Stefano Pitti felt like he was king in the early 1990s, when he sold 150,000 units of his company's mopeds at 10,000 yuan (US$1,233) apiece in his first two years after arriving in Shanghai.

But the rules changed and so did the world of Pitti, China representative for Piaggio, the Italian scooter manufacturer of famous brands such as Vespa.

"They (the Shanghai government) suddenly slapped a ban on motorcycles and our sales nose-dived to zero almost overnight," recalls Pitti.

"Needless to say, we were devastated."

The Shanghai government's move was followed in one way or another by the authorities in other major cities. Instead of a total ban, some cities raised road taxes to discourage the use of motorcycles, mopeds and other two-wheel vehicles. And they did it under environmental protection regulations, saying that motorcycles had failed to meet their new emission control standards.

Piaggio was quick to react by installing new equipment in their products to ensure cleaner emission, but their efforts were fruitless.

"We could never hope to keep up with the fast changing regulations on pollution control and other related issues," says Pitti.

But instead of throwing in the towel and pulling out of the market, Pitti convinced Piaggio headquarters to raise its stake by entering into a joint venture with a domestic manufacturer. The plan was to develop a new model that could push Piaggio into the rural market, where motorcycles are still in demand and pollution controls are less of an issue than in the concrete jungles of the cities.

Pitti's experience, of course, is not unique to companies doing business in the fast changing social and economic environment of China. Many multinational companies, even those established for years in this market, have come up with contingency plans to counter the cycle of change.

However, the lesson Pitti learned in China can serve as a timely reminder to the many second-tier corporations in the US and Europe that are keen to tap the vast potential of the Chinese market. These companies need to remember that in this rapidly growing economy, sudden changes in the business environment are the norm rather than the exception.

Adapting to the market

Compounding Piaggio's problem in China was that it failed to distinguish between the very different needs of Chinese consumers and those in its home market in Italy.

"The difference is not so great in the cities," Pitti says. Shanghai consumers, for instance, are as concerned about style and performance as their Italian counterparts, he says.

"They even share the same driving habits," Pitti observes.

"They (Shanghai bikers) are just as crazy, zipping around on scooters and mopeds between traffic as if they own the roads."

That was why Piaggio's legendary Vespa scooters did so well in Shanghai before the ban. But because of relatively high prices, Piaggio's products never took off in the rural markets of China.

The Italian brand was selling for almost twice as much as domestic brands. To Pitti's chagrin, style, performance, and even durability could not compete with cheap domestic models. To many Chinese consumers, motorcycles are disposable commodities that are to be used and thrown to the scrap-yard when they cease to function.

"Hardly anyone cares to do any maintenance work on his motorbike," Pitti says.

"Oil changes are infrequent and old parts are almost never changed. They just run their motorbikes to death and, for that reason, they want their bikes cheap."

Piaggio simply could not have competed at those prices.

"There is no profit in selling mass-produced motorcycles in China's highly competitive domestic market," Pitti says. At the time, the only option seemed to be total retreat from the market, he recalls.

Changing strategies

The 20-year veteran of the China market would not give up so easily. Pitti decided to give it another try. He knew also that to survive, he would need a local partner to help him break into the markets in the secondary cities, townships and the vast rural districts.

His search for a Chinese partner began in 2001. He spent the following few years traveling all over the country to meet with motorcycle manufacturers to discuss co-operation plans. His quest ended in Chongqing, Sichuan Province, where he found a potential partner in Chongqing Zongshen Motorcycle Co, one of the largest motorcycle manufacturers in China.

With total assets exceeding 4 billion yuan (US$480 million), Chongqing Zongshen Motorcycle Group has 52 manufacturing and marketing subsidiaries. Pitti says he was impressed by Zongshen's marketing strategy, extensive sales network and manufacturing capability, especially the capacity to produce motorcycles at low enough costs to effectively compete in the marketplace.

After 32 months of tough negotiations, both parties agreed in April 2004 to enter into a joint venture agreement which called for the formation of a new company, Piaggio Foshan Motorcycle Co. Ltd (PFM) in Foshan city in South China's Guangdong Province. Piaggio and Zongshen each own an equal 45 per cent share in the new company. The Foshan city government holds the remaining shares.

With a registered capital of US$29.8 million, the new company, whose annual output is expected to reach 100,000 units this year, will focus on making scooters and high-end motorcycles.

Meanwhile, both the Chinese and Italian sides have agreed to set up a motorcycle engine plant in Chongqing with an expected annual output of 500,000 units.

"Foreigners are not familiar with the Chinese market," says Zhou Jianchuan, Zongshen's assistant to the president. He says that without the marketing prowess and sales network of Zongshen, Piaggio, or any other manufacturer for that matter, will not be able to break into the rural markets.

"We understand our customers and know our way around the vague rules and regulations of the rural districts," Zhou says.

With decades of production and sales experience in China, Zongshen has built up a comprehensive network across over 100 cities and rural regions, Zhou says.

"Those are the assets most attractive to Piaggio," he adds.

Last year, Piaggio also purchased 35 per cent of its accessories and components from China, together with another 20 per cent from Europe and 45 per cent from India.

"Our sourcing of parts and components from China is expected to increase to above 50 per cent by the end of 2006," Pitti says.

"We will be buying more from China than from our traditional source in India by the end of this year."

(China Daily 08/08/2005 page3)