In this article, we introduce Changan Automobile (长安汽车)(SZEX: 000625), one of China's largest state-owned auto manufacturers which focuses on producing affordable and occasionally medium tier passenger and commercial vehicles under Ford, Mazda, and in-house developed brands.
This article is part of our China auto industry series, which includes:
An Overview of China's Auto Industry (forthcoming)
Value-For-Money Auto Companies: Wuling Motors
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Changan claims that the company can be traced to a weapons factory founded in 1862 by Li Hongzhang, a high profile government official during China's Qing dynasty. In the 1950s, the weapons factory produced military SUVs for the army, after which production was halted in 1963 and did not resume until China's opening up in the 1980s.
In 1981, Changan resumed business and formed a technology cooperation agreement with Japanese carmaker Suzuki in order to start producing Changan branded mini vans. Subsequently in 1993, Changan formally entered a joint venture with Suzuki through the establishment of Changan-Suzuki, which produced several Suzuki car models for the Chinese market, including the Suzuki Swift and Suzuki Alto.
Changan went public on the Shenzhen Stock Exchange (SZEX: 000625) in June 1997.
In 2001, Changan entered a joint venture with Ford to produce Ford-branded cars in China, including the popular Ford Focus. In 2006, the joint venture was expanded to include Japanese automaker Mazda, thereby becoming Changan-Ford-Mazda, with Changan holding a 50% share, Ford holding a 35% share, and Mazda holding a 15% share. The same year, Changan-Ford-Mazda also acquired technology from Volvo to produce and sell the Volva S40, S60, and S80 models in China.
In 2010, Changan formed a joint venture with PSA Group (Peugeot S.A.) to produce Peugeot and Citroen cars in China.
In 2011, Changan-Ford-Mazda split into Changan-Ford and Changan-Mazda, while Changan itself suspending production of Volvo cars in 2015. Three years later, Suzuki left the China market in 2018, thereby putting an end to Changan-Suzuki, while the Changan-PSA joint venture was terminated a year later in 2019.
Over the past several years, Changan has put greater focus on developing new in-house brands (on top of the existing Changan brand) with the launches of the Changan Kuayue (长安跨越), Changan Oushang (长安欧尚), and Changan Kaicheng (长安凯程) brands from 2018 to 2020. The company also started mass producing pure electric vehicles in 2022.
Changan's current portfolio consists of the following brands:
There are currently 20 Changan branded cars, comprising of a mix of affordable sedans and SUVs.
Note: the Changan CS75 is one of Changan's bestselling cars.
Note: the Changan Yidong is another bestseller from Changan.
Changan-Mazda produces seven Mazda models in China, namely the Mazda 3, Mazda 6, Mazda CX4, Mazda CX5, Mazda CX8, Mazda CX30, and Mazda CX30 EV.
Changan-Ford produces 22 Ford models in China, including the Ford Focus, Ford Edge, and Ford Explorer.
Changan Kuayue (长安跨越)
The Changan Kuayue brand was founded in 2018 and comprises of 13 affordable commercial truck and van models.
Changan Oushang (长安欧尚)
The Changan Oushang brand was launched in 2018 and consists of nine affordable SUV models.
Note: the Changan Oushang X5 is one of Changan's top three bestselling cars.
Changan Kaicheng (长安凯程)
The Changan Kaicheng brand is Changan's newest brand launched in 2020, which includes 27 commercial truck and van models that are slightly more expensive than the Changan Kuayue brand, but are still generally considered to be quite affordable.
Overall, Changan's bestselling models include the Changan CS75 (also called the CS74), the Changan Yidong, and the Changan Oushang X5, all of which have been pictured above.
New Energy Vehicles
Although Changan primarily focuses on traditional internal combustion engine vehicles, the company does have several new energy vehicle offerings, with hybrid models launched in the past and widely commercialized pure electric vehicles launched only in 2022.
Changan's bestselling pure electric vehicle is the Changan Lumin, an affordable compact sedan.
We now turn to look at Changan's financial performance and sales and production numbers.
Revenue and Profit Margins
#1: Revenue Grew Strongly In The First Half Of The Decade But Stumbled Later On
Changan's revenue grew steadily during the first half of the decade from RMB29.5 billion in 2012 to RMB80 billion in 2017, before dropping substantially in 2018 and making a gradual rebound to reach a new high of RMB105.1 billion in 2021. Management attributes the 2018 drop to a slowdown in China's auto industry, although we believe the decline in revenue is more likely due to competitive product launches from other auto makers given that other auto companies did not experience the same substantial drop that year.
It is noted that revenue from Changan's foreign joint ventures are accounted for as Investment Income From Associates and Joint Ventures, which is not included in total revenue but is included in operating income. Changan's operating income turned negative in 2018 and remained negative until 2020, predominantly due to the deteriorating performance and disposal of the company's various foreign joint ventures. It is also noted that the Changan Kuayue brand is accounted for as an associate in the Investment Income From Associates and Joint Ventures item rather than in the company's top line.
Note: our operating income metric presented above differs somewhat from the official operating profit figures reported by the company. Since Changan is listed on the Shenzhen Stock Exchange, the company adopts the Chinese Accounting Standards (CAS) used in mainland China. As most of the companies in our China auto industry series are either listed in Hong Kong (with IFRS accounting standards) or the US (with US GAAP accounting standards), we recalculate the reported CAS financial metrics to be more comparable with those from IFRS and US GAAP for ease of comparison across companies.
#2: Gross Profit Margin Is Relatively Stable, Whereas Operating Profit Margin Is Volatile
As a whole, Changan's gross profit margin declined only slightly from the 17% to 18% range during the first half of the decade to the 15% to 16% range in the second half. In contrast, the company's operating profit margin fluctuated substantially over the past ten years, with negative and near-zero margins during the latter half of the decade as a result of the low levels of operating income discussed above.
#3: More Than 90% of Changan's Revenues Are Generated In China
The majority of Changan's revenues are generated in China, although the company has made some diversification efforts over the past few years with overseas sales particularly in Pakistan and Saudi Arabia.
Note: available data only starts in 2014
Vehicle Sales Data
#1: Changan Sold 2,300,530 Cars In 2021 and 1,125,764 Cars In 1H2022
Changan and the company's associates and joint ventures sold 2,300,530 vehicles in 2021 and 1,125,764 cars during the first half of 2022. Similarly to other mature Chinese auto companies, Changan's sales and production volumes peaked in the middle of the decade. However, the company's sales (and hence production) dropped more substantially than competitors (such as SAIC or Great Wall Motor) during the latter half of the decade, without a very strong subsequent rebound.
In 2021, Changan and the company's associates and joint ventures produced and sold 115,775 and 114,125 new energy vehicles respectively (earlier data on new energy vehicle sales is unavailable).
Regrettably, management does not provide a sales and production volume breakdown by brand.
In this section, we discuss management's key strategies for Changan's future.
#1: Brand Revitalization And Developing In-House Brands
Management's principal strategy is to revitalize and bring greater competitiveness to the Changan brand by launching a series of new products to better meet consumer needs. Specifically, the company plans to launch 30 new products from 2022 to 2025 ranging from more innovative electric vehicles (which we have seen through the launches of Changan Lumin and Changan Shenlan) to traditional internal combustion engine passenger and commercial vehicles across various sizes and models in order to attract different consumer segments.
Given the less than stellar performance of Changan's joint ventures, management plans to rely more heavily on developing in-house brands as a way to compete with other auto makers going forward. This not only gives Changan more room to freely design and innovate, but also circumvents the need for profit-sharing with joint venture companies. We also anticipate the company to place more emphasis on developing higher margin products (e.g. the premium Changan Shenlan) in order to boost profitability.
#2: International Market Expansion
As a supplementary strategy, management hopes to expand Changan's presence in overseas markets, with the goal of having international sales account for 30% of the company's total sales volume by 2030. We think this goal is rather ambitious and difficult to achieve, especially given Changan's relatively slow start in foreign market expansion (compared with other high profile Chinese auto companies), as well as perhaps the company's not so competitive product offerings.
#3: Cost Management
From an operating perspective, management mentions that they intend to concentrate on optimizing resource allocation in order to reduce costs and increase profitability. We don't think this will be easy, as evidenced by the rising production costs faced by auto makers throughout the auto industry, while ultimately what would determine Changan's success going forward (in our opinion) is still whether or not the company will be able to come up with competitive products that can attract consumers to choose the Changan brand over competitors as part of the brand revitalization efforts discussed above.
Through the above three strategies, management hopes to reach a total sales volume of 4 million cars by 2025, of which 3 million are from self-owned brands and 1.05 million are new energy vehicles, and a total sales volume of 5.5 million cars by 2030, of which 4.5 million are from self-owned brands and 2.7 million are new energy vehicles.
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