Why Chinese Sub-brands Are Doomed

In China, a “sub-brand” is a brand under a foreign-Chinese joint venture. Examples: Venucia under Dongfeng-Nissan, or Everus under Guangzhou-Honda. ( Bertel insists that “sub-brand” is a misnomer, but TIC, This Is China, and he better get used to it.)

The Chinese central government ordered the joint ventures to start the sub-brands. “Order” is maybe too harsh a word, let’s call it strong recommendation. Resistance by the foreign partner is futile. If the foreign partner would ignore the wishes of the Chinese government, life would suddenly become very difficult. Applications for new factories, new cars, new permits, new visa for employees, etc etc, would suddenly be delayed or outright refused.

Why does the Chinese government want the sub-brands? Two words: intellectual property (IP). In a joint venture, the IP stays with the foreign partner. The Chinese partner sure can learn from the foreign partner’s knowledge, but cannot use the IP without permission from the foreign partner. If the Chinese partner wants to use platforms or engines for their own cars, like FAW for the Besturn B90 based on the Mazda 6, it has to pay the foreign partner.

This greatly annoys the central Chinese government who wants its mostly state-owned companies to have their own IP so they can make cars that can compete on the world market. The whole joint venture rules were created by the central Chinese government to do just that: learn from the foreigners >> built your own cars >> compete with the foreigners.

But, thanks to IP-regulations and the fact that Chinese state-owned companies have been terribly slow to learn anything, the scheme did not work out. The central Chinese government had to force things around and that is were the sub-brand come into play.

The sub-brand is legally considered to be 100% Chinese. That means all the IP that is pumped into the sub-brand is 100% Chinese as well. It is now owned by the joint venture. Also, there are no more license fees for the brand and the model. The joint-venture plan was about learning and didn’t work, the sub-brand plan is basically a legalized way of taking – at least half.

The foreign makers however are not stupid. They don’t want to annoy the Chinese government, and they also don’t want to hand over their newest IP’s. But they don’t mind to hand over some old IP is that is good enough to make everybody happy.

It seems good enough, for now. Let’s have a look. The Dongfeng-Nissan Venucia D60 is an old Nissan Tiida. Guangzhou-Honda Everus S1 is an old Honda City. The upcoming FAW-Volkswagen Kaili is based on the New Bora which is noting more than an ancient old Bora in new clothes. The upcoming Dongfeng-Honda Ciimo is based on the old Honda Civic. The yet nameless sub-brand from Chang’an-Mazda will use an old Mazda 3. The planned and yet nameless sub-brand from the Chang’an-Ford joint venture will use the old Ford Focus as its first car. The only exception might be Shouwang from Beijing-Hyundai which came up with a fancy concept car at the Guangzhou Auto Show. It is however very unlikely that their real car will be anything but an old Elantra.

So what do we have?

A bunch of old cars that have to be sold under brand-new brand-names. Who will buy? Nobody will, especially because the sub-brand cars are not exactly cheap. The only one on the market right now is the Everus S1. It costs 69.800 yuan, a new Fit costs only 91.300 yuan. It will be mostly the same story with the other sub-brands. Furthermore, Chinese car buyers don’t know the brands, there aren’t many dealers yet, people are unsure about service and in general unsure how long all those new brands will stay on the market. All taken together: hopeless.

The joint ventures will make no money with the sub-brands. Fortunately, their direct investments were not very high, basically not much more than designing a new logo, the cars and factories were already there. Still, the whole exercise takes a lot of time, resources and factory space that all could have been used to make new cars that do sell.

The Chinese government will only get some old IP out of it. Sure, better than nothing, but hardly good enough to ‘compete in the world market’. For now and the near future, the sub-brand scheme seems doomed;.

Things depend on the next step of the central Chinese government. Will they leave it here and give up? In that case, the sub-brands will die quickly. Or, will they give it another shot and force the foreign partners again, this time to inject newer IP in the sub-brands? In that case, it can get very messy because it seems sure the foreign partners think they have gone far enough already.

To be continued …

Dutchman Tycho de Feyter runs Carnewschina, a blog about cars in China, from Beijing, China. He also collects die-cast models of Chinese cars.