Why is Weichai Power's position in the industrial chain so strong?

The heavy truck market is a typical oligopolistic market with fewer market participants and high entry barriers. CR5 has remained above 80% for many years. As the long-term market share leader, Weichai has obvious competitive advantages.


In 2018, the total sales of heavy trucks equipped with Weichai engines reached 360,000 units, and the market share of Weichai City reached 31.6%, far ahead of other engine manufacturers. Followed by FAW Xichai, Cummins, China National Heavy Duty Truck and Yuchai, the share is above 10%.


There is a high probability that market concentration will remain high. The current reasons for the formation of the heavy truck diesel engine market, in addition to the policy impact, are mainly due to higher capital requirements, operating leverage and rising technology (power, environmental protection) thresholds, resulting in the continuous withdrawal of small manufacturers. Combined with the actual situation of current market participants, it is difficult to have a spoiler in the short term.


The price level of the heavy truck diesel engine market will remain stable for a long time. Since almost all heavy-duty truck manufacturers currently have a considerable equity relationship with upstream and downstream, the probability of a market participant rushing to launch a price war is low. Under the background that China Six has more upgrade requirements for in-machine purification and post-treatment, considering the strong bargaining power of heavy-duty diesel engine manufacturers in the industrial chain, the probability that most manufacturers will transfer the cost to the downstream is relatively large.


Weichai does not rely heavily on any customer


As the largest supplier of diesel engines in the heavy truck market, Weichai's customer structure is relatively fragmented and does not depend on any heavy truck manufacturer. Based on its good reputation and large volume for decades, Weichai has a strong position in its main customers and has a high bargaining power. In addition to its supporting Shaanxi Heavy Duty Truck, Weichai is also the main supplier of heavy truck diesel engines for FAW Jiefang, Futian, Jianghuai Automobile, Dayun Automobile, Sany and Xugong Heavy Truck. Among the top 10 manufacturers in China's heavy-duty truck market, except Dongfeng and SAIC Hongyan are equipped with engines by their own joint ventures, almost all of them are known as Weichai as the main engine manufacturer.


Weichai is also working with customers to enter the heavy-duty light truck fast lane. Weichai's light diesel engine customers are mainly Beiqi Futian, China National Heavy Duty Truck and FAW Jiefang, all of which are the fastest growing light truck manufacturers in recent years. Among them, Beiqi Foton is the absolute leader of the light truck market, with a market share of 30%. In the case of the Futian Cummins joint venture, Beiqi Foton still chose Weichai as the main diesel engine supplier for light trucks.


The large amount of Weichai wood leads to the relative dispersion of suppliers


As a heavy-duty diesel engine faucet, Weichai maintained a relatively dispersed supplier structure, effectively maintaining the upstream bargaining power. In the sixth phase of the country, the value of bicycle support for some core secondary components (such as DPF) has increased significantly, and the relevant suppliers are mostly foreign giants. Compared with its competitors, Weichai has a greater probability of upstream and downstream games to avoid being taken over by upstream component suppliers. Compared with its main competitors, such as Dongfeng Cummins, Foton Cummins and Yuchai, Weichai rarely maintains a reliance on a single supplier in a component sector. In contrast, Weichai has introduced competition in most parts and components.


Take the DOC (Diesel Oxidation Converter) in a heavy duty diesel aftertreatment system as an example. Suppliers in this field are basically global giants with high bargaining power. WeChat's DOC catalyst suppliers include Johnson Matthey, Umicore and BASF, and DOC catalytic carrier suppliers include Corning and NGK. For all diesel models of Dongfeng Cummins and Foton Cummins, the DOC catalyst suppliers are all BASF, and the DOC catalytic carrier suppliers are all Corning. The pattern of suppliers in other SCR and DPF areas is similar. Dongfeng/Futian Cummins is deeply bound to BASF and Corning in the upper reaches, while Weichai maintains greater flexibility.


Weichai's layout in the field of superchargers is similar, with less concentration of suppliers. Cummins, Honeywell, Weifu Tianli, BorgWarner and Hunan Tianyan are the main turbocharger suppliers for Weichai. The entire supercharger of Dongfeng/Futian Cummins is almost exclusively provided by HOLSET (a joint venture company established by Cummins in Wuxi).


From the results, due to its large volume, the competition introduced by Weichai does not hurt the cooperation enthusiasm of suppliers while keeping suppliers supply at low prices. A large number of upstream enterprises such as Yinlun shares and Aofu Environmental Protection have increased their layout in the Shandong region in order to increase cooperation with Weichai.


Strong position creates excellent business cycle


Weichai has higher bargaining power in the commercial vehicle industry chain, and higher bargaining power is reflected in the net business cycle through the account period. Weichai parent company's average net business cycle since 2017 (accounts receivable turnover cycle + inventory turnover cycle - accounts payable turnover cycle) is -49 days, not only far lower than other commercial vehicle parts and powertrain manufacturers It is also lower than the vehicle companies that are usually very strong in cash flow.


In the automotive industry chain, companies with higher bargaining power can usually ask suppliers to agree to a longer payment cycle, and on the other hand, allow customers to pay for goods in a near-cash manner. Generally, the vehicle business and the higher-component parts companies have shorter net operating cycles, while the general parts companies have longer net operating cycles. The extremely short net operating cycle of Weichai's parent company ensures that it has sufficient cash flow to cope with market volatility and investment, financing and other needs.


Weichai's wider diesel product line contributes significantly to the inventory turnover cycle in the net business cycle. Weichai products cover 2-13L of all types of large, medium and small diesel engines, and do not rely on a single customer. On the one hand, this supply chain pattern can increase the versatility of components and increase the tolerance to upstream supply fluctuations. On the other hand, it can ensure the smoothness of its production and avoid the output caused by the sudden decrease of single customers. Stocks fluctuated significantly. Since 2017, Weichai's parent company's inventory turnover cycle is only 20 days, far below the average competitor's 61 days.

     
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