Traveling back to 1977

Chapter 564 "Really Not Expensive"

Pricing is something that even the factory itself, let alone Chen Fan, cannot decide.

Even local governments do not have pricing power; instead, pricing is managed uniformly by ministries.

For example, the Hongqi sedan mentioned earlier is a case in point. Although the production cost reached 8 yuan, after the price was determined by the higher authorities, the sales price could only be set at 4 yuan.

However, FAW and Yunhu Automobile Plant are in different situations. They have a very high status and are directly managed by the Ministry of Machinery Industry. Their losses are subsidized by their superiors. Unless their superiors cancel the subsidies and stop assigning them production tasks, they don't have to worry about survival.

Well, that's how Hongqi stopped production. Without subsidies, and with its regular models lacking competitiveness against imported cars, there was no better solution than to cease production.

But Yunhu Automobile Factory is different; in other words, it is far inferior to FAW.

The superior management unit of Yunqi Factory is the Jiangnan Provincial Machinery Industry Bureau (at the provincial level), and it is also involved with the Yunhu area under its jurisdiction.

The Provincial Machinery Industry Bureau was originally the Provincial Department of Industry in the 50s. During the period of great upheaval, the Department of Industry was split into the Department of Machinery Industry, the Department of Chemical Industry, the Department of Fuel Industry, the Department of Light Industry, and the Department of Metallurgical Industry.

After the hurdles event, the three departments of metallurgy, machinery, and the later-established agricultural machinery were merged back into the Department of Industry.

In 71, it was reorganized again into the Machinery Industry Bureau and three industrial bureaus: Metallurgy and Electronics. The three departments of Chemicals, Fuels, and Light Industry remained largely unchanged.

Then the Machinery Industry Bureau will take over the overall management of machinery-related units throughout the province, including functions such as new product research and development, equipment procurement and storage, and material allocation.

Therefore, although it may seem like a simple pricing decision, it required Yunhu Automobile Factory to propose a plan and reasons, submit it to the Provincial Machinery Industry Bureau for approval, and send a copy to the Yunhu Regional Administrative Office. They would then jointly submit it to the Ministry of Machinery Industry and the Ministry of Commerce, and finally the Ministry of Commerce would make the final decision.

If the reasons are not sufficiently reasonable, the Ministry of Commerce will send the order back and require Yunqi Factory to redo it, or they can set their own price based on the reported cost data.

Unless the factory's products are only sold locally and the product prices are within the price range of similar products, they can be approved for listing by the local commerce bureau, and the higher-ups are too lazy to care.

The miscellaneous products that Yunhu Machinery Factory produced a few years ago, such as sewing machines and bicycles, were just like that.

After listening to Factory Director Yang's words, Chen Fan couldn't help but wipe his face. "So troublesome?"

Factory Director Yang picked up his glass and downed it in one gulp. He then poured himself a drink from the bottle and said with his head down, "It can be troublesome, but it can also be simple."

He put down the bottle, turned to look at Chen Fan, and patiently explained, "The Ministry of Commerce has a price list for all products nationwide. Generally speaking, no matter what your cost is, they will set the price based on the product prices in the list."

The difference lies in whether or not more policy subsidies can be secured.

Chen Fan's eyes widened instantly, and he even forgot to eat the bear paw. "Then what's the point of us discussing this here?"

He had previously thought that it wouldn't matter if he lost a little money on the sedans, as he could just use the profits from the minivans to make up for it.

It seems that sedans and jeeps can only be priced around 4 yuan, large trucks cannot exceed 1 yuan, and light trucks cannot exceed 2 yuan. ...No wonder all car companies are suffering serious losses these days; at these prices, it would be strange if they weren't!
Factory Director Yang looked at him and said helplessly, "That's why I wanted to discuss this with you and ask for your suggestions."

Chen Fan was even more helpless than him. "The cost is fixed here. Unless there are sufficient policy subsidies, we will lose money no matter what. What suggestions can I make?"

Factory Director Yang smiled and said, "You don't understand. It's not just automobiles; almost all heavy industrial units, including agricultural machinery, rely on government subsidies to survive."

There are reasons why the higher authorities are doing this. The purpose is to use heavy industry equipment to drive the development of people's livelihoods and other aspects, and to improve people's living conditions.

The losses incurred by heavy industry were borne by the collective, which accelerated the development of the people's livelihood economy.

However, higher authorities won't ignore the actual situation of the production units, so the focus is on policy subsidies—whether to directly compensate the factory for losses or use other methods.

Chen Fan wiped his face, feeling a headache coming on. "But Uncle Yang, have you thought about it? Yunhu Automobile Factory is not the First Ministry of Machinery Industry's favorite son. Even FAW is in such a situation, let alone us?"

Then look at Jiangnan Automobile Factory. They were only temporarily set up because of light truck blueprints. Later, without the support of higher authorities, they could only resort to "self-production and self-sales" within the province.

The situation with these two vehicles is similar to that of BAIC's light trucks; it's an open secret across the industry. If we can't get preferential pricing, then what's the point of all our hard work developing these vehicles?

Director Yang smiled and patiently explained to him, "Of course, it's to enhance the strength and status of Yunhu Machinery Factory. Making cars is much more valued than making machinery. You just mentioned Jiangnan Automobile Factory, but look, although they only produce one or two hundred light trucks a year, they are still the 'favored son' of the Machinery Industry Bureau. That's the key point."

Furthermore, what I just mentioned was price control, but price ranges aren't entirely insurmountable. The key is whether we can include these two models as new products in the product price list. That's where I hope you can offer some suggestions.

Chen Fan rolled his eyes slightly, blinked at Factory Director Yang, paused for two seconds, and finally realized what he meant. He nodded slightly and said, "I understand."

The declared price is not the key point; the key point is whether you can declare prices outside of that catalog!

As for how feasible it is, Chen Fan believes there is still some room for maneuver.

This can be approached by examining the product's features and intended use.

For example, a van is something that has never existed before. If you put cargo in the back, it becomes a truck; if you put seats inside, it becomes a passenger car. To some extent, this can break through the scope of the original product catalog and be added as a new product.

At this point, prices can be circumvented and re-established.

Sedans are a bit more difficult to make, but they are not impossible. If Hongqi is a government vehicle, would it be okay to position this new sedan as a "business vehicle"?

Having made up his mind, Chen Fan said, "Uncle Yang, I think there are two main elements involved."

Factory Director Yang immediately put down his chopsticks and stared intently at him. "Go on," he said.

Chen Fan said, "The first thing is to clearly calculate all production costs so that the higher-ups can see the real production pressure."

Factory Director Yang immediately smiled and said, "We have already calculated this. The cost of a mini-truck is between 9000 and 10000 yuan. As long as the selling price exceeds 10000 yuan, the factory will make a profit."

He then frowned slightly, "The problem is that the production cost of cars remains high. Following your previous suggestion, we reorganized the original machinery plant. Now, except for tires and some rubber parts, all other parts, including axles, universal joints, and engines, are produced in-house, but the cost is still over 60000 yuan."

If a minivan is a thatched hut, then their attitude towards a sedan is like building a villa. They are meticulous and strive for perfection. It is quite remarkable that they can keep the cost to just over 6.

The Hongqi sedan costs 8 yuan, this is much less.

Chen Fan frowned, pondered for two seconds, and asked, "Is the cost you're calculating an internal cost or a commercial cost?"

Factory Director Yang didn't understand and immediately asked, "What do you mean?"

He then frowned. "I mean, what's the difference between these two costs?"

Chen Fan gave an example, picked up a piece of rabbit meat, and said, "For instance, this rabbit is worth 3 yuan. After the chef cooks it, including the chef's salary and bonus, as well as the rent, water and electricity, and other expenses, this plate of rabbit meat is worth at most 4 yuan."

This is the internal cost. But when it's placed on the table and the diners finish eating, it costs 18 yuan a plate…

He suddenly thought of the rabbits at the Northeast Hunting Park. Good heavens, they sell them to foreign visitors for 350 yuan each! They're wielding that knife even more fiercely than Little Fatty's!
At this point, Factory Director Yang finally realized, "Oh, you mean we should calculate it based on the ex-factory price?"

Chen Fan nodded and smiled, "Otherwise, what's the point of splitting up the machinery factory to make auto parts?"

Factory Director Yang frowned slightly. "That makes sense."

He thought for a moment and said, "The cost of a minivan would be between 10,000 and 11,000, so the selling price would have to be at least 12,000. As for sedans..."

He picked up his glass, took a sip, exhaled a breath of alcohol, and said with a wry smile, "Then the cost price is about the same as that of a Hongqi car, at least 8 yuan."

Chen Fan laughed and said, "8 is good. We need to raise the costs, and even include transportation and warehousing."

He tapped his fingers on the table a few times, then looked up and said, "Let's forget about micro-trucks. With light trucks setting a good example, production costs are basically transparent. We can only quote 12,000 yuan at most."

However, sedans are meticulously crafted, and even a slight overstatement wouldn't be noticeable, so it's better to price it around 10.

Factory Director Yang turned to look at him. "I understand that reporting higher prices makes it easier to negotiate with superiors. So what's the other key point?"

Chen Fan smiled and said, "Of course, it's about bringing in allies."

He looked at Director Yang with a half-smile, "This model was developed by us, and we are also the ones who submitted the price application. Since the blueprints have been made public, when it comes to pricing, the companies in the same industry that come to ask for the blueprints can't just sit back and do nothing, right? If the price is reasonable, they will also benefit."

When the time comes, everyone should work together to emphasize the different functions of the two types of vehicles to the Ministry of Commerce, especially the micro passenger and cargo vehicle, which is a completely new model and may be listed separately. That would make it much easier to discuss pricing.

As for sedans, given the current emphasis on revitalizing the economy and expanding exports, we might consider positioning this car as a 'business sedan' specifically designed to serve the economy, and see if there's a chance it could be listed separately.

Factory Director Yang pursed his lips and nodded slightly. After pausing for two seconds, he looked up and smiled, "I really didn't think of the two points you mentioned."

He then slammed his hand on the table and said, "Okay, I'll have someone take care of it right away."

After finishing his business, he let out a long breath, looked at Chen Fan and smiled, "Xiao Fan, what do you think is a suitable price for this car?"

This was just casual conversation, much like discussing international affairs online in later generations—just indulging in idle chatter.

Chen Fan laughed and said, "If I were to set the price, it would be at least 20!"

"20?"

Factory Director Yang was both amused and exasperated. "I was hoping to sell it for 50, but who would buy it? That's all the product is worth!"

Chen Fan shook his head. "Your idea is definitely based on pricing according to cost, right?"

Factory Director Yang: "Shouldn't it be like this?"

Chen Fan explained, "When foreign cars are priced, they add the R&D costs in the form of 'intellectual property patent fees,' as well as brand surcharges, etc. Therefore, product pricing should be calculated based on comprehensive costs and reference to similar products in the market. This way, the pricing will be higher than that based on simple cost accounting."

Factory Director Yang frowned slightly. "But imported cars aren't expensive either, only about 30,000 yuan a car, which is cheaper than the Hongqi."

Chen Fan was speechless for a moment, and looked at him and said in a low voice, "Uncle Yang, are you kidding me? A 30,000 yuan imported car is all bought with foreign exchange, and at the official exchange rate. Do you really think we can buy a 5000 US dollar imported car with 30,000 yuan?"

Tariffs were not mentioned. It wasn't until January 1, 1980, that my country reinstated the system of customs levying tariffs on import and export goods separately. In other words, before that, there were no tariffs at all. Whatever amount of goods were sold abroad, they were brought back and sold directly at the official exchange rate plus a little profit.

Actually, saying "sell" isn't quite right, because foreign trade is basically a government-run business nowadays. The cars that are bought are all allocated to specific groups, so the so-called "sell" is just a formality for clearing accounts.

For example, in 73, we imported 200 Toyota Crown sedans and allocated them for use at the Canton Fair.

In addition, some Eastern European countries are also sources of our car imports. The Polonez, priced at 9000 rubles, has become the official vehicle of many local leaders.

Ignoring exchange rates and looking at the surface, and with no tariffs, these imported cars are "really not expensive."

A high-end imported car can be bought for only 2 to 3 yuan, or even less, but it costs "ten times" more to manufacture a Hongqi car.

How are the higher-ups supposed to choose?!

See, that's the allure of "financial exchange rates".

At this moment, Factory Director Yang also realized what was happening. He squinted and thought for a moment, then leaned close to Chen Fan and whispered, "I heard that some companies are willing to exchange for US dollars at five times the exchange rate. So, an imported car can actually be worth more than 150,000?"

Chen Fan grunted twice, glanced at the driver who had clearly passed out drunk, and said to Director Yang, "I think the higher-ups want to expand exchanges with foreign countries, and they will definitely introduce some foreign technologies and production lines."

Think about it, if everyone's scrambling for foreign exchange, wouldn't someone be willing to pay an even higher price? Like eight times, ten times, or even more?

Upon hearing this, Director Yang gasped and muttered, "Good heavens, how expensive must those foreign cars be?"

Chen Fan smiled and said, "Foreign cars are really not expensive. The key is foreign exchange. With foreign exchange, they are cheap. Even at the official exchange rate, you can make a fortune."

That's how the 84 Taiwan-made car was made.

As long as they obtain the import license, they can convert their money into foreign exchange, import a batch of goods, and even if the tariffs are as high as 120%-150%, plus an additional 80% import adjustment tax, they can still make a profit of 100%-200%.

At its peak, there were over 800 car companies across the island, ranging from government agencies to kindergartens, all exploiting the permits for personal gain.

In this frenzied "feast," billions of dollars in foreign exchange were exhausted, almost leaving the "BAIC Jeep" project without the funds to start.

I won't go into the consequences, since the money is gone for good.

It was precisely because of this incident that the higher authorities saw how much the whole society longed for automobiles, so they accelerated the pace of joint venture car factory construction and opened up imports of cars from Eastern Europe. A large number of Volga cars entered the country at that time.

Chen Fan could foresee that as long as the quality was guaranteed and the price was well controlled, and as long as it wasn't too much more expensive than those imported cars, Yunhu Automobile Factory could definitely get a share of the pie in the subsequent "car frenzy" after the Taiwan boom.

However, he didn't know if Yunhu Automobile Factory could obtain a suitable price. Otherwise, they would have to wait a few years until they could set their own prices before making adjustments.

At this moment, Director Yang was not thinking about foreign exchange, but about whether his own company's car factory could really be sold for 20.

(End of this chapter)