Chinese motorcycle engine maker ready for trade conflicts

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Zongshen Industrial Group, one of China's major motorcycle engine makers with an annual production capacity of four million units, is positioning itself to cope with the ongoing China-US trade dispute.

While its motorcycle and motorcycle engine segments, which together account for over 70 percent of overall sales, do not export much to the U.S., yet the group's general purpose engines do. This segment accounts for 15 percent of Zongshen's overall 20 billion yuan revenue.

Hu Xianyuan, the Executive President of the group, said that out of the group's 3.5 billion yuan in annual exports, three billion goes to the U.S.

“In the short-term, we will share the burden of the tariffs with our clients. As of now we still have some priority in negotiations, which indicates their reliance on us,” Hu told CGTN.

“In 2019, however, if and when the 25 percent tariff kicks in, our clients may start to look for alternatives.”

Hu Xianyuan, the Executive President of Zongshen Industrial Group, said the group was one of the earliest companies in southwest China's Chongqing Municipality to "go global." /CGTN Photo

Hu said Zongshen is taking the initiative by laying out a step-by-step plan for its customers, saving them more time and money, and cutting out the need to look for new suppliers.

"Because we are involved in machine systems, it could be hard for them [our clients] to find other distributors or replacements in just half a year."

Meanwhile, he said his company also has a few countermeasures up its sleeve should the trade spat persists.

For one, he said, Zongshen can expand its exports into markets outside North America, such as South America, Africa, Europe, and Southeast Asia.

Secondly, the company is strengthening its research and development (R&D) capabilities, which will boost product innovation and financials.

"...such that even when my profits are taxed at 25 percent, for example, we are still able to live well," Hu said.

In the past 10 years, Zongshen has spent about 2.5 percent of its annual sales on R&D.

Thirdly, Hu said Zongshen needs to diversify its local product and geographical mix.

“In the past, we used to depend on big export orders, but as China continues to be on the path of a consumption upgrade, we now also need to focus on localizing our offerings,” he said.

Eyes more M&As in general aviation sector

Zongshen acquired a 49 percent share in Canada's Harbour Air Seaplanes in 2015. The stake in the world's largest seaplane company is seen as its gateway to the general aviation sector.

Previously, the group was mainly manufacturing general aviation power and leveraging on its core skills in making motor engines.

"We hope to move from manufacturing [seaplanes] engines to designing and building planes, and gaining aircraft operations and management experience," Hu said, adding that the group aims to eventually secure its industrial chain foothold in the sector.

"In the past, China only has civil aviation and military aircraft, the country did not have any mature experience and expertise in the management, safety and command systems side of things."

Zongshen Industrial Group sees general aviation as a business stream with the highest potential going forward. /CGTN Photo

Hu said Zongshen keeps looking for mergers and acquisition (M&A) opportunities in general aviation -- a business stream which it sees most potential going forward.

"They are mostly in two areas: core technology in new energy systems, and general aviation core assets which are internationally recognized," Hu said, citing Europe and North America.

Hu stated that these M&As are opportunities-driven, rather than spending just because of an allocated budget or target.

Zongshen also manufactures agricultural machinery. /CGTN Photo

Meanwhile, Hu pointed out one of the group's priorities in the next five years is to bump up the production of machines and vehicles which use new energy such as electric power.

Stimulated by the pains in traditional manufacturing such as the lack of efficiency and transparency, Zongshen has transformed and now covers areas beyond traditional manufacturing.

"Since 2012, we have transformed into a diversified group with holdings in finance and internet of things. We today offer financial solutions such as micro loans, leasing and factoring, to SMEs that are part of our industrial value chain," Hu said.

Presently, these new business streams account for five billion or a quarter of the group's revenue.

In a nutshell, to truly elevate China's manufacturing industry to the global stage, Hu said there are three things that need to be internationalized: innovation, talent, and capital.

Engines using new energy power and beneficial for the environment will be one of Zongshen's priorities in the next five years. /CGTN Photo