An all terrain vehicle. (Photo/CFP)
China's biggest all terrain vehicle (ATV) producer, Taotao Group, is searching for overseas acquisitions to promote sales in the West.
Chairman Terry Cao said in an exclusive interview that acquisitions were expected to help enrich the private company's product variety and upgrade technology management. The company was targeting acquisitions of US firms in the same industry, but he would give no other details.
Taotao had maintained 20% annual growth in the value of exports since 2006 when its first subsidiary was established in Los Angeles. "Before 2006, we depended too much on local distributors who held a huge part of the profit," said Cao, adding that the company had absorbed bad debts.
The manufacturer has already established nine wholly-owned subsidiaries in the US, Canada and Russia. "More than 100 staff abroad are directly in charge of sale and after-sales service in local markets," he said.
In 2013, the value of the company's exports climbed to US$85 million, while the profit margin has remained around 30% for the last seven years.
The US is Taotao's first big foreign market, accounting for 70% of its export volume. Taotao accounts for 70% of China's total ATV exports to the US. Last year, it sold 120,000 ATVs and motorcycles in the US, where it has a 30% market share. It keeps the Taotao brand on 70% of products and limits the OEM rate to 30%.
The company had anticipated a potential challenge with its limited product structure and brand promotion.
"Our products are still limited to low emission vehicles under 250cc with prices from US$300-700, half the price of Honda products," Cao said, "though we still don't enjoy a majority share of the American ATV and motorcycle market," adding that customers have little loyalty to Taotao products.
Taotao has been engaged in ongoing R&D, but Cao argued that the process was too slow. "If we wait too long, our rivals will catch up," he said.
"The country keeps the GDP growth rate above 7% each year. That requires enterprises like us to grow by more than 10% a year," he added.
The company expected to boost both sales volumes and brand awareness by purchasing leading established foreign enterprises. According to Cao's plan, the acquired companies would continue local production in developed markets like the US in the initial stage after the acquisition, but in emerging markets, including Southeast Asia and Eastern Europe, products under the same brand would be made in China. "Gradually, we will win the trust of mid-range and high-end customers," he said.
Taotao was founded in 1985 as a foundry industry. In 1998, it spotted overseas market demand for ATVs and motorcycles, completed a product transition and transformed into an export enterprise. Now its products include electric vehicles, electric bicycles, wooden doors, steel doors, running machines, fitness equipment and garden tools. However, its ATVs and motorcycles account for half of Taotao's overall production value of US$165 million.
Li Jian, researcher at the Chinese Academy of International Trade and Economic Cooperation of the Ministry of Commerce, said Chinese privately-owned firms have often sought acquisitions abroad since the global financial crisis. "Enterprises engaged in auto parts production in the US were purchased by private Chinese groups who wanted to extend the industrial chain and grow profits," Li said. "It is also a shortcut to build and promote a brand."
Independent R&D takes too long for Chinese firms, as foreign competitors have advantages in technology, branding, distribution channels, and the capital to sustain them.
Chinese private enterprises effectively avoid trade frictions with acquisitions, Li acknowledged. He warned, however, that Chinese private enterprises had to properly investigate markets and apply internationally-accepted practices before and during acquisitions, rather than continuing to operate like a family-run businesses.
Li said acquisitions would be a fresh driving force for private Chinese businesses in Southeast Asia, taking a large number of production orders from Western enterprises.