Since this year, Futian, Jianghuai and other enterprises have successively planned to set up joint ventures to extend the engine along the industrial chain, and the vertical integration process of the heavy truck industry is accelerating. Analysts believe that when heavy truck companies make engines, initial profits will be hurt, but after a certain scale effect, gross profit margin will be improved. Whether the expectation of lowering costs can be realized in the later period mainly depends on whether the industry cycle is up or down. What is certain is that competition in the heavy truck engine industry will become even fiercer.

Engine erosion vehicle profit

Heavy truck companies do not have much engine business. The main reason is that there is not much sales scale for a single company. It does not have economies of scale for an engine to be built by itself. Therefore, it is only necessary to purchase engines from engine manufacturers such as Weichai, Shangchai, and Xichai. Guomeng Li, a researcher of National Securities and Securities Co., Ltd., said that whether a vehicle company is an engine or not depends on its own sales. In general, if the cost is less than 50,000, the cost of investing in an engine cannot be recovered. Enterprises do not have the incentive to expand upstream, unless the production engine can also be sold to other companies.

Due to the high degree of market concentration in the heavy truck engine industry, the bargaining power of the relevant manufacturers is strong, which erodes the profits of companies that need to purchase engines. The engine is the core component of the car, and the gross profit rate is 20%-30%, which is about twice that of the whole vehicle. Many profits of the entire vehicle company are shared by the engine companies. For heavy trucks, the cost of the engine accounts for about 15%-20%. Taking a 200,000-yuan heavy truck as an example, the engine costs about 3-5 million yuan.

In this situation, vehicle companies have the incentive to expand upstream and reduce costs. From a global point of view, it is a major feature of the auto industry that automakers make their own engines. Auto giants such as Volkswagen, Toyota, Daimler, and Man have their own engine plants. In China, most passenger car companies also have their own engine plants.

Domestic heavy truck industry, in addition to larger companies such as FAW, Dongfeng, CNHTC, Shaanxi Auto, etc., produce their own engines. Others require outsourcing engines. It is not very common for truck manufacturers to do their own engines. Zhu Xuedong said that many heavy-duty truck companies do not make engines because the sales scale is relatively small, but it is an inevitable trend to build engines in the future.

Upstream engine extension

This year, Foton, Jianghuai and other companies have set up joint ventures to produce engines. The Dongfeng Cummins 13-litre engine has been completed and will be available this year. The engine business of heavy-duty truck companies gradually began to exert strength, and the vertical integration process of the industry showed an accelerating trend.

Heavy truck upstream expansion and sales are not unrelated. Without quantity, there will be no scale effect. It is better to let others do it. The most important advantage of horizontally integrated company Weichai Power is the low cost brought by scale effect.

In the first half of the year, heavy trucks saw a year-on-year decline in sales, but since the second half of the year, sales have increased significantly year-on-year. The recovery of tractor-trailers has been particularly noticeable. The annual sales of heavy trucks have increased by about 10% year-on-year. The data shows that from July to October, the sales volume of heavy trucks was 236,715 units, a year-on-year increase of 94%. In the first half of the year, the total sales volume for the first to the same period increased by 1.89%.

The cycle of the heavy truck industry is positively related to the increase in investment in fixed assets. About 1% of the investment in fixed assets is used to purchase transportation vehicles directly related to the construction of the project. This year's national investment plan (including reconstruction after the Sichuan disaster) has resulted in Heavy trucks increased demand for 37,600 vehicles. For now, this good trend will continue. It is expected that the sales volume of heavy trucks will increase by about 15% next year.

At present, among the top five companies in the heavy truck industry sales, except that Foton Motors is basically relying on Weichai Power to provide engines, the rest can produce their own. With the gradual progress of cooperation with Daimler, Fukuda will also get rid of the era of not producing engines. Foton Motor and Daimler signed the "Commercial Vehicle Cooperation Agreement" as early as January, and plans to jointly invest 6.35 billion yuan in the formation of a truck and engine joint venture, each holding 50% of the company's equity. This plan is waiting for the approval of the government.

JAC, which does not sell heavy trucks, is also planning to jointly produce engines. On September 29, the company issued a reminder that Jianghuai Automobile and NC2 Global LLC had signed a framework agreement for joint-venture cooperation between the two companies. It plans to establish a joint venture company to produce and sell medium and heavy-duty trucks and parts and components at a ratio of 50%:50%. NC2 is a joint venture between Caterpillar and Navistar, whose main business is the engine.

The total investment of the joint venture company is not less than 2 billion yuan. JAC will invest nearly all the assets and businesses of medium trucks and heavy trucks as joint ventures, and NC2 will provide cash and provide certain industrial property rights for the joint venture company. According to the announcement, the joint venture company will initially increase the output of existing heavy-duty trucks by three times and gradually increase its output in the future; the joint venture company will also have relevant engine strategies to support the development of medium-heavy trucks in JAC.

It takes time to improve profits

However, from project approval to investment and construction, to production, scale effect, and the improvement of related supporting facilities, a process is still needed. Therefore, in the short term, it is still impossible to see that the gross profit margin of heavy truck companies has been significantly improved.

After the engine project produces benefits, it is conservatively estimated to save 4%-5% in the engine part of the vehicle. However, in the initial period of construction of the engine, the heavy truck company does not have a cost advantage. Even if the cost is amortized, the profit will be damaged. After about one year of production, benefits will only appear as sales increase. Weichai Power's gross profit margin, which already has economies of scale in engine production, exceeds 30%, and heavy-duty engines from companies such as JAC and Foton Motors are buying from it.

Among current heavy-duty truck companies, China National Heavy Duty Truck and Dongfeng Automobile have relatively good engine business. Taking Dongfeng Motor as an example, Dongfeng Cummins’ sales volume in the third quarter increased significantly compared to the previous period, but profits did not improve significantly. Yang Huachao said that the reason for no significant increase in profits may be due to the investment depreciation of the new 13-litre engine, and the profit will only increase significantly after the sales.

The desire of the entire vehicle company to implement the engine project to reduce costs is understandable, but there are still certain risks that can be realized, depending on the sales volume of heavy trucks. Analysts said that after the economy warms up, it is necessary to pay attention to possible changes in the macro-control policies. For example, the reduction in raw material transport that is closely related to infrastructure construction will adversely affect truck demand. At present, the heavy truck companies' upstream extension is based on the judgment of the industry cycle. If this judgment is inaccurate, heavy truck companies in the future will be overwhelmed. In fact, the fluctuation of heavy truck sales is relatively large, and it is difficult to estimate the future.

In addition, after the replacement of the engine, it is also necessary to prevent users from adapting to this. The technical barriers to heavy-duty truck engines are relatively high. It is difficult for them to research and develop, there is no brand guarantee, and it is difficult to obtain user approval. Therefore, companies such as JAC and Futian have chosen to use joint ventures with foreign brands to produce engines. However, the quality, technology, price, etc. have changed compared with the engines that were previously used by Weichai or other domestic companies. It takes a process for users to accept new engines.

Future industry competition intensifies

To be sure, with the launch of new projects, downstream customers of heavy-duty truck engines will gradually get rid of their dependence on professional engine manufacturers. Analysts said that in the next 2-3 years, Foton Motors and JAC will gradually relied on external engines because of the joint venture's engine technology. From the perspective of professional engine manufacturers, that is, they will face the risk of reduced demand. Coupled with the development of heavy truck manufacturers with existing engine business, the future industry competition will become more intense.

At present, China National Heavy Duty Truck and Dongfeng Motor need attention. The cooperation between Sinotruk and Mann has entered a substantive stage. Both parties formally signed a contract on October 7. Mann will pay 560 million yuan to obtain a 25% stake in Hong Kong, Hong Kong, and one share. Mann is the third largest truck company in the world and has long maintained its global technology leadership in diesel engines.

Chairman of Chung King Hong Kong's Board of Directors Ma Chun-chi said that this will inevitably combine the two sides' technological and cost advantages, thus accelerating the bilateral cooperation in the sales network and global procurement, and consolidating and enhancing their respective strategic positions in the market. In terms of technology, the company will receive long-term technical support in the future, especially through the technology transfer of Euro III, Euro IV, and Euro V emission engine products, providing stable technical support for the company's development over the next 10-20 years.

Weichai Power and China National Heavy Duty Truck belong to the platform technology of Steyr (acquired by Man Corporation). The exclusive introduction of MAN Technologies by China National Heavy Duty Truck (STC) will enhance its technology and will pose a certain threat to Weichai Power.

The other is Dongfeng Motor. It is understood that Dongfeng Cummins's 13-liter displacement engine has been completed by trial fire. This year, it is ready to go public. This product will cause a greater impact on Weichai's power. In addition, Dongfeng's EGR engine has also been developed. This product can compete with Weichai and Heavy Duty's products.

However, real fierce competition will not occur in the short term. According to Ute, at least one year, Sinotruk, Foton Motors, and JAC will not have a substantial adverse impact on professional engine manufacturers represented by Weichai Power.