Antonov: transmission project to open in China

Bosch has been making efforts to promote its continuously variable transmissions (CVT) application in China as Japanese automakers are set to be the largest followers; BorgWarner, a leading global supplier of dual-clutch transmission (DCT) recently announced the establishment of a joint venture in the northeastern city of Dalian with 12 Chinese automakers; Antonov, the UK-based automatic transmission developer is also eying to start a joint venture to put its latest 6AT into production. Obviously the automated transmission war is breaking out in the Chinese market already. Has Antonov been prepared for the war? We invited Mr. John Moore, CEO of Antonov, to Gasgoo Executive Interview.

Gasgoo.com: We know that Antonov has set up a WOFE (Wholly Owned Foreign Enterprise) early this year (2008), and how about the joint venture program with local company Longcin now?

John Moore: The (Chongqing) regional government has been supportive and helps us expedite the set-up of our Chinese subsidiary-and now we've secured the location of it in Chongqing, and now we're looking for additional industrial partners. From Antonov, we want to get the correct parties involved in the program.

We've been talking with a number of customers, who have interest to make investment commitment. Our latest 6-speed automatic transmission has just been launched at the Chengdu A1 GP and we're busy inviting our potential customers to see the demonstration vehicle.

Up to now, we've invested nearly 20million Euros in developing the Antonov transmission, and once we're set to make mass production; there'll be another same investment of 20 million Euros in R&D and the production plant in China.

Gasgoo.com: So the shareholding pattern in the upcoming joint venture is still not clear?

John Moore: No, not decided yet. The current discussion is still going on, so I can't give you any specific details of it. But it could be one or more than one domestic carmaker.

Already the Chinese automakers are realizing that they need to cooperate to develop key component, like the transmission. For each company to develop their own gearbox independently, it's too expensive. So it makes sense for Antonov to closely develop transmissions with our end customers. We provide the complete transmission solution in China, which is different from other alternatives of offering only sub-system.

Gasgoo.com: What kind of product and service will this joint venture offer after being established?

John Moore: Of course, we'll supply the Antonov technology based automotive transmissions to the Chinese automakers. And also we have customers in Europe and North America, so there could be some export business. (You don't sell have licensing of transmission technology and patents?) We would talk about the possibility to sell the licenses, but at this stage, we believe it's the most effective way to invest directly into the production. And Antonov will take control of the product developing and production process.

Gasgoo.com: How about Longcin's preparation for a mass production?

John Moore: We have had the initial plant in place, and then working on the details of the production timing. We haven't finalized the decision of production location in China, because the very first products will be built in Europe, and then we'll move the production into China. Maybe for the first 6-12 months we'll build this first transmission in Europe, and then move to China-this gives us much more reliable quality at the start. Although, even from the start we're planning on using a very high number of Chinese suppliers for components.

Although it's quite difficult to select and find the local supplier, finally these suppliers we found are indeed good suppliers. I think once we start the production in China, there should be very few components that are not made in China, that would be high specification, high value-added parts.

We'll precede our plan to put our latest gearbox into production. The first product will be launched in two year, i.e. in late 2010. And then we'll put it into mass production in 2011.

Gasgoo.com: How long have you been looking for local suppliers?

John Moore: Our first supplier discussion in China goes back to three years ago. It's important-to support our product strategy, we have to start from the suppliers. Or it'll be no purpose to pursue the Chinese production strategy if we can't make the local suppliers have the correct capability.

One particular feature of our transmission technology is that with lots of specification, it's very efficiently you can match it. For the manufacturers, it's very easy to make, and each of the individual component is much less complex than other automated transmission technologies. This is why it is cost-effective-as the development cost and the production investment is much lower.

Gasgoo.com: It's said that the local Chinese carmaker Geely planned to buy Antonov's patent in late 2006, but finally we saw the talks ended with nothing. What's the reason behind this un-closed deal?

John Moore: We have had a test service agreement with Geely, and it was not because of individual leaders, but as we all know, Geely's organization is going through major changes and shifting priorities then. And in the changes, our project was relocated in Geely from one group to another group. It was impossible to maintain a good communication during this period. In the end, we decided not to carry on with Geely, as clearly their organization was not ready for the project.

And in terms of our strategy, we're looking for a partner who's independent from any carmaker, because we noted that if we set up manufacturing with a carmaker, for example Geely, maybe it'll be difficult for us to sell the gearbox to Chery or Chang'an. And we don't want to have only one customer in China.

Gasgoo.com: So cooperation with Geely does not continue any more after that?

John Moore: No, it was just the license. Geely is also one of our potential customers, and we're still talking about selling them gearboxes.

Our customers are mainly the local Chinese carmakers. Although there's no reason that we shouldn't sell gearboxes to the global automakers, they have already made high investments on their own gearboxes and have no immediate program to buy from other providers like us. But in the emerging markets, particularly in China, there're lots of companies that are in urgent need to buy a good and highly-efficient 6-speed automatic gearbox-and they have no other options. So there's good competitive climate for us.

Gasgoo.com: Have you found it's difficult to pursue the Chinese companies to buy transmissions from Antonov because of the price sensitivity and risk and technology factors?

John Moore: First, they are cost-sensitive, but we're able to offer a 6-speed automatic gearbox for a price which is actually the similar price other people offering a four-speed, so our products are cost-effective. Secondly, to solve the problem of Chinese customers'' lack of expertise, is to give them the expertise. Take the Japanese supplier Aisin AW as an example, they won't be interested in the small-volume customers who lack in expertise, but Antonov is different. We're willing to support these new customers and we have more business interest in that as we're also a new supplier. We're always trying to understand what they need, to teach them how to integrate the gearbox into their car and how to calibrate it properly, and so on.

Gasgoo.com: Do you have a big-enough engineering team to support them?

John Moore: Yes, we need to build up our team here, but we have a strong team in Europe. That's also why we have two programs (for the latest gearbox technology to be produced in China), and we build it from there (Europe). Because we want to have a program developed with the Chinese domestic companies; this is a significant step, and it's far away our strategic plan to grow in China.

Gasgoo.com: What's the risk of doing business in China?

John Moore: The big risk today, I think is that as there're many local-brand companies-although some of them are quite small, they have very ambitious growing plan, as the market develops, there will be some changes in the industry. Maybe not this year, but that (consolidation) will sure take place in the next five years.

Another challenge is that consumers in China are very demanding and conscious of brands. Many people prefer to buy foreign-branded cars and thus the local carmakers need to realize that they can't only compete on cost, but they need to offer high-technology, high-specification products. The surveys have already shown the Chinese consumers are willing to pay for good products, and they're expecting a smooth, efficient, easy to shift automatic gearbox. And again, that's what we can support the domestic carmakers, so that they can have a completive product against the imported brands. So as these carmakers grow in China, Antonov will benefit from the growth.

Gasgoo.com: We can see at the moment that several transmission options are being marketed in China. Are you confident that 6-speed automatic transmission will take the largest market share in China in the upcoming 5 to 10 years?

John Moore: Yes, absolutely, because this is the technology taking over almost every market worldwide. Although 6-speed AT is predominating overall and in the long term, still I think other transmission solutions will have a place here, just as what the world's major consulting companies have forecasted.

I think DCT has a small market share to pull; it has the best efficiency but it's also quite expensive, so it's not directly competitive. For the vehicle brands, like VW that wants to make a particular segment, they have to hold very strong market position if they plan to use this high cost high technology solution. VW, as big carmaker, has made a success of DCT, but actually DCT is a difficult gearbox technology to control-it requires extremely high level of control capability and most of the Chinese companies at the moment still don't have the control capability of their engines to produce successful DCTs.

As for CVT, it's quite the similar situation. Many companies have worked on CVTs for many years, and recently a carmaker has announced they'll have no more CVT. The main reasons are cost and efficiency-sure there're ways to improve the efficiency of the CVT, but that increases the cost as well. So if you look at the world-player carmakers, like Toyota, GM and Ford, they moved away from CVT.

Gasgoo.com: But as the multi-player involved DCT program was organized by the Chinese government, so people get optimistic about the DCT's being widely accepted here, what do you think?

John Moore: It's always hard to predict what will happen to the technologies, especially those quite different touchingly trends. What I can say here is that our 6-speed AT uses components similar to those of current production automatics, offering the Chinese carmakers low development cost and the ease of introduction a new product into production. Basically, the product has the similar customer and drivers with other 6 AT. But DCT is fundamentally a different technology, even VW found challenges in using DCT. Although many local companies have made investment in DCT, it'll take them long time to develop it and then launch the very first product; also it'll then take them long time to put the first product into mass production.

I think it's quite understandable that BorgWarner also comes to China to market its DCT technology, as China's the world's largest and most attractive market. Of course everybody wants to come to China, but I'm not sure for the Chinese customers every technology will be the best solution.

Gasgoo.com: what's your prediction of the transmission market here in the upcoming decade?

John Moore: I think one thing is clear enough-the market will very quickly move automated; we'll see there's CVT, DCT, 4 AT and 6 AT( there's be quite a lot of 4 AT because of the established supply), but inevitably the domestic automakers need to develop their own automated transmission vehicles, as it's the consumers'' demand.

At the moment the automated gearbox roughly take less than half of the market, but it's just because of the limited justified suppliers, and limited choices. It's not because of the customers' preference. It's forecasted by those professional forecasting companies that 6 AT will reach a 60-65 percent of market share in the coming five year here.

Sure there'll be some consolidating the market, and that will affect the automakers' choices of the transmission technology. If you compare the Chinese local carmakers today with five year ago, you'll find that Chinese companies are catching up so quickly that they'll not be long way laid behind in the world.

The market will always be a mixture of all kinds of summated transmission. Every transmission has its own particular characteristics, and the Chinese companies will always have their reasons to choose one or two as their major options.

Gasgoo.com: Last question: when will be the deadline for the production site and joint venture partner being decided?

John Moore: It depends on how hard we'll negotiate with it. We don't think there's too much to hurry, as we have time to make sure that we have got the best partner. The partner decision will not cause any time delay to our program as our European team is till busy working on more progress. We have been in the good position, being able to take time and make a careful choice. We've seen many Chinese companies regret on the decisions their rapid decision; we'd rather make the joint venture "a good marriage".