
Chinese–Russian exchange. Apart from the demands of the Russians described above, Zhu Jingcheng also sensed thesudden increase in demand for vehicles, which came with economic growth. Particularly in 2002, the demand for usedcars began to shrink with the implementation of the Russian government’s used car regulation policy, and the demand
for new cars suddenly began to rise.13 Zhu Jingcheng sensed the possibility of introducing attractively designed,
inexpensive Chinese cars of uniform quality into Russia as a substitute for imported used cars. At the time, a used 1998
Toyota pickup sold for $16,000 in Russia, and a new Mitsubishi sold for a much higher price of $22,300–$28,500. In
2003, Zhu Jingcheng happened to see a pickup truck by ZX Auto on display in Beijing. He was convinced of thepossibility of exporting a ZX Auto pickup truck priced around 100,000 RMB ($15,000) to Russia. In May 2003,
together with a Russian dealer friend who had handled German cars and imported Japanese used cars for many years,
Zhu Jingcheng visited Baoding city, Hebei province—known in China for its large amount of pickup truck
production—and began negotiating. On 30 May, he signed a contract to export 506 ZX Auto ‘Admiral’ pickup trucks.
ZX Auto was established in 1949 as Baoding Auto Manufacturing, and was later reorganized as Tianye Auto, alarge-scale, state-owned enterprise. In 1992, it suddenly became famous for selling the first pickup truck in the Chinese
market for 48,800 RMB. However, the small profits were not enough to cover high operating costs, and the company
became unprofitable. In 1999, Brilliance Auto provided capital, restarting the enterprise as a joint venture called Hebei
ZX Auto Manufacturing Co., Ltd., with 60% of capital contributed by Brilliance Auto and 40% contributed by Tianye
Auto Group. In 2002, when Brilliance Auto’s business began to decline, Brilliance Auto became a subsidiary ofZhejian Huaxiang Group when Zhejiang assumed its shares. In 2003, ZX Auto acquired the right to manage itself
independently from Zhejiang Huaxiang Group, and continued to operate with its focus mainly on pickup trucks (ZXLightweight Automobile Manufacturing) and SUVs (ZX Passenger Automobile Manufacturing). It started exporting
earlier than other companies did. In 2000, it began by exporting 500 vehicles to Iraq, and went on to pioneer new export
markets in Egypt, UAE, and Vietnam. Not only did it record sales of 28,701 units in 2003, it shone as the year’s
top exporter, with 7,126 units. Later, however, they struggled to reach annual sales of 30,000, and the number of units
exported peaked at around 10,000, showing no further progress. When exports to Russia began, the first Chinese
vehicle to arrive—ZX’s Admiral Pickup truck—was sold for $16,900 and basked in the limelight. Later, a change instrategy from finished car exports to CKD exports was planned, but not completed. In 2005, Avtotor Russia agreed to
75,000 CKD exports over five years, but this plan also never became reality. In 2006, problems occurred regarding
product quality and an inadequate after-sales service network, and, on losing the price war that ensued when Great Wall
Motor expanded into Russia (cementing ZX’s decline), ZX Auto was forced to withdraw. In 2007, ZX plotted a return
12

Except in cases otherwise noted, the description here is based on the internal Siberian document, ‘The Path of Chinese Vehicles
into Russia’.
13
In order to limit these used car imports that had been increasing since 2002, the Russian government revised the original usage
time limit from seven years to five, and greatly increased import duties. The cost of new cars began to fall, and the gap with usedcars shrank. For instance, a 1600 cc Ford or a 2000 cc Hyundai Sonata cost $16,000, while a new imported 1600 cc AT Mitsubishi
cost just $18,000. As the attraction of used cars decreased, the $10,000–$20,000 market went into gear.
22

International business strategy of Chinese auto in Russia

to Russia, completing an SKD trade assembly agreement with Amur Russia for 3,500 Grand Tiger
pickup trucks. Unfortunately, as its application to be registered under the terms of the favorable ‘Industrial Assembly’
policy, popularly called as Government Ordinance 166, was rejected, implementation of the agreement was suspended.
In general, exports to Russia by lower-ranked manufacturers (who mainly sold highly similar, low-priced
pickup trucks and SUV products) tended towards over-reliance on Siberian. Most of the manufacturers (which wereeven smaller than ZX Auto) were so-called body manufacturers which lacked the capability to produce completed cars,
and they sold and exported parts to Siberian at the lowest level of participation in Russian expansion—the CKD parts
trade. Siberian would then assemble the parts as local brands it owned at the factory of a local Russian manufacturer(Derways Russia) and sell the vehicles. (For instance, Dadi Auto did this.) Due to lack of technical capability, allbusinesses, which belonged to this group, have now withdrawn from the Russian market.
We will describe only the unique characteristics of the overseas expansion strategies of this group. Exports ofproducts requiring low technical skill (copies/imitations) relied completely upon trading companies, and sales
distribution (as well as after-sales service) was left entirely to trading companies, so that sales based solely on a pure‘parts trade-based export method’ uniquely characterized the overseas expansion strategy of this group. This method ofoverseas expansion ,that is, the parts trade method, in which expansion relies upon low prices and the manufacturer
disappears as soon as problems arise, is most easily linked to a ‘cheap but bad’ image and must be called a ‘cancer’ on
the overseas exports of Chinese cars. A similar expansion method was seen in the expansion of Chinese two-wheeledvehicles into the Vietnamese market. As long as this problem remains unsolved, it will continue to have a negative
influence on the foreign expansion of all Chinese cars.

(2) The early top group—the expansion of Great Wall Motor/Chery Automobile
This group includes manufacturers which entered the market in 2006 or before with production of more than
100,000 vehicles per year. It includes Chery Automobile, Great Wall Motor, BYD Auto, and Hafei Automobile.
Great Wall Motor’s expansion into Russia
Like ZX Auto, Great Wall Motor, located in Baoding city, Hebei province, was established in 1984 as a car
conversion maker belonging to Great Wall Industries Co. In 1990, Great Wall Industries Co. had become unprofitable,
and Wei Jianjun entered as a contractor to reorganise the company. In 1998, as Great Wall made the transition to a
publicly traded company, Wei Jianjun’s management performance up to that point was highly praised, and thecompany’s stock was transferred to him. Later, Wei Jianjun used the IPO to successfully gain ownership of more than
40% of Great Wall Motor’s stock, and the company was privatised. Under Wei Jianjun, Great Wall transitioned from its
original core business of producing oil tank cars to modifying buses and lightweight trucks; and in 1996, the decision
was made to enter the world of the pickup truck business. In 1998, the number of pickup trucks manufactured and soldexceeded 7,000 units, and it promptly took the top spot in the business. Later, it pursued a combination of new products
development and reforms, and has now become the number one manufacturer of pickup trucks and SUVs, with thenumber of units produced annually topping 100,000 units. In 1998, it began by exporting 240 units to Iraq, andcontinued expanding its foreign market to North Africa in 2000, Central and South America in 2003, and Russia in
2004.14 In 2007, the number of vehicles it exported topped 50,000 units, making it one of the top-ranked exporting
companies.
Great Wall Motor’s expansion into Russia was in response to its learning of competitor ZX Auto’s expansion there;
it quickly followed up by planning to enter the market through investment in the pickup truck product ‘Deer’ and the
SUV ‘Safe’ ($16,000). In 2006, to reduce costs, a plan was made to establish an assembly factory in the RussianFederation Republic of Tatarstan, and an attempt was made to begin local production, but as the application for thefavourable ‘Industrial Assembly’ policy was rejected, the plan was halted. Currently, exports to Russia consist ofcompleted cars.
14

Great Wall Motor’s ‘Great Wall Motor’s opportunities and challenges in a globalized market’ document distributed at the 2007
China Automotive Export Conference.
23

Zejian Li

Chery Automobile’s expansion into Russia15
When Siberian introduced Russian buyers to Chinese automobile manufacturers, Chery Automobile was one of thecandidates. In April 2004, Siberian signed an agreement to cooperate in Chery Automobile’s cultivation of the Russian
market. With this, Chery Automobile’s expansion into Russia officially began. Also in 2004, once 476 completed cars
were exported, the company began investigating local production possibilities. In 2005, through the mediation ofSiberian, Transservice, the parent company of Pekinsky Jeep16 (the first dealer of Chinese cars which became involved
in importing from ZX Auto), agreed to conduct KD manufacturing of Chery’s SUV, Tiggo, by establishing a factory in
Siberia’s capital city Novosibirsk. Also, the companies established Chery Automobile as a joint venture, and began
trial production while applying for the favourable ‘Industrial Assembly’ policy. However, as the Russian customs
policies stipulated that imported parts which were ultimately to be assembled as finished vehicles would be assessed
for taxes at the same rate as completed cars, the cost of the first 100 vehicles assembled via KD was even more
expensive than that of imported finished vehicles. Chery Automobile realised that assembling vehicles in Siberia wasthus unprofitable.
Avtotor—a business group in which a deputy prime minister of the former Soviet Union, Vladimir Scherbakov, has
had 100% ownership since 1991—is involved in diverse businesses including agriculture, industry, and banking. It has
used its advantages17 in terms of industrial promotion policies, as a company in the Special Economic Zone in
Kaliningrad, to create knockdowns of Kia as well as of BMW, GM Chevrolet, and Hummer 2 vehicles. However, thecompany experienced a severe conflict with SOK Group Russia over the acquisition of assembly qualifications for Kia
vehicles, and preparing for failure in acquiring these qualifications, it decided to fill the gap by using its spare
manufacturing capacity to assemble Chinese cars. In 2005, through Siberian, Avtotor visited Beijing Automobile,
Nanjing Automobile, and ZX Auto, exploring the possibility of cooperation and agreed to KD production of Nanjing
Auto’s Yuejin truck and ZX Auto’s pickup trucks. Since Chery Automobile was in negotiations with Transservice,
Siberian did not dare introduce Chery to Avtotor. However, Chery Automobile, understanding the importance oflegally avoiding customs duties through the privileges enjoyed by Avtotor, wished to form a partnership with thatcompany. In November 2005, Chery Automobile began secret negotiations with Avtotor regarding onsite KD
production, and a contract was drawn up in January 2006. Then, on 24 April, locally assembled Chery brand cars weretaken offline. Both companies looked at the sales records and agreed to use a total of $200 million of additional capitalto establish a new factory. The partnership with Transservice was halted. With this, Chery Automobile used the
Kaliningrad manufacturing site to sell 37,000 vehicles in 2007, rapidly increasing its presence in the Russian
market. However, in March 2008, due to the decline of the dollar (Avtotor’s operating currency), the company
announced that it was putting a halt to the KD manufacturing of Chery cars.18 When this occurred, sales of Chery
Automobile vehicles fell rapidly (Table 4). In August 2008, Chery Automobile announced that it would begin local
production again in partnership with TagAZ Russia, but it is unlikely to be shielded from customs duties as was thecase in its partnership with Avtotor.
A special characteristic of this group is that, in general, when independent manufacturers belonging to it planned

15

Regarding the introduction of Chery Automobile, see Li (2007a, 2007b). Except stated otherwise, this is based on two interviews
with Siberian Automobile Export (Beijing) Co., Ltd., President Zhu Jingcheng in August 2007 and April 2008, the internal
Siberian document ‘The Path of Chinese Vehicles into Russia’, and content posted to the Siberian Website.
16
The name of the Pekinsky Jeep Company has been translated in China as ‘Beijing Jeep (Zhongshin)’ and in Japan as ‘Beijing
Jeep (Centre)’; this company has no relationship with the automobile manufacturer Beijing Jeep Group. As described earlier, thedealer Company A, which was on friendly terms with Zhu Jingcheng from Siberian and was the first to become involved in ZX
Auto imports, later defaulted on its contract. Company A established Pekinsky Jeep to continue the contract. The head ofPekinsky Jeep’s import division is the same as the head of Company A. Consequently, when Chery Automobile expanded into
Russia, reports stating that it used the sales network of ‘Beijing Jeep’ were essentially erroneous; in fact, it used Pekinsky Jeep’s
sales network.
17
Speaking only in regard to automobile manufacturing, the policy was designed to invite investment, so as to raise the local supply
rate to 50% over five years, and allow the levelling of zero-duty imports of automobile parts.
18
Avtotor seemed obviously insincere in its explanation. As ‘the decline of the dollar/the rise of the rubble’ would reduce the priceof CKD imports calculated in dollars, this would in fact have been an unparalleled opportunity for Avtotor. Underlying the haltingof production were appeals to the Russian government by other domestic firms in the same industry to do away with Avtotor’suniquely favourable tax status. To maintain this uniquely favourable tax status, Avtotor had to stop assembling Chinese cars. Also,in May of that year, Avtotor halted production of the Chinese Yuejin truck, which had made up only 1% of the cars it produced,
apparently attempting to improve its situation by hurriedly distancing itself from the production of Chinese cars.
24

International business strategy of Chinese auto in Russia

expansion into Russia, they did not rely too much on Siberian but were able to maintain a certain degree of
independence. Of course, the certainty of this independence must be considered separate from success at expanding
into Russia. Although it did not succeed, the plan for factory construction put into place at the time of expansion showsthat the overseas expansion plan of this group was ‘Greenfield-esque’. By using every possible method, the early
manufacturers somehow managed to survive in the Russian market. However, the situation was not necessarily
pleasant. The reasons will be described later, but it is felt that there were problems with the risk management of
independent manufacturers regarding the method of expansion as well as method options.

(3) The late top group—the expansion of Geely Automobile
This group includes manufacturers which entered the market after 2006 with production of more than 100,000
vehicles per year. It includes Geely Automobile and Brilliance Auto.
Geely Automobile’s expansion into Russia19
In 2007, Geely Automobile independently signed a contract for KD production with Amur, which had been
conducting KD production of Siberian’s ‘Siberian-Dadi’ brand SUVs. In 2007, it planned to produce 17,000 Otaka
cars. However, transportation to the Ural region, where Amur is located, is extremely inconvenient, making it difficult
to fulfil the KD manufacturing contract.
The Russian company Rolf is the largest group importing and selling foreign cars, dealing in thirteen
foreign-branded vehicles. In 2007, it was involved in importing and selling Mitsubishi, Hyundai, Mazda, Ford,
Mercedes, Audi, and Peugeot cars, and with yearly sales of $3 billion, it qualified as a megadealer. In 2007, through theRussian Business Society and the Chinese consulate in Russia, the company expressed a desire to import $1 billion
worth of Chinese passenger vehicles. At first, FAW and SAIC Motor were mentioned as candidates, and Geely
Automobile was added as a candidate on the recommendation of a friend of Zhu Jingcheng. Then, Siberian
investigated Geely Automobile on its own, gained confidence in exporting Geely Automobile’s cars, and made it the
number one candidate. Once individuals on the Russian side had been invited several times to Geely Automobile andpersuaded, a contract was established to export 200,000 units over five years—$1.5 billion worth of completed
cars. Geely’s creating this partnership with a powerful local importer helped it to successfully counteract difficulties
encountered in expansion, such as channel maintenance and provision of after-sales service. Also, it can be said thatsince cars assembled in China were higher in quality than cars assembled onsite in Russia, a favourable environment
had been prepared for expansion. Currently, the export of completed cars by Geely Automobile to Russia is viewed asa very promising project. This group’s overseas expansion strategy is still stuck at the stage of ‘exporting completed
cars’, but in that it exports original products with full-scale after-sales service (when compared with the previously
mentioned ‘parts trade-based expansion method’), the expansion pattern of this group is relatively favourable in termsof competitive position.

(4) The late lower-ranked group—the expansion of Lifan Automobile
Lastly, we will take a brief look at the late lower-ranked group. This group includes manufacturers which entered themarket after 2006 with production of fewer than 100,000 vehicles per year. It includes Lifan Automobile andShuanghuan Auto. Because the reputation of ‘cheap and bad’ had already been established for the Chinese cars
produced by the late lower-ranked group because of early manufacturers, it is easy to imagine that the independent
manufacturers in the late lower-ranked group operate in a more trying environment. Young manufacturers like Lifan
Automobile, Changfeng Motors, and Shuanghuan Auto could not find their way into the market on inexpensive prices
alone. They needed another strategy in order to break into the market.

19

Regarding Geely Automobile, unless otherwise noted, the description here is based on the same content as that listed in Footnote
12 and Li (2007a, 2008).
25

Zejian Li

Lifan Automobile’s expansion into Russia
Lifan Automobile, as an important manufacturer of two-wheeled vehicles, was allowed to enter into passenger
vehicles manufacturing (which it had long wished to do) in 2005. Due to its late entrance into the market, it adopted a
growth plan which emphasised both domestic sales and overseas exports from the beginning. In 2007, it was alreadyexporting to 20 countries. To facilitate its entrance into the Russian market, in February 2007, Lifan Automobile
entered into a three-party agreement with the Russian companies Derways and AutoMir in which KD parts from Lifan
Automobile were assembled at Derways and sold by AutoMir. In 2008, it began to construct the welding and painting
facilities it had requested under Government Ordinance 166, and it aims to achieve full local production by 2010.
Although Lifan Automobile made a late entry, it is the most discussed Chinese car manufacturer in Russia
today. The reason is that in November 2007, the Lifan 520, which is being produced as a knock-down, passed the safety
inspection conducted by Russian authorities. In 2007, the influential Russian car magazine AvtoRevu conducted a crashtest using automobiles manufactured by Chery Automobile, and reported that ‘the results were the worst seen in thelast three years’. However, the approval rating of the Lifan 520 is perceived as an opportunity to recover the trust of
Russian consumers towards Chinese-made vehicles as regards safety. In this way, the late lower-ranked group wereable to gain the high-quality image the original early independent manufacturers were unable to establish among
Russian consumers and appeal to the latter other than on the basis of price. The price was set at $9,000–$14,000,
making it possible to distinguish between this and products from Russian local manufacturers, which, it would seem,
meant that one chance still remained for Lifan to penetrate the Russian market. However, as described later,
Government Ordinance 745 increased KD manufacturing costs by 10%, and Lifan Automobile was forced to react.

4. How should Russian expansion by independent Chinese manufacturers be evaluated?
(1) Analysis in terms of expansion timing
Firstly, we will examine expansion timing. In 2003, the emergence of the previously mentioned Siberian made iteasier for all independent manufacturers, regardless of scale, to expand into Russia. Also, around 2003, the family cars(less than $10,000) that made up 80% of the Russian market became a significant factor spurring on expansion (seeFigure 3).
The fact that Chery Automobile’s Amulet was at one time sold for $9,000 and became popular was also due to theever-present demand for family cars. It can be said that, for a time, the company was blessed by a large number ofowners who emphasised price over quality. However, with economic growth, the scale of the family car market shrankas the years went on, and in 2007 it shrank to less than 30% of the market (see Figure 3). The management ability of
independent manufacturers was tested by such sudden changes in the market environment. The interior configurationof small manufacturers’ pickup trucks and SUV products was designed for the Chinese, and it was often pointed outthat these cars were not intended for tall Russians. However, small industry manufacturers lacked the ability to makelarge-scale design changes. Also, sales and market cultivation were left completely to Russian dealers and Siberian,and responses to problems of rubber and resin parts becoming fragile in the low-temperature environment were
slow. As a result, the reputation of Chinese cars as ‘cheap and bad’ became more and more entrenched. Consequently,
young, small manufacturers like ZX Auto were forced to withdraw because they lacked the productdevelopment/improvement skills and also the wide-ranging sales capabilities needed to respond to these sudden
market changes. To some extent, the top manufacturers possess the product improvement and market cultivating skills
to respond to the above-mentioned sudden changes in the market, but are limited by lack of operational know-how
regarding expansion, which will be examined next.

(2) Analysis in terms of market entrance methods
When we look at past Russian expansion by independent manufacturers, we see a tendency for manufacturers toinitiate CKD or SKD manufacturing after a brief period of exporting completed cars. In the Russian tariff system, the26International business strategy of Chinese auto in Russia

Figure 3. Composition of car types and average price range in the Russian market (unit: dollar)

100%

30,00080%

25,00020,00060%

15,00040%

10,000

20%

5,000
0

0%

2003

2004

2005

2006

2007

$40,000 and above$30,000–$40,000$20,000–$30,000$15,000–$20,000$10,000–$15,000$6,000–$10,000$6,000 and below

Imported cars

All cars

Russian cars

Chinese cars

Note: Average price of Chinese cars calculated by the author from the 2006–2007 version of Chinese
Automobile Export Report.
Source: Renaissance Capital (2008), Sector report (http://www.rencap.com/eng/research/MorningMonitors/Attachments/Auto-Feb_22.pdf).

tariff for imported completed cars is 25–40%, and the import tariff for automobile parts is ordinarily 5–15%. At aglance, it would appear that KD manufacturing is a more reasonable option than finished car exports, but like thepreviously mentioned Chery Automobile Siberian project, KD parts intended for assembly into completed cars areultimately subject to the same duty rate as completed cars, so they are in fact more inefficient than finished car
exports. Even so, KD parts exports have been favoured because of the existence of grey parts imports by Russian
partners. In other words, another corporation separately obtains customs clearance for the KD parts, avoiding finished
car tariffs. However, as Russia lacks clear operations regulations and laws regarding imports of KD parts, Russian KD
production by independent manufacturers (except Chery Automobile’s Kaliningrad assembly operations) essentially
falls into a grey zone in terms of the law, so the operational risk of such expansion methods is considerable.
In March 2005, in a bid to develop Russia’s own automobile industry, the Russian government issued a favourable
policy to attract foreign manufacturers called ‘On Amending the Russian Federation Duty Rate on Automobile Parts
Imported for Industrial Manufacturing Assembly’ (popularly known as Government Ordinance 166). In other words,
when automobile manufacturers imported parts intended for assembly, pre-existing manufacturers with annual
manufacturing volume of 25,000 units or more were given seven years, and new manufacturers were given eight years
to achieve localisation of welding, painting, and assembly. If the applicants fulfilled certain conditions, including
gradually raising the local supply rate to 30%, their tax rate would be reduced or eliminated. Every important Chinese
independent manufacturer applied under Government Ordinance 166, but everyone was rejected. This perhaps had
something to do with the fact that they were involved in grey imports and lacked operational know-how regarding
expansion methods.

(3) Analysis from the perspective of operational know-how regarding expansion methods
From the beginning, independent manufacturers failed to understand that, by attracting foreign manufacturers, theRussian government intended to promote the parts industry in its own country. For this reason, there were many cases
in which conflicts of interest existed regarding the Russian government’s intentions and the local
27

Zejian Li

Table 6. New OEM Projects in 2006 (unit: 1,000 vehicles/$1 million)
Company

Manufacturing capacity

Investment scale

Investment vs. manufacturing
ratio

Geely Automobile

100

50

0.50

Chery Automobile

200

150

0.75

FIAT

155

175

1.13

BAIC

70

115

1.64

Renault

80

150

1.88

GreatWall*

50

100

2.00

GAZ-D.C.

65

131

2.02

BYD*

70

155

2.21

TATA*

60

150

2.50

Toyota

50

140

2.80

VW

115

396

3.44

GM*

230

815

3.54

AvtoVAZ-Magna

450

1700

3.78

PSA*

60

243

4.05

Nissan

25

219

8.76

RZGA-Hyundai
6
120
20.00
Note: Companies in shaded areas are Chinese manufacturers; * indicates undetermined information.
Source: Created by the author from Ernst & Young (2006) Russian Automotive Market Overview 2007.

production/manufacturing methods or investment publicity of Chinese independent manufacturers. This is the main
factor behind the sudden decline of Chinese cars in the Russian market from 2008 onward.
Table 6 is a listing of new OEM projects planned as of 2006 in Russia and the CIS. Of course, these are plans, andmass communication strategising was involved, so they cannot be said to necessarily reflect reality with accuracy, but
it is certain that this information was present in reports in general. Consequently, regardless of the accuracy of theinformation, the image of Chinese independent manufacturers that ignore contributions to society through investment
and pursue maximum manufacturing scale for minimum investment is becoming entrenched. Also, since Russian
manufacturers that manufacture Chinese cars locally are in general not major Russian manufacturers, they have little
interest in protecting the industry of their own country. In addition, because young, small Russian manufacturers obtainseparate customs clearance for chassis and bodies through grey imports as described above, they are derided by major
Russian manufacturers for doing ‘screwdriver assembly’ using one screwdriver. In 2007, sales of Chinese cars in
Russia leaped forward, exceeding 50,000 units. Even so, compared to the 3,131,000 cars sold in the entire market, theyhold only a 1.6% market share, and are not significant. However, mistakes have been made regarding the positioning
strategy of Chinese cars, as when Chery Automobile put the Amulet into direct competition with the major local
Russian manufacturers AvtoVAZ and Kalina. Also, since it adopted a manufacturing system which barely fulfilled theneeded investments in facilities, its share of the total market stood at a mere 1–2%. A protectionist view regarding the‘Chinese car threat’ (that is, that the entrance of Chinese cars contributed nothing to Russian society or thedevelopment of the Russian automotive industry, and caused only damage) has become more and more mainstream.

5. Conclusion
Inexpensive Chinese cars in direct competition with local Russian manufacturers, which are in a continuing decline,
are a problem the Russian government cannot overlook.20 Recently, the Russian government has strengthened its
20

Apart from its providing competition with local makers, ‘screwdriver assembly’ had the effect of suppressing hiring in thedomestic Russian automobile industry, so that it became an employment pressure factor. For economic reasons, it could be said
that eliminating Chinese cars was an unavoidable choice for the Russian government.
28

International business strategy of Chinese auto in Russia

control over grey imports and rejected Chinese applications under the ‘industrial assembly’ scheme in order tominimise the negative influence of independent manufacturers expanding into Russia. Also, to completely eliminate‘screwdriver assembly’, the Russian government issued Ordinance 745 on 10 October 2008, amending the importduties assessed on bodies for automobiles, mainly passenger vehicles. Beginning on 14 November, a transition wasmade from the original flat rate of 15% to one of 15% or 5,000 Euros per car body, whichever is higher. The increase in
manufacturing costs caused by such policy regulations has become an unavoidable problem affecting the continuationof the advancement of Chinese vehicles into Russia. In particular, local mass manufacturing by other foreign
manufacturers, which benefited by complying with the ‘industrial assembly’ policy, began from 2009, and thefavourable status of Chinese cars in terms of cost has been lost, pressing Chinese manufacturers towards inevitable
withdrawal. Due to policy regulations of the Russian government deliberately designed to eliminate Chinese cars, even
Chery Automobile’s partnership with Avtotor, referred to as the sole success, was halted in March 2008. Although
Geely Automobile, which planned to expand into Russia and export the completed cars in partnership with Rolf, andLifan Automobile, which aimed to achieve local manufacturing, were seen as promising, it has become more and moredifficult to eliminate the cost increases caused by revised customs duties. In 2009, sales of Chinese cars in Russia
essentially consisted of dealers disposing of stock, and the number of units sold fell drastically.
The factors behind the loss of momentum of Chinese cars in the Russian market since 2008 lie not only on the
Russian side. Even more important factors lie on the Chinese side. The most significant one is the fact that, due tonon-payment of numerous mediator fees, the strong cooperative relationships between independent makers andSiberian, which once functioned so well, are dissolving. A typical example is the suit brought against Geely
Automobile by Siberian.21 The differences in the two parties’ understanding of contract implementation are having adefinite negative effect on Geely’s sales in the Russian market. Problems regarding non-payment of mediator fees are,ironically, occurring mostly among groups other than the least competitive, late lower-ranked group. Siberian, which
had been involved in the Russian expansion operations of 27 Chinese car manufacturers, temporarily stopped
performing mediating tasks related to expansion into Russia in 2009, and is devoting its attention to lawsuits.
In general, when Chinese cars expand into overseas markets, deficiencies in risk management know-how regarding
the local market have been observed even among top manufacturers, and the fact that they lack the proper andnecessary know-how required for conducting domestic and overseas partnerships has been especially conspicuous in
the case of expansion into Russia. The manufacturers have been unable to recognise in advance the operational risks
that might result from deficiencies in know-how regarding overseas expansion. Further, in terms of the timing of
expansion, lesser, smaller modified car (body) manufacturers that are easily branded with the reputation of ‘cheap andbad’, appeared first, which negatively influenced the overall expansion of Chinese cars. Hence, corrective measures
are needed at both government and industry level.
Recent trends have seen many Chinese car manufacturers (including Chery Automobile) establish bases in the
Ukraine and move towards cultivating markets in the CIS after being shut out of Russia, but to the extent that they failto learn from the experiences gained in the Russian market, there is a risk that the Ukraine may be a repeat of
Russia. We must continue to watch developments.

21

Shi Baolin (2009), ‘Chinese car business defeated in Russia due to internal factors causing trouble abroad’ (21st Century
Economic Report, August 5, 2009). According to an internal Siberian document, in November 2007, through the mediation ofSiberian, Geely Automobile signed an automobile export trade contract with Rolf for a total of $1.5 billion. The contract specified
that regarding mediation fees, one of two options was to be selected through negotiation by both companies: either A, thecontractor (Geely Automobile) would use the total amount of the first three trade contracts signed with the overseas buyer (theRussian company Rolf) as a base for calculations; or B, the contractor (Geely Automobile) would follow the payment contract
with the foreign buyer ( Rolf) from the first trade contracts, and from the day the contractor (Geely Automobile) received
payment of the contract amount, it was to use the total amount of all trade contracts within one year as a base forcalculations. Ultimately, option A was adopted, but the two parties clashed over their very different understanding of the tradecontract. When the contract was first enforced, Geely Automobile supplied three batches to Russia, which totalled 1,000
vehicles. Each time, a car export acceptance contract was signed. Therefore, Geely Automobile insisted that these 1,000 units
should be the base of calculations for the mediation fee, but Siberian insisted that because these three vehicle export acceptancecontracts were incidental to the original $1.5 billion trade contract, they were not trade contracts. Therefore, they insisted that abase for calculations of 1,000 units was not enough.
29

Zejian Li

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[Received June 12, 2010; accepted October 31, 2010]31

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32

ABAS: Annals of Business Administrative ScienceVol. 9 December 2010

CHIEF EDITOR

Junjiro Shintaku, the University of TokyoEDITORIAL BOARD

Makoto Abe, the University of Tokyo
Takahiro Fujimoto, the University of Tokyo
Makoto Kasuya, the University of Tokyo
Nobuo Takahashi, the University of Tokyo
Technical Editor: Maki Nishida, Global Business Research Center

ABAS: Annals of Business Administrative Science is published annually by Global
Business Research Center, Hongo, Bunkyo-ku, Tokyo, JAPAN. http://www.gbrc.jp