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How FAW's new chairman can rescue the company
Yang Jian | 2017/8/11

SHANGHAI -- Beijing has dispatched Xu Liuping, former head of China Changan Automobile Group Co., to lead China FAW Group Corp. 

After arriving at FAW last week, Xu vowed to revive the company's car business in three to five years.

Xu, 53, earned renown for transforming Changan from a manufacturer of cheap minibuses into China's largest producer of passenger cars. By the standards of China's state-owned enterprises, he is relatively young and dynamic.

But fixing the moribund car business at FAW, China's oldest state-owned automaker, will require a herculean effort. The company suffers a variety of ills and three must be addressed promptly.

FAW¡¯s new chairman first must completely rebuild the company¡¯s management team. 

In 2015, dozens of senior managers -- including FAW¡¯s chairman -- were sacked or imprisoned for corruption. Two years later, the company still lacks a general manager, the Chinese equivalent of a COO.

Second, Xu must restart the merger of FAW¡¯s two passenger vehicle subsidiaries.

Of the two subsidiaries, Tianjin FAW Xiali Automobile Co. has been mired in the red for years because of fast-shrinking sales. The company¡¯s Xiali-brand and FAW-badged compact cars can¡¯t compete with Chinese rivals, let alone foreign brands.

FAW Xiali has warned that it might have lost as much as 715 million yuan ($110 million) in the first half of 2017 after sales slumped 39 percent. 

The other subsidiary, FAW Car Co., builds Honqi limousines as well as passenger vehicles under the Besturn and Oley brands. That company estimates profits of 300 million yuan in the first six months after losing 950 million yuan in 2016. 

But the subsidiary¡¯s profit comes from the Mazda models that it produces under a licensing agreement with the Japanese automaker. With sales nearly doubling this year to 59,000 vehicles, Mazda accounted for more than half of FAW Car¡¯s deliveries in the first six months.

Except for Honqi, the two subsidiaries¡¯ other brands build roughly the same products. Merging the two subsidiaries would allow FAW to eliminate product overlap and make better use of capital. 

That¡¯s what the company intended to do in 2015. But the merger plans were shelved after its chairman was arrested on corruption charges.

After Xu merges the two subsidiaries and forms a new management team, he must tackle a third task. To prevent corruption, he should introduce a system of checks and balances at the top managerial level. 

He also must reward FAW¡¯s managers and engineers for good performance with stock options and other incentives.

Three other state-owned companies -- SAIC Motor Corp., GAC Motor Co. and Changan Auto -- used stock options to attract and retain talent. It¡¯s now helping the bottom line as they upgrade product mix and enjoy robust sales.

Their success holds useful lessons for Xu. To revive its passenger vehicle business, FAW must invest a lot more in r&d.

In fact, that was Xu¡¯s recipe for success at Changan. After he was named president in 2007, he insisted that Changan allot 5 percent of annual revenue for r&d.

To be sure, FAW will be a tough challenge. In the wake of the government¡¯s anti-corruption campaign, sales are wobbly and FAW¡¯s management team is dispirited.

Xu must move fast to assemble a new executive team and streamline FAW¡¯s bloated operations.

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