CIMC Vehicles’ new growth strategy

David Li, General Manager of CIMC Vehicles, the trailer building arm of China’s International Marine Container (CIMC) Group, isn’t quite what you’d expect of a man who has built a €1.93 billion industrial empire from the bottom up.

Distinctly humble in his bearing and refreshingly unpolished in his language, the industry veteran is enveloped in an aura of authenticity and adventure that is much more Silicon Valley than Shenzhen Special Economic Zone (the official jargon for a giant business incubation area the Chinese government has set up across the bay from Hong Kong to help local businesses connect more easily with the western world).

As such, there is nothing imperious about Li laying out his plan to build the world’s first international trailer building company – only genuine excitement in an idea so captivatingly grand that it would arguably suit an intrepid start-up more than an asset-rich manufacturing firm operating in a time of extreme economic volatility.

Understanding the phenomenon that is CIMC Vehicles is therefore not so much a question of mapping out the business itself as it is one of getting to know the man behind it – a scenario akin to US start-up Tesla, which is largely dependent on the drive and vision of flamboyant Chief Executive, Elon Musk.

Quietly spoken and with a habit of pausing briefly before responding to a question, David Li might not subscribe to the analogy, but there is a lot the Chinese trailer OEM and the Californian electric vehicle company have in common: Each is led by an enthusiastic, entrepreneurially thinking individual, both hope to disrupt a highly diversified mass market by outperforming a group of long established, slow moving behemoths; and both have a vision that is transcending the realm of industrialisation.

As a result, Li is regularly forced to break new ground and venture into unchartered territory where risk is growing exponentially to yield and setbacks must be tolerated as a natural side effect of entrepreneurial audacity. With that in mind, it is telling that Li is quoting a Musk favourite – Leonardo Da Vinci – to explain CIMC Vehicles’ evolution over the past half-decade or so. Too global is his vision, too broad his horizon to not tap into the ancient wisdom of the world he is hoping to revolutionise.

“Obstacles cannot crush me, [as] every obstacle yields to stern resolve,” he says with a youthful smile that doesn’t quite reveal the sincerity behind the message, and eloquently disguises what he is really trying to say – that CIMC Vehicles has been plagued by growing pains of late and found itself impaired by a challenging political environment that doesn’t quite allow for the kind of rampant expansion that made Chinese manufacturing flourish in the first place.

But, what it also says is that Li is more convinced than ever to grow CIMC’s trailer building arm into a world-spanning empire that will bring corporate globalisation to a market traditionally considered un-scaleable. The near-constant surge of political, economic and social crises he had to overcome since he took on the job in 2003 may have changed his game plan along the way, but they didn’t quite manage to move the target itself.

 

For Li, last year’s sale of a fully functional factory in southern Germany – which the company never officially moved into – was one such game-changing moment. After taking over Dutch OEM Burg and forming a new stand-alone brand named Silvergreen, he had hoped to use the 135,000m2 facility to produce semi-trailers for the European market, but shelved the project in mid-2014 when he recognised that servicing the old continent from one central location would prove too complex and, therefore, too costly to formulate a unique selling point.

A major setback on the way to globalising the CIMC Vehicles operation, Li says it “hurt” when he realised project Silvergeen would not come to fruition in the same way a 2003 venture dubbed Vanguard worked for the US market. “I felt lost after Silvergreen, it wasn’t a good time,” he says with the same, inscrutable smile. “We had a plan and thought we had done our due diligence, but we didn’t quite understand the actual dynamics of the European market until we got there – and by then it was too late.”

Much like South African Musk, who almost went broke in 2009 when trying to scale up Tesla while rolling out space exploration company SpaceX, Li went on to cut his losses and find a new way to make his dream come true in Europe. Following a very Silicon Valley-esque ‘fail fast’ ethos, he is now focusing on “regionality” instead of manufacturing logistics and economies of scale. While not supposed to negate his grand vision, CIMC Vehicles’ revised plan of attack places more value on local specifications and preferences, he explains, while scale is to be created on the backend with view to finance, design and business administration (see breakout box).
“Instead of servicing a whole continent from one central location, we have split Europe into four key regions that can be served by four ‘local’ businesses covering the north, east, south and west,” he says – revealing that the west will be serviced by LAG, a Belgian company that joined the CIMC stable as part of the Burg deal, while the east will soon be covered by a new brand that is expected to emerge from the ashes of the Silvergreen project and operate out of Poland.

While the south is officially still unaccounted for, Li says the north will be covered by CIMC Vehicle’s latest purchase, Irish company SDC Trailers. The €112 million acquisition will help it serve the UK, Ireland and Scandinavia, and might also support the company’s expansion in the Middle East, Li explains – admitting that the regional reshuffle is still very much in project stage.

However, Li’s quick and decisive response to the Silvergeen debacle in Europe has already attracted many a comment on his leadership style, with some considering him a hopeless romantic who doesn’t quite grasp the limitations of trailer manufacturing, and some admiring him for not giving up on the grand vision of building the first globally operating trailer brand in history.

In stark contrast to Musk, however, US-educated Li is only just exploring how to bring high technology to a strongly commoditised market. After recalibrating his expansion plan for Europe, and with the US operation going so well that Vanguard had to commission a whole new factory (see breakout box), Li says Industry 4.0 and digitalisation are next on his agenda.

To investigate the trend and ensure CIMC Vehicles is ready to embrace the digital age, Li has installed a cross-departmental taskforce comprised of trusted Chinese businessmen and acclaimed experts from Siemens, Cisco and McKinsey. The – interim – result of that effort may not be quite as headline-making as the Tesla project, but as opposed to Musk’s futuristic ventures, David Li has consistently operated in the black over the past half-decade, generating a solid €88.9 million profit in 2015 – despite a severe slowdown of the Chinese domestic market and substantial investment in additional production capacity in both North America and China.

As such, it’s safe to say the ever-expanding CIMC Vehicles empire is quickly gaining ground on its peers in the automobile industry – with David Li adopting a mind-set Jim Cantrell, SpaceX’s first engineer, also noticed in his Californian counterpart: “Most of us can’t conceive these things working, [while] he can’t conceive them failing.”

Q: Since we last spoke in 2011, the global economy has seen a fair share of economic and political volatility. How has the CIMC Vehicles organisation coped with the situation – especially the resulting closure of the Silvergreen project in Germany, which you were quite bullish about back then?
A: It’s certainly been a tough time for everyone – not just us – but of course the decision to put an end to the Silvergreen venture wasn’t the ideal outcome. After we took over US company Monon in 2003 and successfully formed the Vanguard brand, we were hoping the same strategy would work in Europe too, which is why we invested in Dutch OEM Burg as a basis for Silvergreen. But, the recipe didn’t quite translate and the timing didn’t work in our favour as well – just think about the whole Crimea debate or the Grexit scenario. It’s been a very costly lesson for us, but there’s no point crying about spilt milk – we have moved on and reviewed our strategy.

Q: What does that strategy look like now?
A: The goal is still to build a global operation by tapping into local knowledge with strong regional brands such as Vanguard for the US and now SDC for the UK – that’s always been our core value proposition. What we’ve learned, though, is that you cannot see Europe as a single, unified market – you need to be even more regional in your thinking. Let’s face it – that was our mistake back then. But at least we’ve learned from it: Instead of servicing a whole continent from one central location, we have decided to split Europe into four key regions that can be served by four ‘local’ businesses covering the north, east, south and west, respectively.

Q: So the best way to achieve globalisation in a trailer building context is to take a very bespoke approach to each market, rather than what some may call a cookie-cutter one?
A: Yes, that’s one way to put it. We’re still committed to Europe, but in a slightly different way. We now place even more value on local specifications and preferences while trying to create economies of scale on the backend – for example with view to finance, design and business administration. Luckily the market has picked up globally, which has helped finance that strategic realignment process.

Q: Speaking of which – has your view of the global trailer market changed in line with that new strategy for Europe?
A: Not dramatically. We generally separate the globe into North America, Europe, China and the rest of the world – admittedly a very broad term covering emerging markets as well as established ones such as Japan, South Korea and Australia. North America, where we are represented by Vanguard and our CIMC Intermodal business, is currently our strongest market outside China – in fact, it has performed exceptionally well since 2013, even though it is now flattening out a bit. Europe is still very much at the beginning after the Silvergreen project was cancelled. But that doesn’t mean we’re not taking it seriously.

Q: Rumour has it you’re currently preparing for the launch of a new brand in Poland…
A: Correct. We’ve taken the know-how and equipment left from the Silvergreen project to build a new plant in Poland to serve the eastern European market. It’s quite a small scale operation.

Q: So we have a new company covering the east, the existing LAG business covering the west and SDC Trailers covering the north. What’s happening in the south?
A: Correct. For now, LAG will be our only brand in the west of mainland Europe, and SDC Trailers, our latest acquisition, is supposed to cover the UK, Ireland and Scandinavia. The Silvergreen replacement, meanwhile, will be responsible for Eastern Europe. We’re still missing a piece of the puzzle for the southern part of Europe, but I am sure we will find a location to establish an assembly plant there sooner or later, too. I can’t talk too much about it just yet, though.

Q: Let’s stay with SDC Trailers then. For some it may be surprising to learn you do not want to use it to break into the German or French market.
A: Then so be it. There’s not much equipment leaving the UK and going into mainland Europe and vice versa, because they are two very different markets – that’s a reality we understand and appreciate. As such, SDC will keep doing what it’s doing. It may well try and extend its footprint a little down the track, but I see more potential in the Nordic countries, not so much in Germany.

Q: Is that a reaction to the ill-timed Brexit scenario, which happened right after you signed the contract, or the original plan?
A: Believe it or not, it’s always been our plan to have SDC Trailers focus on what we call the northern region of Europe. Frankly, we didn’t see Brexit coming – no one thought it would really happen – but it didn’t change anything for us, either. It made the whole exercise more expensive, but that is what we have to deal with.

Q: With that in mind, let’s go back to our 2011 interview, where you said that by 2016, CIMC Vehicles would be world’s leading trailer OEM. Have you reached your goal?
A: Did I really say that? That was brave for someone leading a publicly listed company. Luckily I think I can back it up now: If you look at volume alone, we’re certainly the number one in the world. With regard to profitability, however, I am not so sure. Schmitz Cargobull is doing very well on that level, for example, but I am not sure if we’re using the same accounting method, so it’s hard to tell who’s in the lead. At the moment I’m only looking at CIMC Vehicles, to be honest – maybe I’m less competitive now than I was back then.

Q: In line with that, how have you dealt with all the crises you had to face around the world, from the Eurozone meltdown and the recent stock market rout in China all the way through to Brexit?
A: By not losing sight of our original plan and vision and continuing to diversify regionally. The good thing of a broad global operation is that well performing markets usually help balance out pockets of slow growth, which is why our revenue remained almost unchanged since we last spoke, even though there were several major market set backs in certain regions during this period. By the way: What has changed is the share of revenue coming from overseas – which is a good sign that we made progress in becoming more global and proof that you need to stick with your goal if you want to find lasting success.

Q: With so many businesses trying to push into the Chinese market, do you find it ironic that global revenue is becoming more and more important for CIMC Vehicles?
A: China is going through a dramatic readjustment phase at the moment, so if I can be honest, I am quite happy that we can draw on our international business to back up our work domestically. It’s tough for everyone right now, so if anything, I think our work outside of China is even more important now than it was in the past. I think we’re perfectly set up in China as far as capacity and engineering prowess are concerned.

Q: Where do you see growth coming from apart from China and the US?
A: The European market is still solid. We also place a lot of hope in Saudi Arabia, where we have a small facility, and Thailand, where we also own a factory. Southeast Asia as a whole has a lot of potential, especially countries such as Vietnam.

Q: So although they do not account for a separate ‘region’ from a group accounting perspective, emerging markets are still a focus area for you?
A: Absolutely, they’re just so fragmented that we’re grouping them a little when talking about the business from a global perspective. We sold some 5,000 units in emerging markets like Saudi Arabia in 2013 and more than 11,000 in 2015, so it’s safe to say we’re still working hard to achieve growth there. We’re going to invest more in the coming three years.

Q: Why do you think going global is widely considered unattainable for a trailer manufacturing business? The automobile industry has mastered globalisation long ago, after all.
A: You can’t compare the two. A car is relatively easy to standardise, but there is no standard trailer, unfortunately – you have to take it region by region. That’s why it’s a lot harder to create the same economies of scale, and with it the same profit margin and supply chain efficiency.

Q: So why bother at all?
A: That’s a valid question. Our venture in southern Germany has shown that going global is risky and expensive, but I think we’re getting very close to cracking the code. Even though it might make me sound naïve, I think there is something incredibly inspiring about trying to build a global operation – regardless of the challenges that come with. Thinking globally is empowering, there’s something extremely energetic about it. If you’re just focusing on the domestic market and follow the same business cycle over and over again, there is no true progress. I hope by exploring how to make trailer building work at a global scale – against all odds – we can inspire the entire automotive community.

Q: So there’s more to it than just profit thinking? That’s an unusual approach for someone in manufacturing.
A: Absolutely. I treat any trailer builder that is trying to go global as a peer, not as a competitor, because I think we share the same view, the same philosophy. We may compete with each other for market share, but I don’t think that’s an issue once you take on a global view. I like to think we’re in an age of exploration still and only just beginning to measure the world. As fellow explorers we deserve each other’s support, which is why I have huge respect for what Andreas Schmitz has built here in China, for example.

Q: But at the end of the day, you still need to earn money at some stage?
A: Of course. At CIMC Vehicles, each local entity is contributing to the group, while the group is building the supply chain and financing infrastructure, which is where savings can be made. I think the real value of going global comes from the opportunity to exchange knowledge, though. Tapping into design know-how from around the world will enable a better product and therefore benefit the business, don’t you think? We are currently exploring digital modelling to make sure that knowledge exchange is working seamlessly without having to come together physically. People are talking less in person but information is flowing more freely, if you will.

Q: Does that mean the trailer is not just a commodity item anymore?
A: Yes, that’s all changing very quickly. The trailer is quickly becoming a value-adding product, even here in China, so the whole infrastructure has to change.With that in mind we’re thinking a lot about Industry 4.0, for example. Zvi Feuer of Siemens has been truly inspiring in that regard, especially as we are trying to understand what kind of people we need in the future and what kind of mind-set we want to see across the business. It’s an exciting time: We now understand that a classic pyramidal hierarchy just doesn’t work for the business we want to be. Zvi inspired us to think of it as more of an eco-system, with CIMC Vehicles in Shenzhen at the centre.

Q: From a more pragmatic point of view, how will that eco-system work?
A: Our vision is based on what we call intercontinental manufacturing – and I’m glad to say it’s not just a mind game but already in the making. The idea is that no one trailer is built to 100 per cent in the same location anymore. Instead, we want to divide the workload globally so we can make best use of our internal resources and maximise utilisation of our capital-intensive machinery. Put simply, it’s a three-pronged approach: Firstly, we produce what we can in a central Lighthouse Factory in China that everyone has access to, using world-class technology. Secondly, we use our economies of scale to source key components globally, much like the automobile industry. Finally, we produce locally what we know will need local input – that’s what we’ve taken away from the Silvergreen failure.

Q: It’s interesting to see just how open you are in dealing with the Silvergreen debacle. Would you say it’s been the lynchpin to CIMC’s evolution into the business you just described?
A: Why should I be sugar-coating anything? Making mistakes is at the very heart of going global: When you are stepping out of your comfort zone, the risk of failure will grow exponentially. But if you don’t, you’ll never know what you’re missing out on. So yes, it’s helped us learn a lot about ourselves. But as long as we’re honest to our shareholders and have a contingency plan in place, they will continue to support us. Why? Because they share the same vision. That’s what is making us strong, and a bad investment won’t change that.

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