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ASIMCO TECHNOLOGIES: 2005

op yo Taehoo Kim, Liang Liu, Guangyu Nie, Wanhong Shao and Xiaotian Xie wrote this case under the supervision of Dr. Xi Liu solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
Tsinghua School of Economics and Management and Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 6613208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 2010, Tsinghua School of Economics and Management and Ivey Management Services

Version: (A) 2010-04-27

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In late April 2005, Jack Perkowski, chairman of ASIMCO Technologies, a company headquartered in
China and supplying auto components for both Chinese and global customers, was in his office located in the bustling Chaoyang District of Beijing, pondering the next step that his company should take. Whatever the decision, it needed to be made soon, as the Chinese government’s upcoming and much stricter regulations on air pollution — caused by the rapidly increasing number of vehicles on the road — had been confirmed in the news. China’s National Standards III for Auto Emissions, which was dubbed Guo-san, literally “national three” in Mandarin Chinese, was to take effect on August 1, 2008. By that date, automakers would not be allowed, theoretically and quite likely practically, to supply the Chinese market with non-Guo-san-compliant products.

Do

No

ASIMCO’s major diesel engine customers, such as Yuchai Group, First Automobile Works (FAW) and
Dongfeng Cummins Engine Co. Ltd. (DCEC) had already sent requests for upgraded engine components to ASIMCO as well as other suppliers. Obviously, to respond to such requests, ASIMCO had to enhance the fuel systems that it had been offering. While three technologies, namely, common rail, electronic unit pump (EUP) and exhaust gas recirculation (EGR), seemed to provide the Chinese market with a solution, divergent views existed among Perkowski’s management team as to where ASIMCO should turn its spotlight. Some favored in-house development, strongly believing that an in-house EUP solution would be beneficial in the long-run. Others suggested an easier but, unfortunately, more expensive course of action: capacity acquisition, which could be achieved either through collaborating with international partners to develop the technology, or through simply purchasing certain sophisticated technologies from outside
China. Added to the already difficult tug of war was the obvious fact that at the very far end of the auto value chain in China, i.e. with the end users, price largely dominated purchase decisions.
Reflecting upon the many years he had spent working in the industry and serving customers, Perkowski totally understood that the successful application of any new technology would require a long process. The lengthy procedure would typically involve lots of back and forth, as it progressed through necessary stages, such as design, testing, trial production and mass production. Knowing that, and also considering the regulation’s compliance deadline, would it be a good idea for ASIMCO to develop its EUP solution from

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scratch? Or, would it be better to take the easier option? Either way, Perkowski was certain about one thing — because ASIMCO’s clients were being quite proactive in the face of the regulatory changes,
ASIMCO had to decide on a course of action soon so as to gain enough lead time to meet its clients’ needs.
Indeed, ASIMCO had to be ready before its clients, as the company supplied the clients, who in turn served the market to its satisfaction. The question, however, was how ASIMCO should meet this commitment.
THE CHINESE AUTO INDUSTRY

op yo The Chinese auto industry witnessed a stunning growth in the 13 years leading up to 2005. Its total yield increased from 0.7 million units in 1991, to five million units as of the end of 2004, with a compound average growth rate (CAGR) of 16.3 per cent, dwarfing the global rate of 13.4 per cent. As a result, China boasted the world’s fourth largest auto market, claiming 8.6 per cent of the world’s yield after Japan, the
United States and Germany.
Following the lead of Xiaoyu Zhang, the president of the Society of Automotive Engineers of China, analysts commonly divided the past 27 years of the Chinese auto industry into three phases1:

1. Initial booming (1978 to 1994)
The CAGR of yield was higher than 23 per cent, with the industry substantially transformed by a series of reforms touching economic, financial and investment issues.

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2. Consolidation (1995 to 2000)
The CAGR of yield shrank to as low as seven per cent. Regulatory initiatives such as the Automotive
Industry Policies, which were issued in 1994, and the 1998 Asian financial crisis were commonly cited as the major factors that had slowed down the pace of growth.
3. Real booming (since 2001)
The CAGR of yield averaged 25 per cent and even approached 40 per cent in 2002 and 2003. The booming economy in China in general was believed to have driven the explosive growth.

Do

No

Sales of commercial vehicles2 in China experienced an average CAGR of 15.5 per cent between 2001 and
2004, even exceeding that of the country’s economy. During that period, 2.1 million units were sold. In
2005, rising manufacturing costs, stronger oil prices and tightened regulations all seemed to be weakening the market performance of commercial vehicle makers. Nonetheless, given the small size of the demand, those emerging obstacles did not turn out to undermine the overall confidence in the Chinese auto industry in general and the commercial vehicle sector in particular. Moreover, given the fact that exports accounted for about 14.6 per cent of auto sales in 2004, and the upward trend was continuing due to low production costs in China, analysts were positive about the future of made-in-China commercial vehicles in the global market. The domestic market, however, was extremely concentrated (see Exhibit 13). Various categories of commercial vehicles targeted a particular base of corporate clients with totally different needs; they were primarily run by diesel engines.
1

The full article can be found at http://auto.gasgoo.com/News/2008/10/10085105515.shtml, accessed November 1, 2008.
The industry usually distinguishes between two categories of automobile — passenger cars and commercial vehicles. A passenger car is designed to seat no more than eight people and is mainly for the transport of passengers. A commercial vehicle is used for commercial purposes such as carrying merchandise. Motor coaches carrying passengers are commercial vehicles. 3
According to the Chinese Motor Classification Standards (GB9417-89), trucks are classified according to their greatest mass on the highway (GA). The standards for trucks are mini truck (GA≤1.8 tonnes), light truck (1.8 tonnes<GA≤6 tonnes), middle truck (6.0 tonnes<GA≤14 tonnes) and heavy truck (GA>14 tonnes).
2

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THE CHINESE AUTO PARTS INDUSTRY

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Given the rapid expansion of China’s automotive industry, it is probably not a surprise that sales of auto parts in the country exceeded RMB700 billion4 during the period when China witnessed a quick growth of its auto industry. Starting in 1994 and continuing throughout 2004, the auto parts industry experienced a
CAGR of 18.4 per cent. Unfortunately, factors such as the lack of scale, scarcity of proprietary technologies and inefficiency had been hindering most domestic players from offering products of good quality. As a result, foreign manufacturers dominated the high-end segment of the market, leaving local companies to fight for a share of the maintenance market.

op yo Competition in the auto parts market (see Exhibit 2 for distribution of shares), which had nurtured a clientoriented mentality among suppliers, was getting more intense. Moreover, the strong pressure for the appreciation of the renminbi had forced global purchasers to look to other countries with even lower labor costs such as Vietnam, India and Thailand. In spite of this, export revenue for auto parts increased from
$0.33 billion in 1994 to $10.6 billion in 2004; Africa, Central Asia and Southeast Asia were the main target markets. Observers commonly held that for Chinese auto parts vendors, the impact of globalization had not yet fully played out, and exporting would remain the dominant theme in their business ventures.
Upon entering the WTO in 2001, the Chinese government promised liberalization with regards to crossborder trade and investment. To align with the spirit of the agreement, limits on the per centage of ownership by foreign investors in joint ventures and on the ratio of local production for auto components were relaxed. A 10 per cent reduction in the tariffs of imported auto parts was expected to take effect in
2007. Although the government issued the Automobile Industry Development Policy in 2004 to support domestic manufacturers, there seemed no escape from fiercer competition when more and more foreign companies established themselves in China.

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A conservative estimate would suggest that there were 15,000 auto parts suppliers operating in China by
2005. When it came to fuel systems, Bosch, Delphi and Denso controlled the most sophisticated technology, collectively occupying about 14 per cent of the whole market.
Bosch (China) Investment Ltd.

Do

No

Ranking 94th on the Fortune 500 list in 2004, Bosch had a very wide product lineup and lead the global auto parts industry. Its business in China covered automotive technology, industrial technology, and consumer goods and building technology. By the end of 2004, Bosch had invested 550 million euros in the
Chinese market. On the top of its priorities were localization and technology innovation. Bosch took an active role to support its host country’s 10th Five-Year (2001-2005) Plan of Economic and Social
Development; this role was evidenced by Bosch’s emphasis on developing environmentally friendly automotive technologies and their applications, and a broad range of power trains. As for Bosch’s plan for
2005, an investment of 75 million euros was on the agenda to build two top-tier diesel research centers — one in Wuxi, Jiangsu Province, and the other in Hangzhou, Zhejiang Province. Bosch was among the few international producers that had mastered the technology of common rail, the fuel injector technology that was mature and widely accepted in the global market. To ensure a successful application of the technology in China to allow automakers in that market to comply with Guo-san at a relatively inexpensive price, several modifications were perceived as necessary. It was estimated that Bosch would be able to produce
400,000 fuel injectors with common rail by the year 2008.
4

RMB=Yuan Renminbi

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Delphi China

Chengdu WIT Ltd.

op yo Delphi was another leading global supplier of automotive electronics and transportation systems. It had been the biggest motor parts producer until the end of 2004, when Bosch took over the lead. Since its expansion to China in 1993, Delphi had been growing at an extraordinary speed. In 2004, Delphi operated
15 companies, of which nine were joint ventures specializing in manufacturing and after-sales service. By
2004, there were 40 offerings in its product portfolio. Delphi’s China strategy stressed a gradual transformation from manufacturer to industry researcher and innovator. Delphi was well known for helping its clients in R&D, especially when strategic products were involved. It was also good at offering customized solutions to satisfy clients’ unique needs. Delphi was an eager advocate for EUP technology. It had once pulled off an upgrade of diesel engines for heavy-duty trucks, which relied solely upon single pump technology. The same technology was also being applied to certain diesels manufactured in China.
Delphi’s collaborative endeavor with four Chinese companies to develop the common rail system was also well under way.

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Besides attracting international suppliers, the expansion of China’s auto parts industry had also kindled the ambition and aspiration of local enterprises. Chengdu WIT Ltd. was regarded as a rising star when it came to fuel injector technology that had the potential to meet Guo-san requirements. WIT was founded jointly by the China Aviation Industry Corporation, Tsinghua University and the Chengdu Municipal Bureau of
Science and Technology. In a 2003 experiment, WIT successfully delivered an EUP solution for Yuchai’s
YC6112ZLQ diesel engine and thus allowed a Chinese engine maker to meet Europe III standards. One year later, WIT signed an agreement with the Chengdu municipal government to put in place a plan for building a manufacturing base with a yearly capacity of 500,000 units of EUP injectors. Analysts concurred that the in-house development of EUP technology and the improvement of corporate governance in Chinese companies, as seen in WIT, represented real threats to the international rivals in the Chinese auto-parts market.5
Engine Sectors and Diesel Sectors6

No

As a key part in auto making, the engine was described as the heart of a vehicle. Diesel engines were
“notorious” for the heavy air pollution they caused. Since the sector of cars/sedans grows much faster than the whole auto industry in general, the adoption of the diesel engine had been limited to trucks. In the years leading up to 2004, however, diesel engines started to show more advantages for car use, such as fuel efficiency. Concurrently, innovations in technology had made possible the substantial reduction of diesel waste gas emissions. The improvement of technology triggered wider acceptance of diesel engines. A survey by Global Insight showed that sales of diesel engine-driven vehicles grew by 141 per cent more than the period between 1996 and 2004.

Do

In China, FAW, Yulin Diesel Engine (Yuchai) and Weifang Diesel Engine (Weichai) were the top three domestic producers of diesel engines, according to data up to the end of 2004 (see Exhibit 2). All three were authentic state-owned enterprises, which had all ventured, to various extents, into absorbing foreign capital and technologies in their modernization and diversification processes.

5
6

www.airshow.com.cn/cn/Article/yjxx/2006-08-28/17649.html, accessed November 1, 2008. www.chinatruck.org/2006/vip/2/15001.htm, accessed November 1, 2008.

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FAW

op yo Based in Changchun, Jilin Province, FAW was a leading automaker in China. Its diversified product lineup included a variety of vehicles and a wide range of auto components. Founded in 1953 as the national pioneer, FAW started as a commercial truck producer and later expanded into making light trucks and passenger cars. In 1991, a modern automobile factory was added to FAW’s facilities under a joint venture arrangement with Volkswagen AG, and soon achieved an annual capacity of 150,000 units. Two strategic moves in 2002, namely, merging with Tianjin Automobile Industry (Group) Corporation and then forming a joint manufacturing venture with Toyota Motor Corporation, allowed FAW to place more emphasis on passenger cars while maintaining the dominant position in the truck category. FAW operated two subsidiaries specializing in engine making in Dalian and Wuxi, respectively. The output of Dalian in 2004 was 101,000 units and that of Wuxi 154,000 units.
Yuchai

Weichai

tC

Founded in 1951, Yuchai was located in Yulin, Guangxi Province, and maintained the largest independent production base of diesel engines in the world. Its core business consisted of six sectors: diesel engines, construction machinery, auto parts, auto chemical products, electromechanical products and special vehicles. It had also diversified into hotel management, tourism, real estate development and management.
With an annual sales volume of 600,000 diesel engines and 10,000 units of medium and small-sized construction machines, Yuchai claimed half of the high-grade diesel engine market in China. Yuchai went public in 1994, and was listed on the New York Stock Exchange. In 2005, Yuchai was planning a highprofile “second take-off.” That expansion was to launch four new engine products, three of which would meet Euro III standards by adopting the common rail technology.

No

Founded in 2002, Weichai had the shortest history among the top three Chinese suppliers of diesel engines.
However, the origins of its backbone, Weifang Diesel Engine Factory, dated back to 1946. As the philosophy and policies of modern management were gradually making an impact, Weichai further strengthened its position as a major force in the diesel engine market. Its products could be widely applied to heavy-duty vehicles, coaches, construction machines, vessels and power generators. As of 2004, the segment of heavy-duty vehicles contributed roughly 60.7 per cent to its sales revenue. The rest was split across the construction machinery market and that of vessels and coaches, with the former accounting for
27.7 per cent and the latter 11.6 per cent. In that year, Weichai went public in Hong Kong. In March 2005,
Weichai successfully produced its first Euro III-compliant large-power diesel engine. In the same year, as part of its efforts toward diversification and away from a single product line, Weichai purchased Xiang
Torch Corp., the largest spark plug manufacturer in China.

Do

Most analysts were quite optimistic about the favorable market prospects of commercial vehicles in 2005, especially where heavy trucks were concerned. Nonetheless, with the top five players only occupying 40 per cent of the share, it was obvious that the diesel engine industry in China was highly competitive.
ABOUT ASIMCO

ASIMCO Technologies (ASIMCO) was a global auto components supplier born in China. The company was the outcome of Perkowski’s successful attempt to put into practice his belief that “Asia and

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specifically China would ultimately represent the fastest growing market in the world as well as a manufacturing base for the global economy for all types of products and services.” With a history of more than 15 years, ASIMCO now had a client base stretching beyond the borders of China.

op yo ASIMCO was formally founded in February 1994, with an initial funding of US$150 million. Since the first day of ASIMCO’s existence, Perkowski was determined that the Chinese venture would be based not only on capital but also on management and technology to capture the unlimited opportunities in the world’s biggest emerging market. Therefore, once the core business units were in place, either through acquisition or through strategic partnerships with industry leaders such as Caterpillar and Nippon Piston
Ring, ASIMCO set out to tackle a major challenge in the real practice of running the business, namely that most managers appointed by the Chinese partners to lead joint ventures were somehow hampered by their background in state-owned enterprises, and did not seem to share Perkowski’s vision. One of the most impactful initiatives taken was the “New China” management program, which aimed to define a new approach to managing an operating company. This led to an overhaul of the top management — by the end of 1999, finance, sales, marketing, manufacturing, purchasing and other general managing functions were mostly headed by well-educated young professionals with deep exposure to the operations of multinational corporations in the Chinese market. Those New China managers soon carried out a complete managerial transformation at ASIMCO’s 13 manufacturing units located across the country. On its tenth anniversary,
ASIMCO was renamed ASIMCO Technologies so as to more clearly articulate its strategic vision to its employees and all its external stakeholders, i.e., in the future, ASIMCO would strive to be a global leader in technology.

No

tC

ASIMCO’s main strategy was to attract Chinese clients with offerings that allowed for compliance with the continually upgraded global standards at a low cost. Localized production of components ensured costs at an acceptable level. Another crucial component of ASIMCO’s competitive strategy was the collaborative development of new products, which tended to favorably position its clients in the face of rapidly evolving market needs. As to international customers, ASIMCO’s knowledge of the market dynamics in China made it a desirable supplier. As a result of global expansion, which officially started in 2000, ASIMCO established operations in the United States and the United Kingdom. Presence in mature markets enabled
ASIMCO to access the latest technology and a more extensive engineering capacity; meanwhile, it made the company more accessible to global clients.7 With the most recent addition of seven new factories in
2005, ASIMCO further strengthened its capabilities as to the supply of air compressors, piston rings, camshafts, safety critical brake components, NVH products, aluminum castings and ductile iron (see
Exhibit 3). Localized manufacturing of its Chinese clients’ strategic components became possible. In the same vein, with a supply of these quality, made-in-China auto parts, ASIMCO could better satisfy the global need for cost reduction.
Products

Do

In 2004, ASIMCO mainly supplied automotive parts (see Exhibit 4) and provided overall solutions for the heavy-duty components, modules and systems used in the power trains and chassis of vehicles, especially commercial vehicles running on diesel engines. The power train consisted of an engine, a transmission and fuel system. The chassis contained the brake and suspension. NVH (noise, vibration and harshness) products were commonly used in both power trains and chassis for customers who were particularly attuned to service. Around 70 per cent of ASIMCO’s revenue came from heavy-duty business relating to commercial vehicles. Passenger cars, the international market and after-sales service each accounted for 10 per cent of revenue. In terms of geographic origin, business in China contributed 85 per cent of the total
7

www.ukinvest.gov.uk/Investor-case-studies/4011525/en-GB.html, accessed November 1, 2008.

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income. In fact, Perkowski did not even take the number as a surprise, for he believed that the major players in the Chinese market, such as Dongfeng Engine, were comparable to General Motors in terms of both market value and sales revenue.

ASIMCO gradually gained global recognition as a leading supplier of precision fuel system components, and fully assembled hydraulic pumps and injector products. Fuel pumps, injectors and nozzles were made at two plants, one located in Beijing and the other in Hengyang, Hunan Province. These manufacturing facilities primarily supplied the Chinese market and produced certified Euro II-compliant pump products.
INDUSTRY REGULATIONS

European Emission Standards

op yo Typically, the automobile industry operated within the parameters set by various laws and regulations. One of the most profound constraints seemed to be the requirements defining exhaust emissions. Driven by concerns with energy shortage and climate change, the Chinese government had been gradually tightening up its clasp on the issue of emissions as evidenced in the upgrading of its Chinese National Standards that were initially enacted in 2000. While China looked to European emission standards for a benchmark, it did have to take into consideration the future of its automobile industry and factor certain Chinese preferences into the formation of its regulatory measures.

tC

European emission standards were a series of requirements that specified the acceptable levels of exhaust emissions for new vehicles sold in European Union (E.U.) member countries. The evolution of these standards indicated a trend toward increasingly strict regulations. As of 2004, limits were set for the emissions of all road vehicles. Different standards applied for each vehicle type and different standards regulated the emission of nitrogen oxide (NOx), hydrocarbons (HC), carbon monoxide (CO) and particulate matter (PM). Non-compliant vehicles were not allowed to be launched in the market. While mandating a total compliance by auto manufacturers, there were no specific requirements as to the use of technologies to assure compliance. Automakers thus had the motivation and the leeway to seek costefficient technology.

Do

No

E.U. regulations had been enhancing standards about every four to five years. Starting in the Euro II stage, different emission limits had been set for diesel and gasoline vehicles. Compared to gasoline, diesel allowed for a 20 per cent saving on fuel spending.8 Moreover, diesel offered more power — the distance that a diesel vehicle could travel was almost twice that of a gasoline vehicle consuming the same amount of fuel. Against the rapidly increasing prices of petroleum and gasoline in the global market, diesel engines were widely adopted for heavy-duty and light commercial vehicles. However, despite all the advantages, exhaust emissions turned out to be a serious problem for diesel vehicles. That was partially why diesel vehicles faced stricter emission limits and why they were the focal concern for E.U. regulations. While the
European Union seemed quite aggressive in upgrading emission standards, the newly defined requirements did not apply to vehicles already on the roads. The European Union also tended to postpone its planned dates for the introduction of new standards to allow two years for oil refineries to improve their plants.

8

www.ztauto.com/blog/user1/222/2875.html, accessed November 1, 2008.

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China’s Situation

op yo Starting in 1978, China’s process of industrialization had occurred at a high cost in that its natural environment was heedlessly put on the fast track of deterioration. As to the ongoing problem of air pollution, the rapidly growing number of automobiles on the roads and the creation of new coal power plants seemed to be the two major sources of emissions. Transferring the value of sustainability into the auto industry so as to address the environmental problems caused by auto penetration, the Chinese government enacted its first measures for emissions control in 2000, which were equivalent to Euro I standards.9 These measures were upgraded in 2004 to meet the standards of Euro II. Guo-san measures
(for light vehicles), equivalent to Euro III, were announced in 2005, with the enforcement scheduled for
July 1, 2007. Arguably, auto manufacturers would have enough lead time to improve their products accordingly.10 Equivalents to Euro IV were expected to take effect in 2010, with the possibility that Beijing might have to introduce the new standards on January 1, 2008, ahead of all other Chinese cities.
China also had a series of emission standards targeting diesel engines. Although lagging behind the United
States and European countries, the Ministry of Environmental Protection in China had been taking firm steps in implementing higher emission standards across the country. Guo-san measures for six-cylinder diesel engines were scheduled to be initiated in 2008, and even stricter standards (e.g. those equal to Euro
IV and Euro V) were to be adapted to diesel engines in 2009. To comply with Guo-san, the fuel system of a diesel engine, i.e. the system feeding fuel into the combustion chamber, must switch from a purely mechanical system to one controlled electronically. Moreover, the fuel system must operate under a significantly increased level of pressure to assure reduced exhaust emissions.

tC

Guo-san would also touch the supply side of fuel. In fact, the public debate surrounding the true impact of
Guo-san highlighted strong concerns that Petro China and SINOPEC, the two giant stated-owned petroleum suppliers in China, might find it hard to produce gasoline that would meet the new emission standards and still be profitably sold at an acceptable price in the market. Obviously, in the past, the government had experienced tremendous difficulties trying to prohibit vehicles from violating emission standards. Some analysts even speculated that the real schedule for enacting Guo-san had not been fixed yet. No

Common Rail, EUP and EGR Technologies

Do

The supply of Guo-san-compliant automotive parts necessitated the adoption of one of three technologies: common rail, EUP or EGR. Comparatively speaking, both common rail and EUP technologies had pros and cons. The advantages of common rail lay in flexible control and low noise, while EUP worked more safely and more stably, allowing commercial vehicles, especially heavy trucks, to travel long distances. In the international market, common rail was regarded as the mainstream and the most advanced technology to be used in small and medium engines. It was also the most complex technology. Its mass production could meet Guo-san. More importantly, common rail could be upgraded easily to satisfy higher requirements as evidenced in the fact that since 2000 most European companies had chosen the common rail solution to meet Euro IV standards. However, knowledge of common rail technology was quite concentrated. The few companies such as Bosch, Denso and Siemens that controlled the technology had been strongly advocating its application. Delphi, however, supported EUP.11

9

www.mep.gov.cn/image20010518/1920.pdf, accessed November 1, 2008. http://gb.cri.cn/13524/2007/06/07/2245@1624202_1.htm, accessed November 1, 2008.
11
www.enginexz.com/?action-viewthread-tid-5317, accessed November 1, 2008.
10

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As to EGR, there were two types of solutions in the market. One was called the “real EGR” and it had previously dominated the international market but was not popular anymore. The other EGR, which had been on the industry agenda since Guo-san was still in its conception, was Chinese-born, i.e., created in
China and driven by the need for compliance with the tightened emission limits and concerns favoring low costs. Indeed, at a price approximately RMB10,000 to RMB20,000 lower than common rail,12 Chinese
EGR gained enough buy-in among Chinese automakers. Yet, while lab testing suggested positive results in meeting the regulation requirements, there was widespread doubt that it could perform the same way in a real vehicle on the road, and more importantly, lasted as long.

ASIMCO’S DECISION

op yo Given their positions on the pricing ladder in 2004, EUP seemed most vulnerable to downward pressure. A lower price would be expected for both common rail and EGR, but for different reasons. Less expensive common rail solutions would be available due to the migration of manufacturing to cost-efficient regions.
The price of EGR, however, would be driven down as the volume built up. Some analysts believed that
EUP might lose the market share if it failed to follow the price-cutting. As of 2004, EGR undercut EUP by
RMB2,000 and was arguably perceived as the best choice for price-sensitive customers.

It was late, and most employees had left for the day. Strolling around in the empty office area, Perkowski was still weighing ASIMCO’s next step. To get a more comprehensive view, he had called a meeting early in the afternoon. The feedback collected was mixed. He recalled what Wilson Ni, the vice-president of global sales and marketing, said:

No

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Some people declare that EUP does not have a bright future at all because it can’t survive
Euro IV. But we have seen certain well-known companies that have successfully developed their EUP solution compliant with Euro IV and Euro V in both the U.S. and the
European markets. Obviously, it’s technically possible to upgrade EUP to meet Guo-si13 and even higher standards. As to EGR, we all know that Cummins has been working on it in the U.S. for a long time. However, let’s not forget that what some domestic automakers are now lobbying for is ‘Chinese EGR,’ different from, if not inferior to, the real technology. Of course, Chinese EGR is usually cheaper, but would anybody be confident enough to say that it would sustain and render no problem after the vehicle has been on the road for several months?

Do

For those at the meeting, the following set of numbers was just too familiar: leading auto manufacturers and auto parts manufacturers typically spent four per cent and six per cent, respectively, of their revenue on research and development (R&D). R&D spending in ASIMCO was just two per cent. When it came to other Chinese suppliers of auto components, the spending level was even lower, at one per cent. In
Perkowski’s mind, self-developed products and technologies were the upcoming trend in China. This trend would be driven mainly by the demand — except for the rather few circumstances where the real technology was keenly pursued, most automakers manufacturing for the Chinese market were concerned with producing vehicles that passed all the emission requirements and, more importantly, were affordable.
Simply put, technologies from developed countries may not fit well with local needs.
As far as the fuel injector system was concerned, EGR was surely the cheapest option. The whole industry knew this. The knowledge gained over the many years of operating the business in China, however,
12
13

http://content.caixun.com/NE/00/vc/NE00vcsd.shtm, accessed November 1, 2008.
Abbreviated Mandarin Chinese for China’s National Standards IV.

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cautioned Perkowski that competition in the rapidly transforming market was anything but a simple matter of price. Consumers in general and auto parts purchasers in particular were observably broadening their buying-decision criteria in that they now gave more weight to quality. The question was whether ASIMCO would be able to provide its clients with both quality and affordability.

op yo At the afternoon meeting, the executives considered ASIMCO offering EUP solutions to its Chinese clients and, with this scenario in mind, explored routes of cost reduction in order to fend off competition from cheaper EGR. Several seasoned account directors highlighted the importance of maintaining closer longterm relationships with key clients, and they strongly proposed a total-solution approach that would bundle
EUP with power train, chassis, fuel system and NVH in the same contract. They were positive that given the company’s time-tested skills and competency, the sales force was ready to pull off such a strategy.
Others suggested that once scale was achieved, cost would definitely drop in the process of mass production. tC

In the midst of the heated discussion, when Perkowski posed the question, “Shall we develop EUP solutions all on our own from scratch, or shall we acquire it somewhere else?” the enthusiasm of his team accelerated. Obviously, in-house development would require a big investment, which was not what
ASIMCO had been doing so far. Indeed, ASIMCO was a Chinese company founded by an American and mainly supplied the Chinese market. To what extent were the industry’s concerns with the new regulations on emissions necessary? And for that matter, was it a worthy effort to engage in the painful process of weighing options so as to set ASIMCO on the right track toward expanding its technological capability?
Experience in the past had taught Perkowski and his executives that in China, there was no guarantee that the planned timeline for enforcing emission standards would not be changed. Sinopec and Petro China were two powerful, entrenched players in the chain of interests. Would the National Environmental
Protection Bureau have to postpone the time when Guo-san was set to take effect, or even have to delay the prohibition of non-compliant vehicles?

Do

No

A way to trade off between risks in the macro task environment and opportunity costs in the market, as suggested by some, would be to acquire the technology from outside ASIMCO, either through a technology transfer or through joint venture manufacturing. Yet, to everyone at the table, the memory was still fresh that just a year before, in February 2004, ASIMCO had put into place a repositioning initiative and added the word “Technologies” to its name. Common rail, EUP and EGR — how would the choice of any of the three turn out against ASIMCO’s ambition?

This document is authorized for use only by Vikas Gupta until February 2013. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.

9B10A001

rP os t

Page 11

Exhibit 1

MARKET SHARE DISTRIBUTION IN COMMERCIAL VEHICLES BY PRODUCT CATEGORY

Heavy motor coach (total 28)
14%

13%

op yo 41%

13%

9%

10%

First Automobile

Fujian New Forta

Zhengzhou Yutong

Dongfeng

Anhui Ankai

Others

Heavy truck (total 25)

tC

15%

34%

9%

12%

30%
Dongfeng

CNHTC

Beijing Auto Holding

No

First Automobile

Do

Others

This document is authorized for use only by Vikas Gupta until February 2013. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.

9B10A001

rP os t

Page 12

Exhibit 1 (continued)

Middle truck (total 15)
16%

38%

6%
6%

Others

op yo 34%

Dongfeng

First Automobile

Beijing Auto Holding

Sichuan Yinhe

Light truck (total 39)
42%

tC

6%

7%

10%

35%
Beijing Auto Holding

Anhui Jianghuai

Dongfeng

No

Others

Do

Jiangling

This document is authorized for use only by Vikas Gupta until February 2013. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.

9B10A001

rP os t

Page 13

Exhibit 1 (continued)

Mini truck (total 10)
14%

37%

10%
12%

op yo Others

27%

Chang'an

SGMW

First Motor

Hafei

Source: China Auto Industry Association, www.auto-stats.org.cn, accessed November 1, 2008.

Exhibit 2

TOP 10 DIESEL ENGINE MANUFACTURERS IN 2004

1
2
3
4

Production (units)

First Automobile Works (FAW)

255,000

Yuchai Group

224,000

Weichai Power Co., Ltd

141,000

Dongfeng Chaoyang Diesel Co., Ltd. (DCD)

132,000

Kunming Yunnei Power Co., Ltd.

131,000

No

5

Name

tC

Rank

6

Dongfeng Cummins Engine Ltd.

123,000

7

Jiangsu Sida Power Mechanical Group Co., Ltd.

92,680

8

Yangzhou Diesel Engine Co. Ltd.

90,000

9

Shanghai Diesel Engine Co. Ltd.

86,000

10

Luoyang YTO Group

49,100

Do

Source: www.chinatruck.org/2006/vip/2/15001.htm, accessed November 1, 2008.

This document is authorized for use only by Vikas Gupta until February 2013. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.

9B10A001

Exhibit 3

rP os t

Page 14

LOCATIONS OF ASIMCO OPERATIONS
Country

Location

Operations

Hebei Province

1 sales office, 1 technology center

Anhui Province

2 plants

Sichuan Province

1 plant

Hubei Province

2 plants

Hunan Province

2 plants

--

United Kingdom

3 plants

Shanghai

United States

1 plant

Jiangsu Province

Japan

3 plants

Shanxi Province
China

ASIMCO headquarters, 2 plants

ASIMCO regional office

op yo Beijing

Michigan

ASIMCO regional office

Leicestershire

ASIMCO regional office

Do

No

tC

Source: ASIMCO Technologies.

This document is authorized for use only by Vikas Gupta until February 2013. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.

9B10A001

Exhibit 4

rP os t

Page 15

MAIN PRODUCTS BY ASIMCO TECHNOLOGIES AS OF 2004
A=light/heavy truck
B=passenger car
○ represents a production item
▲ represents a new production item in ASIMCO publicity material in April 2004
■Chassis products

■Power train products
A

Air brake compressors



Alternators



Bearing caps

B

A

B

Control arms




Camshafts

Product name









op yo Product name

Steering knuckles

Disc brakes/calipers





Cylinder heads
Engine blocks
Engine brackets
Engine mounts
Flywheels and covers

Rotors







Drum brakes/drums







Drum brakes/hubs





Automatic brake slack adjusters







Boosters







Boosters pump master cylinders



Disc brakes/brackets



Disc brakes/rotors





tC

Fuel pumps, injectors & nozzles





Die cast oil pans



Piston rings





Drum brakes/wheel cylinders







Shock absorbers components



Starters

Valve seat inserts

No

Cam covers

■Other


Transmission cases



Do

Oil seals, oil pans

Product name

A

B

Dust covers





O-rings





Seals





Rubber to metal bonding





Diaphragm





Machined aluminum casting





Source: MarkLines Co., Ltd., www.marklines.com/en/index.jsp, accessed November 1, 2008.

This document is authorized for use only by Vikas Gupta until February 2013. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860.

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