Why does Zeng Qinghong oppose "involution"?

Original by Dianshu Digital Economy Studio

Author | Si Youzhe

Recently, Zeng Qinghong, the chairman of GAC Group (601238.SH, 02238.HK), released his views on "anti-involution" in the automotive industry, calling for the promotion of the "same rights for oil and electricity" policy, which sparked widespread controversy.

In fact, it is not entirely appropriate for Zeng Qinghong and GAC Group to make the above remarks.

Over the years, GAC Group has earned significant profits by leveraging two "profit cows": GAC Toyota and GAC Honda. However, when sales of Japanese automakers declined, GAC Group's independent brands were unable to carry the banner, especially its new energy vehicle subsidiary GAC AION. Under the "pressure" of BYD, as well as the "gang fights" of Xpeng, NIO, and Li Auto, and the "rise" of Wenjie and Xiaomi, GAC AION's sales have continuously declined due to its inability to compete.

To put it bluntly, GAC Group needs to learn to stand on its own feet instead of relying on its "comfort zone" and placing its future hopes on empty rhetoric and the misguided thinking that holding back the industry constitutes progress.

Zeng Qinghong: Have you ever seen infighting among Japanese companies?

At the 2024 China Automotive Chongqing Forum, which opened on June 6, Zeng Qinghong, the chairman of GAC Group,发表了 important views on the current involution competition and new energy vehicle development trends in the automotive industry.

Zeng Qinghong emphasized that the automotive industry should adhere to long-termism and avoid getting caught in endless price wars. At the same time, when the proportion of pure electric vehicles in new energy vehicles reaches 50%, the "same rights for oil and electricity" policy should be promoted to facilitate fair market competition and sustainable industry development.

Zeng Qinghong pointed out that the current "involution" phenomenon in the automotive industry is severe, with many companies engaging in price wars to compete for market share, which not only damages their profitability but also poses a threat to the healthy development of the entire industry.

The "same rights for oil and electricity" policy means that new energy vehicles and traditional gasoline vehicles should enjoy equal rights in areas such as government procurement, car licenses, purchase restrictions, and consumption subsidies.

In the field of new energy vehicles, Zeng Qinghong predicted that by 2025, the proportion of pure electric models in new energy vehicles may reach 50%. This prediction is based on the rapid growth of China's new energy vehicle market and the government's continuous support for the new energy vehicle industry. He called for relevant government departments to study and implement the "same rights for oil and electricity" policy when the proportion of pure electric vehicles in new energy vehicles reaches 50%.

At the forum, Zeng Qinghong also emphasized that the purpose of enterprises is to make profits and contribute to the country and society, including creating employment opportunities and paying taxes. Therefore, the automotive industry needs to have a broad perspective and long-term vision to avoid getting caught in the quagmire of short-term interests.

In fact, this is not the first time that Zeng Qinghong has proposed the view of rejecting "involution".

At the Guangzhou Auto Show in November 2023, Zeng Qinghong proposed that there should be less "involution" and more collaboration. He even said, "Have you ever seen infighting among Japanese companies?"

It seems that Zeng Qinghong has confused "involution" with "infighting." The current "involution" among Chinese automakers is actually a benign competition, involving technology, price, business models, and supply chains.

While "infighting" refers to competition using improper means, such as malicious slander, commercial defamation, and deliberate smearing.

Japanese automakers also have their own form of "involution." In 1997, Toyota's first hybrid model, the Prius, was officially launched and sold well. In the following years, Toyota's THS technology matured and established a strong patent barrier.

As a result, Honda had to circumvent Toyota's patent barrier and developed the world-renowned i-MMD hybrid system, which was officially launched in 2013.

Revenue and net profit "double decline" in the first quarter

In fact, if Wang Chuanfu, the chairman of BYD, had stood up and called on automakers to not engage in "involution," there might have been a good chance of getting a widespread response. However, as a struggling company, GAC Group, represented by Zeng Qinghong, does not have the qualifications to call for "rejecting involution."

In 2023, GAC Group sold a total of 2.505 million vehicles, representing a year-on-year increase of 2.92%. Its sales have been growing positively for three consecutive years, surpassing the 2.5 million mark for the first time.

"2023 was a landmark year in the history of our group," said Zeng Qinghong in the opening remarks of the 2023 annual report.

For the future, GAC Group stated that it will aim to achieve a 10% year-on-year increase in sales in 2024.

However, in future news reports, the 2.505 million vehicles sold in 2023 may become a "watershed" for GAC Group.

From January to May 2024, GAC Group's total sales reached 699,500 units, a year-on-year decrease of 24.51%.

In terms of performance, GAC Group achieved operating revenue of 129.706 billion yuan in 2023, representing a year-on-year increase of 17.62%. Its net profit was 4.429 billion yuan, a year-on-year decrease of 45.08%.

The decline in net profit in 2023 was the highest since 2013, and the company's profitability was comparable to the 4.232 billion yuan earned in 2015, representing a "regression" of eight years.

Regarding the decline in net profit, GAC Group did not specify the specific reasons but mentioned that its investment income in 2023 was 8.66 billion yuan, a decrease of 5.657 billion yuan or 39.51% year-on-year, mainly due to the decrease in profits of joint ventures.

In fact, GAC Group's investment income has long been derived primarily from associated enterprises and joint ventures, including automakers such as GAC Honda and GAC Toyota.

In the first quarter of 2024, GAC Group's performance declined significantly, with operating revenue reaching 21.566 billion yuan, a year-on-year decrease of 18.79%. Its net profit was 1.22 billion yuan, a year-on-year decrease of 20.65%.

Obviously, GAC Group has relied on Japanese automakers to earn significant profits. Combined with Zeng Qinghong's question, "Have you ever seen infighting among Japanese companies?" it is difficult not to suspect his intentions.

GAC AION's declining sales or potential losses

Zeng Qinghong's proposal of "same rights for oil and electricity" seems to be a call for support for gasoline vehicles, without considering the feelings of its new energy vehicle subsidiary, GAC AION. Of course, he may not care.

Founded in July 2017, GAC AION is the carrier for the development of GAC Group's pure electric new energy vehicle business.

In 2023, GAC AION achieved sales of 480,000 vehicles, representing a year-on-year increase of 77.02%. Although this still fell short of the company's target of 500,000 vehicles, its rapid growth momentum remained unchanged.

However, in 2024, GAC AION's sales have declined rapidly. The company sold 100,600 vehicles in the first five months, a year-on-year decrease of 38.71%. Moreover, GAC AION had once become the third new energy automaker to achieve profitability after BYD and Li Auto.

However, in the first five months of 2024, GAC AION's average monthly sales were only 20,000 vehicles, making it highly likely that it has fallen back into losses.

Some analysts have said that to achieve a "curve overtaking" in the automotive industry in the short term by vigorously developing the new energy business, only continuous benign "involution" can surpass the historical accumulation of overseas automakers spanning over a hundred years.

Driving transformation with digitalization, but sales and management expenses increase

In the field of digitalization, GAC Group has ambitious goals and significant investments, but the current results are not entirely satisfactory.

GAC Group introduced that 2024 is a crucial year for sprinting towards the goals of the "14th Five-Year Plan." The group will focus on "XEV (hybridization) + ICV (intelligent connectivity)" and "EV (electrification) + ICV (intelligent connectivity)" to comprehensively enhance independent innovation capabilities, promote high-quality development, and strive to achieve sales of over 1 million units for its independent brands, achieving breakthroughs in electrification, intelligent connectivity, digitization, sharing, and internationalization.

Specifically, in 2023, GAC Group officially launched the GDA (GAC Digital Accelerator) 2.0 three-year action plan (2023-2025) to comprehensively promote the group's digital transformation.

Among them, GAC Group's independent brand, GAC Trumpchi, released a brand marketing strategy called the "Golden Triangle" strategy, which aims to achieve value-added benefits for consumers, dealers, and the manufacturer through three areas: product value-added, technology value-added, and service value-added.

At the same time, GAC Group hopes to rely on digital transformation to achieve standardized and automated management, improve organizational management efficiency, and reduce operational management costs.

Feng Xingya, the general manager of GAC Group, even emphasized that digitalization is the driving force for GAC Group's transformation into a technology-oriented enterprise.

Obviously, the ultimate goal of GAC Group's digitalization is to increase sales and reduce management costs.

However, in 2023, GAC Group's sales expenses reached 6.196 billion yuan, a year-on-year increase of 57.94%, far exceeding the 17.62% increase in revenue. Moreover, the group's management expenses reached 4.301 billion yuan, a year-on-year increase of 13.31%. Both reached historical highs.

In the first quarter of 2024, under the double decline in revenue and net profit, GAC Group's sales expenses reached 1.277 billion yuan, a year-on-year increase of 19.96%, while management expenses reached 1.024 billion yuan, a year-on-year increase of 25.15%, continuing to rise.

The development of digitization, networking, and intelligence directly affects the quality level of intelligent manufacturing in our country. GAC Group's focus on intelligent manufacturing as the main direction to promote the transformation and upgrading of the industrial chain is correct.

However, when sales of Japanese and other joint venture automakers decline, GAC Group shares the same issues as leading companies such as SAIC Motor and Dongfeng Motor, and even global automotive giants, namely, being burdened with too many responsibilities and lagging behind newcomers in areas such as technological research and development, management efficiency, and marketing innovation. In this new intelligent era, starting from unmet customer needs, investing more research and development resources in new intelligent technologies, automotive safety, product performance, and future trend judgments, and carrying out top-down innovation reforms and brand reshaping in the new era to provide consumers with high-quality products that exceed expectations, values, and cutting-edge technologies.

At this time, GAC Group should ensure that digitalization, intelligence, and innovative transformation are implemented in a down-to-earth manner, avoiding situations where the tail is too big and the trunk is weak, ultimately being overwhelmed by the tide of the times.