China local brands brace for onslaught from abroad

Reuters, April 27, 2012

China's homegrown car makers unveiled a host of new models amid glitzy lights and blaring music at the Beijing auto show this week - but also under growing uncertainty about their future.

Indigenous auto upstarts such as Chery CHERY.UL, . (0175.HK) and Great Wall (601633.SS) grew spectacularly in 2009 and 2010 but began struggling last year following the government's decision to scrap vehicle purchase incentives that favoured their small cars.
Their share of China's auto market dipped to 27.8 percent at the end of March, a drop of about 3 percentage points from the 30.9 percent peak at the end of 2010 - an all-time high, according to the China Association of Automobile Manufacturers.
A more fundamental cause of their struggle, however, is pressure from low-cost cars from global auto makers. Those cars, such as the Chevy Sail subcompact, have been designed to compete head-on with the no-frills models from China brands, priced around 60,000-70,000 yuan.
"This is not a joke. It is a top priority for us to make sure Geely doesn't fail under pressure" from the foreign rivals, said Zhejiang Geely Holding Group Co Chairman Li Shufu in an interview earlier this month. Geely needs to do everything it can, Li said, to weather the pressure, including gaining some technology from Sweden's Volvo, which Geely acquired in 2010.
Reuters Insider TV at the autoshow: reut.rs/IfSA5O
China's auto market has long been divvied up between homegrown and foreign car makers, which have both been able to thrive by serving different customers. Mostly throughout the last decade, global car makers have targeted the richer elites, while domestic makers including Chery Automobile Co, Geely, and BYD Co (1211.HK) have catered to consumers on a budget.
Those days are coming to an end. Now, in a trend that has been building for a few years, the two groups are headed for a collision in many segments as global auto makers like GM (GM.N) move in on indigenous China brands' territory: people who are just becoming affluent enough to afford their first car.
Pressure from this expansion is making some of those auto upstarts with names like Anhui Jianghuai Automobile Co (600418.SS) (also known as JAC Motors) and Great Wall Motor Co., as well as more well-known and bigger Geely, Chery and BYD vulnerable.
One source of uncertainty is an overall slowdown of China's once red-hot market. The market began softening last year after a decade of breakneck growth. Many analysts and industry executives believe annual growth rates could slow to 7-8 percent on average through 2020, compared with sales surges over the past decade by as much as 46 percent, the rate recorded in 2009.
What's worse, this slowdown is happening as more new entrants appear in the market and as existing competitors add to their offerings, making survival in China, the world's biggest auto market since 2009, even more tenuous.
"When there is enough water in the lake, the boats will float. But when the water level comes down, not all the boats will be able to float," said William Russo, head of Beijing-based consulting company Synergistics.
U.S. consulting firm Alix Partners says the number of households in China with annual income of more than 60,000 yuan - a level considered as sufficient for a family to buy a no-frills car - will likely nearly double to 65.6 million by about 2015.
GM's Chevy Sail, which was launched in 2010, sells for 56,800 yuan, while Volkswagen (VOWG_p.DE) and Nissan (7201.T) also have several models that sell in the 70,000 to 80,000 yuan range.
Further heightening the pressures on Chinese brands is China's own industrial policy.
As part of its effort to nurture domestic auto makers, the country's policymakers have been encouraging global companies and their Chinese joint-venture partners, mostly large state-owned auto makers such as SAIC Motor Corp (SAI.N) (600104.SS), to establish joint China-only brands.
In most cases, those brands that have already been launched - Baojun from GM and its partner SAIC, as well as Venucia, which is operated by Nissan and Dongfeng Motor Group Co (0489.HK) (600006.SS) - use older technology the foreign auto makers retired recently while using more Chinese-designed and -produced components to cut costs.
Use of older technology means those China-only, foreign-Chinese co-brands could sell their cars with relatively low price tags, putting further pressure on China's indigenous brands - a source of worry for many indigenous auto makers.
The Venucia D50 compact car, based on the previous-generation Nissan Tiida, sells for as little as 67,800 yuan, compared with the 100,000 yuan for the most affordable version of the redesigned Tiida.
The Baojun 630, a compact sedan built on the underpinnings of a retired GM model, is 5,000 yuan cheaper than the Venucia D50.
In the case of the Chevy Sail, GM went back to the drawing board in 2005, simplifying older vehicle underpinnings among other cost-reduction efforts and pulling from the company's global parts bin to shave costs and create a rival to cars such as Geely's King Kong, a 56,000-yuan sedan.
China brands are fighting back by investing in technology to upgrade the quality of their no-frills cars. In some cases, they're also trying to take on their global rivals with more upscale cars, but the effort has mostly been unsuccessful.
Many analysts and industry executives believe big state-owned companies such as SAIC and Dongfeng, with strong ties with foreign auto makers, are likely to fare relatively well, while those without strong backing, such as Jianghuai Auto and BYD, might struggle.
BYD's F3, for example, China's best-selling car in 2009 and 2010, has dropped out of the top-10 list, giving way to new low-cost cars like the Chevy Sail and Volkswagen's Bora, according to the China Association of Automobile Manufacturers.
Geely and others with foreign ties, meanwhile, appear well-positioned to weather the foreign assault. Geely Chairman Li, who is also chairman of Volvo, said the two companies agreed recently to share some Volvo technology with Geely.
Geely desperately needs Volvo technology, Li said, to deal with this "life or death matter".

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