Mats Harborn, President of the China operations of global truck maker Scania, talks about the current trends in the Chinese transport sector and what they mean for his company, both in China and abroad

In early 2022, Scania, an automobile manufacturer specializing in trucks, trailers and various industrial engines, will become the first international transport firm to produce vehicles from a wholly-owned production facility in China. This business development came straight after the introduction of new regulations that allowed whole-ownership by foreign companies, previously anything of its kind would have to be a joint-venture with a Chinese firm.

For Scania, which originated in Sweden and has been a fully-owned subsidiary of auto giant Volkswagen since 2015, the new plant could be a game changer. Since 1965 Scania has sold over 20,000 vehicles in China, the vast majority of which have been imported. The new plant in the eastern Chinese province of Jiangsu will produce, among other things, the company’s tractor units—the engine section of articulated lorries—which are its biggest selling product in China. Scania intends to use the new facility to raise sales in the country to a level similar to that of its current single biggest market, Brazil, by the end of the 2020s.

In this interview, Mats Harborn, President of Scania China Group, discusses the trends in the Chinese transport sector, the increasing importance of China to Scania’s global supply chain and his hopes for more market-driven solutions for foreign manufacturing in China.

Q. What developments do you see in logistics in China and how are these impacting Scania’s business worldwide?
A. If I narrow it down to heavy-duty trucks, what we see is a market with tremendous overcapacity, and that was exacerbated by maybe the biggest pre-buy effect in history, at least in our field. Before the 2020 introduction of the China VI emissions standard (a standardized pollution emissions limit for vehicles), dealers were given sales deadline for China V emissions vehicles, which were consequently rapidly sold at discounted prices, resulting in China now being flooded with China V emission level vehicles. So that means that capacity is far above the needs of the economy today.

We do expect to see the less professional operators of truck fleets and those who don’t have enough mileage or a source of goods to transport, pushed out of the market and that is going to happen in the next few years. We also expect that those who remain will have to become more efficient, more sustainable, and also more specialized, serving narrower ranges of the truck sector. So we are, in short, expecting consolidation and specialization.

Q. China has historically required almost all vehicle manufacturing companies in the country to operate as joint ventures, usually with a state-owned enterprise, but Scania has recently opened a wholly-owned production facility. What is the significance of this in terms of your China business and global business?
A. We’ve known for quite a few years now that China was about to lift the 50/50 restrictions, the compulsory joint venture cooperation, if you want to get into the market. So last year, we moved quite swiftly and we bought Gaokai Automotive in Jiangsu, and we immediately set up a fully-owned factory—previously we had imported all of the vehicles we sold in China. What this enables us to do is to fully integrate that production plant into our global production system. So this is not only in China, for China, but in China for the world. We will be producing the same components with the same processes, the same equipment, the same standards in China, as we do in Europe and in Latin America. And then we can use that to balance our global production system. If we have a shortage of components in Latin America, we can supply from China or the other way around. So that is the real impact of now being able to run a fully-owned factory, we’ve made a decision that this is now part of our global production system as our third global leg.

Q. What regulatory changes would you like to see in China?
A. We would like the government to let the market decide on how we set up our manufacturing. Currently, there is strict regulation around the ownership and outsourcing of specific parts of the manufacturing process. We know best how to plan our production, and we are best in deciding which part of the production should be in-house and what should be outsourced. We have done this for 130 years, so I think we are the best judges of how to set that up in China, too. China seems to be moving in that direction, and that, we encourage.

In terms of the market, we really don’t want to have any preferential treatment, the only thing we want China to do is to create a truly level playing field. And that means also treating different energies or fuels for vehicles, in the same way. The government, in our view, should refrain from prioritizing one solution over another, there is no one single silver bullet in the future, there are a number of silver bullets. And we see that batteries will be one, hydrogen will be another, renewable fuels will be a third one, and we will have a phase-out period of diesel. So in that phase-out period, we need to, as China is rightly doing, very strictly enforce emission standards.

And then we hope that the government will create a regulatory framework that allows for each truck to carry as much goods as possible, to reduce the CO2 footprint per work done, per ton/kilometer. That means in effect, that we would like to see longer vehicle combinations or larger vehicles being used. For example, in cities, it doesn’t make sense to have, say, a five-ton garbage collector when you can use the 26-ton because the roads are able to carry or support the three-axle, 26-ton vehicle. It means that less energy will be used to do much more transport work. This is really important as a complementary or supplementary policy to driving this shift towards clean fuels.

Q. China’s economy appears to be heading back into an economic slowdown. Which specific economic trends are impacting most heavily on Scania’s business and in what way?
A. I don’t know if you can say that it’s trending towards a slowdown. What I see is a China that is now pursuing sustainable growth, which means that growth in itself is not the important thing, what’s important is the value created and that the externalities of the value creation are minimized. And we see the government now introducing a lot of regulations that are controlling the sort of “wild east” or extreme type of capitalism, and this is something we really welcome. This is in line with our view of how the market and, in particular, the transport market should develop.

Take the Chinese heavy-duty truck market for example. Last year there were 1.6 million trucks sold, but at quite low price levels. If you have high-quality vehicles that produce more work done, the price of the truck will be higher, but the cost per ton/kilometer will be lower, which means that the value of the truck market would increase, if you go from 1.6 million down to, say, 900,000 but with much higher quality vehicles. In that scenario the use of raw materials and production apparatus will also shrink. At the same time, the cost of producing ton/kilometers for society will be smaller. So, one thing slightly increases GDP and the other one reduces GDP, but the result is a much more sustainable transport system. I think this is what China sees in all aspects of its economy, and it is something we as businesspeople need to embrace.

Q. How do you see the Dual Circulation Policy, which stresses domestic production, impacting a company such as yours?
A. I think it is just describing the reality that China has probably reached the ceiling, as to how much of its economy can be based on exports and the rest will be domestic growth. And when you look at it, the proportion is roughly 20/80. The 80 will be sufficient both to help drive the doubling of the GDP by 2035—from a base level set in 2017—and it will also be a way to guarantee that China will not suffer too much if decoupling—the trend towards a split between the China and Western economies—policy materializes, China knows that it will still be able to grow. And it means for us that in China, we are serving the Chinese market, we think it will grow and we see great opportunities. We believe that China will still be a possible base for export to Asian countries. So Dual Circulation in my view is misunderstood and exaggerated, I think it’s an explanation model for how China will continue to grow.

Q. How would you rate the performance of Chinese companies in the transport sector? What do you think that multinationals can learn from their local counterparts?
A. I think in China we have a range from the least developed to world-class companies. And what we can learn from China is speed and the integration of digital solutions into the complete offering. At the same time, the massive speed and convenience that is offered to the consumer in China comes at a price, it is not entirely sustainable. I think we can, as Western companies, learn both from the way that China uses its technology, but we can also learn from some of the side-effects of that very quick growth. We can learn from both sides, so to speak, the positives and the negatives.

But for any foreign company, whatever industry you’re in, you need to keep an eye on China. Apart from technology, I think it’s also about the business models that are being developed in China, very much driven by—and this comes as a surprise to many foreigners—a very, very demanding consumer class. It’s almost like going back to Japan 30 years ago. Many foreign companies were surprised by how demanding the Japanese were on quality and the rate of absolute rejection of quality faults. When you’re delivering in Japan, it has to be perfect. And it’s beginning to become the same in China. The consumer class is extremely demanding. So it means: can you meet the demands of this consuming class? If you can, you’re already on a very good level, globally speaking.

Q. How is Scania approaching the electric vehicle (EV) revolution?
A. Currently, we do not have an EV model available for commercial vehicles, but in general we look at EV in two ways. One is, at this moment apart from sustainable liquid fuels, we see batteries as the only viable carrier of energy. Secondly, we see electrical vehicles remaining much more expensive than the combustion-based vehicle. We already see today, in certain sectors, that the electric vehicle has a transport economy advantage over the combustion engine vehicle. So we see that the market is driving the shift towards electrification, where it makes economic sense. Long term, as we get more economies of scale and better infrastructure, we expect the growth of the EV proportion of the fleet to increase. But fundamentally, we assume that governments will be honoring their promise to supply green energy, be it liquid or be it electric, and we expect the market, based on what makes most economic sense, to choose the best transport solution.

Q. Apart from your position with Scania, you were previously president of the EU Chamber of Commerce in China. How would you describe current China-EU relations and what impact is that having on Scania’s business in China?
A. Well, the funny thing is that, despite the skirmishes that we have seen in the political arena, trade and investment have continued to boom, so we haven’t seen any impact. I mean, last year, for example, was the year when China became the biggest recipient of foreign direct investments globally. So all of this seems to happen, irrespective of the political landscape. But of course, from being businesspersons, we know that constructive dialogue is always the best and we hope that politicians will follow suit and engage with China and China with the world. That is best for all of us.

Q.What advice do you have for foreign companies seeking to develop their presence in the China?
A. I think the challenge is to stay true to your values and business models, whilst at the same time adapting to China, which in many respects is quite different from our traditional markets. And getting that balance right I think that is the key to success. And that means that to a very large degree, we must let go and empower our local organization to, within the boundaries that we set, come up with unique China solutions. And we will find that some of those China-unique solutions are so good that they become global solutions for our respective companies.