Case 7-1 Prosperity Painting Equipment

Case 7-1 Prosperity Painting Equipment

James Vreeland is an international marketing manager with Prosperity Painting Equipment in Kunming, in the Yunnan Province in southwestern China. He was previously a manager for Baker Equipment, an equipment manufacturer on the East Coast of the United States, a former Peace Corps volunteer in Nepal, and an MBA graduate—with a marketing concentration—of the College of William and Mary in Virginia. He recently married a Chinese woman from Kunming and decided to settle there.
Prosperity Painting Equipment is a supplier of painting equipment for three small automobile manufacturing firms—three out of many in China’s booming automobile industry—and is a medium-sized firm with reasonable potential for growth in a rapidly expanding market. Prosperity Painting Equipment’s competitors are medium-sized and large state-owned enterprises, as well as smaller private firms. The firm’s director, Zhang Chen, hired Vreeland for his excellent English and his polished presence, and to date, his primary task was to learn about China’s automobile industry. Zhang Chen had important decisions to make regarding the future growth of the company and Vreeland was going to play an important part in his plan.
The Chinese Automobile Market
Vreeland found that, in 2007, Chinese automobile manufacturers had a combined share of 29.1 percent of China’s market, the world’s second largest. Chinese automakers were ahead of the Japanese, who had 28.3 percent of the market share. Still, the Chinese market is dominated by big-name foreign brands, holding 70.9 percent of the market share, with most automobiles produced in China by joint ventures. China has more than 100 automobile manufacturers, but only 20 produce in large volume. China’s success in the Chinese market is attributed to price, especially in the large-vehicle segment, where, for the price of one foreign heavy truck, one can purchase three Chinese ones. Automobile buyers are pickier, but a cheap automobile appeals to many Chinese consumers.
The best-selling brand in China is the Chery (see Figure 7-6), produced by Chery Automobile, which was founded in 1997 and is government-owned. Its most popular model, the Chery QQ, appeared 6 months earlier than GM’s Chevy Spark, the car it copied successfully, because a Chinese firm somehow got hold of the blueprints. The Chery sold more cars than Shanghai GM, which makes Buicks, Chevrolets, and Cadillacs. But it lagged behind Shanghai General Motors, a joint venture between Shanghai Automotive Industry Corp and GM, and Shanghai Volkswagen, a partnership between Shanghai Automotive and Volkswagen. It sold 50,000 automobiles overseas in 2006, with its primary markets in the Middle East and Eastern Europe. It is currently eyeing the U.S. and Western European markets, hiring expertise that will help it launch the Chery in these markets.
FIGURE 7-6

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The Chery automobile is the best-selling car in China; it is produced by Chery Automobile, which is government-owned.
Another important player in the Chinese automobile industry is SAIC GM Wuling Automobile Co., a Chinese joint venture with General Motors (with the Chinese partner owning 50.1 percent), situated about 1,200 miles west of Shanghai. It makes commercial minivans and the Chevrolet Spark minicar. Wuling’s automobiles are tiny, with the best selling Sunshine van at a third the size of GM’s Chevrolet Tahoe SUV. The starting price of a Wuling Sunshine van with a 1-liter engine is $3,700, about the same price of a low-end Chevy Spark. Wuling’s sales were 460,000 vehicles in 2006. Production capacity goals are as much as 600,000 to 700,000 vehicles. Wuling’s target customers earn $200 to $600 a month, do not own a car, and travel on bicycles, scooters, or motorized three-wheel vehicles. Wuling’s automobiles—the Sunshine, and the more upscale Hongtu—are not designed for mature markets, such as the United States: The engine and wheels are small, and air bags are optional. At the Wuling factory, workers do the jobs that are performed by robots at Western GM plants, taking advantage of low wages. Wuling is a model closely studied by GM operations in other locations, such as India.
In other examples, the Changan Automobile Group Co. is an important newcomer to the automobile industry, with BenBen, a microvan that has been on the market since 2007. BenBen quickly became the number two seller in China’s booming microvan segment, averaging about 7,000 cars a month. Its target market is Chinese farmers and small business owners in smaller provincial towns. Shanghai Automotive, in turn, acquired design rights for U.K.’s Rover and is planning to offer an automobile with a higher sticker price, positioned upmarket.
For Chinese consumers, in 2004, the automobile brands with the highest brand recognition are Santana, Red Flag, Mercedes, Beijing Jeep, Shanghai VW, BMW, Honda, Volkswagen, Toyota, and Buick, according to the Gallup Research Co. LTD. Today, these brands will include many more local makes, including the Chery.
Chinese Automobile Exports
Vreeland also reviewed the state of Chinese automobile exports and quickly concluded that this is a growth market. Chinese automobile manufacturers exported 340,000 vehicles in 2006, bound primarily for developing countries in the Middle East, Russia, and Southeast Asia. About 25 percent of the passenger cars China exports are made by Japan’s Honda Motor Company, which owns a plant in Guangzhou that manufactures cars specifically intended for overseas markets. Honda exports its Jazz compact cars to Europe from this plant.
Predictions of Europe and the United States being flooded with cheap and popular Chinese cars may be premature, as Chinese manufacturers must first build cars that meet European and U.S. safety and environmental standards, and, equally important, consumers’ standards for quality. Jiangling Motors’ Landwind, a copy of Opel’s Frontera, spectacularly failed European crash tests. International joint ventures in China, with the exception of Honda, have little interest in selling automobiles outside of China, because they would face political and economic disadvantages. Instead, they are focusing on tapping the growing Chinese market. But, even if only few of China’s automobiles are available in the West (Chrysler has signed a letter of intent with Chery to build a small car in China for Chrysler to sell in North America), they are likely to heighten competition for U.S. automobile manufacturers worldwide. In the face of growing political pressure in the U.S. and Europe to address China’s large trade surplus, this may spell trouble for Chinese exports in general in the future.
The Task
Zhang Chen set up a meeting with James Vreeland. They started their conversation casually exploring Vreeland’s take on the Chinese automobile industry. Zhang Chen informed him that the supplier of painting equipment for the SAIC GM Wuling Automobile Co., the GM joint venture, has just been contracted to supply General Motors’ operations worldwide. Zhang Chen would like Prosperity Painting Equipment to enter into a similar relationship, supplying the worldwide operations of a large automobile manufacturer with painting equipment.
James Vreeland’s task is to create a presentation for the company’s investing partners that will segment the automobile market in China based on dimensions such as degree of focus on the Chinese market, joint-venture partnership, export orientation, and brand recognition. Then, Vreeland is to present a targeting strategy that is appropriate for his firm. The strategy proposed must convince investors to provide the necessary funding for Prosperity Painting Equipment’s growth.
(Lascu 232-233)
Lascu, Dana-Nicoleta. International Marketing, 3e, 3rd Edition. Cengage Learning, 02/2008. VitalBook file.
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