Chinese Car Companies Racing to Produce a Global Champion

Money Morning, July 7, 2011

With Detroit a shadow of its former self and Japanese automakers sidelined by that country's recent disasters, Chinese car companies are racing to produce a global champion capable of competing with Western brands.

It's something that's long been talked about and something that Nissan Motor Co. (PINK:
NSANY) Chief Executive Carlos Ghosn says could happen in just five short years.

"The Chinese government says this is a huge industry. We want to have a Chinese champion," Ghosn
toldReuters. "It's logical. It's normal. We were expecting this."

Ghosn anticipates such an emergence will take about five years, but could happen even sooner if one of the major Chinese car companies acquires a mass-market auto brand from a foreign rival.

So who will this Chinese auto champion be?

A short-list of serious contenders includes:

SAIC, and Chang'an are state-owned, which makes them difficult to invest in. But Geely, Dongfeng, and BYD are open to U.S. investors, with the latter backed by Warren Buffett. At the very least, these Chinese car companies stand to profit handsomely as China takes its place as the automotive capital of the world.

A Race Around The World

Auto sales in China, which overtook the United States as the world's largest auto market in 2009, rose 32% last year to a record 18.06 million units. However, most of those sales have gone to foreign companies. China's domestic car companies have less than 20% of the local market, with Volkswagen AG (PINK:VLKAY), Toyota Motor Corp. (NYSE ADR: TM), and others swallowing up the rest.

Chinese auto companies are looking to change that - mainly by siphoning talent and know-how away from Western competitors.

China's government already requires foreign automakers to form joint ventures with domestic companies before entering the Mainland. And over the past two years Chinese companies have been trying to attract overseas talent.

First they went to Detroit following the bankruptcies of General Motors Co. (NYSE: GM) and Chrysler looking for high-level engineers with experience. And since then the search has broadened to Germany, Japan and the United Kingdom.

Beijing Automotive Group (BAIC) in May held its first recruitment fairs in the German cities of Stuttgart, Munich, and Aachen hoping to attract engineers. Dongfeng also went to Munich in May following in the footsteps of SAIC and Geely.

"Sure there are many engineers in China. But the talent pool is fairly shallow," Bill Russo, former head of Chrysler in China, told the Financial Times. "Chinese companies are finding that there are many engineers who have been educated in the West, including overseas Chinese, who are anxious to work in such a dynamic place as China. This allows them to fill the talent gap that they are unable to fill with domestic recruiting."

More Chinese automakers are also building overseas manufacturing and research and development (R&D) plants. It costs more to build and operate these plants abroad than it would domestically. However, companies like SAIC say that it's sometimes easier than attracting talent to China.

SAIC employs more than 400 workers - including 340 design engineers - at its MG Motor UK plant in Longbridge, Birmingham. And it may soon be joined by China's third-largest carmaker, FAW Group Co.

Mike Whitby, leader of the Birmingham City Council, said he spoke with representatives who traveled with Chinese Premier Wen Jiabao on a visit to the MG Motor UK facility.

"The Chinese premier brought a delegation of powerful industrialists with him to Birmingham," Whitby told the Birmingham Mail. "I met with FAW. There's a real positivity there and we are hopeful the warm relations we have nurtured will result in a new car assembly facility here in Birmingham."

Meanwhile, Chang'an has an R&D facility in Nottingham, just north of SAIC's Birmingham plant. It also has R&D centers in Italy and Japan, and just last year became the first Chinese carmaker to establish such a facility in Detroit.

Finally, as Nissan's Ghosn pointed out, Chinese auto companies are constantly on the lookout for acquisition targets - as evidenced by Geely's acquisition of Volvo. GM's Opel unit has been on the block since a deal with Canada's Magna International was scrapped in 2009.

Regardless of the route, one Chinese car company is destined to become a global leader.

China's top five exporters from January to May of this year were: Chery Auto Co. Ltd., Chang'an, Jianghuai Vehicle Group, Great Wall Motor Co. Ltd. and Dongfeng.

Still, SAIC may have the best shot at becoming a global leader, as it remains China's largest passenger car manufacturer. The company, which operates joint ventures with both GM and Volkswagen, plans to boost annual commercial vehicle sales to about 500,000 units by 2015.

Of course, rather than try and guess which of China's car companies will finish first, it may be easier to simply invest in a company like China Yuchai International Ltd. (NYSE: CYD), which builds and sells diesel engines that are mainly distributed in China.

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