China’s carmakers have yet to make their marque

The Financial Times, February 3, 2014

By Tom Mitchell in Wuhan

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  Crowded lot: thousands of cars sit outside the Dongfeng-Peugeot Citroen plant in Wuhan awaiting shipment. High production from the joint venture contrasts with Dongfeng’s own plants
• Dongfeng’s Aeolus S30: the Chinese carmaker has four successful joint ventures, but it has struggled with its own branded vehicles. These account for less than 10 per cent of annual sales
  

  
  

Aside from a few Communist Youth League banners and a summary of the reforms unveiled at the Chinese Communist party’s third plenum last November, there is little to distinguish Dongfeng’s wholly-owned Aeolus car plant from its nearby joint venture with Peugeot Citroën and Honda.

Situated in a development zone in Wuhan, an industrial city in central China, the Aeolus factory has borrowed equipment and manufacturing systems from both Peugeot and Nissan, state-owned Dongfeng’s third joint venture partner.

Wheels in motion

Passenger car exports

The parking lots outside each plant, however, tell a different story. While thousands of cars are lined up outside Dongfeng’s Peugeot and Honda factories in Wuhan, awaiting shipment to distributors across the world’s largest car market, its Aeolus factory produces only about 300 vehicles a day, or about 100,000 units annually.

Dongfeng, one of China’s “Big Three” car groups alongside Shanghai Auto and First Auto Works, has more joint ventures with international car groups than any of its domestic peers. Including Korean partner Hyundai, it currently operates four joint ventures and signed a fifth partnership agreement in December with Renault. The Wuhan-based company is also poised to take a 14 per cent stake in Peugeot as part of €3bn capital raising.

Dongfeng’s four joint ventures account for more than 90 per cent of the group’s annual passenger car sales, dwarfing those of its own Aeolus brand. It is an imbalance shared by all of China’s state-owned car companies and helps explain why the country that boasts the world’s biggest car market has, unlike Japan and Korea before it, thus far failed to produce a national champion of its own that can compete globally.

“On the plus side, joint ventures spin off a tremendous amount of profit for the state-owned enterprises that they’re affiliated with,” says Bill Russo of Synergistics, an industry consultancy. “On the negative side, those profits are a drug that you become dependent on. Chinese car companies haven’t really been successful at investing them into their own branded vehicles.”

Last month, the China Association of Automobile Manufacturers announced that the country’s car sales grew more than 15 per cent last year to 18m units – almost triple the number sold in 2008. During this period, the market share of Chinese brands peaked at 31 per cent in 2010 and has since fallen to 27 per cent. Meanwhile, China’s 2013 car exports fell almost 10 per cent year on year to just 596,300 units – accounting for only 3.3 per cent of total production.

Imports, meanwhile, nearly tripled to 1.1m vehicles, driven by strong demand for luxury vehicles. While China exports more cars to Algeria than any other country – with its next biggest markets being Russia, Chile and Iran – the largest source of its own automotive imports is Germany.

“The quality of Chinese cars currently can’t compete with multinationals,” says Yao Jie, deputy secretary-general of the association. “We need to work harder to improve domestic brands.” According to CAAM, last year China’s 10 most popular models, led by the Ford Focus, were all manufactured by Sino-foreign joint ventures.

“Most Chinese state car companies know how to bolt a car together,” agrees Max Warburton, car analyst with Bernstein Research. “But replicating a foreign manufacturing system is not a particularly valuable skill set. Real skills lie in product development and in future technology.”

On a tour of Dongfeng’s Aeolus plant, employees are humble but also determined. “I feel that we can catch up but it will take a long time, perhaps 10 years,” says Huang Mingke, a line manager who gave up a job with Dongfeng’s Peugeot joint venture even though the Aeolus plant generally pays lower wages than the joint ventures. “We are investing a lot in critical components, such as engines and transmissions.”

“Although we have borrowed some advanced management techniques from Peugeot and Nissan, it’s only a foundation on which we are building,” adds Tao Haiying, a company official. “We can study and absorb their best practices as we create our own.”

Many analysts believe Dongfeng and its domestic peers will have to sort out their competitive issues at home before they can emerge as a threat overseas. “Maybe China can do something that no one else has, but I haven’t ever seen a car company become a successful exporter without having stable development in their home market first,” says Mr Russo. “You have to achieve a certain size and scale at home before you can compete away.”

The challenge for China’s car companies will be to achieve this in the world’s most competitive automotive industry. When Japanese and Korean carmakers broke out in the 1970s and 1980s, they did so from the shelter of protected home markets.

Dongfeng’s pending deal with Peugeot and Geely’s acquisition of Sweden’s Volvo in 2010 suggest another way forward. What Chinese car companies lack in experience and technical expertise, they can make up for in cash.

Last year Geely established a research centre in Sweden, while Peugeot offers Dongfeng a tempting short-cut in some key areas. “Peugeot has kept spending through the [global financial] crisis,” notes Mr Warburton at Bernstein Research. “So even though its finances are a mess it does have basic platforms, power trains and transmissions that are fully competitive. Dongfeng doesn’t have any of that.”

Additional reporting by Wan Li

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China Still 5-10 Years Away From Being Western Player

Wards Auto, October 18, 2013

A top China industry consultant blames the delay on many factors, including the lack of positive identities for Chinese brands, the still-fragmented nature of the country’s domestic auto industry and the perception of Chinese goods as "cheap."

Click here to read the article at WardsAuto.com (subscription required)

WUHAN, CHINA – It will take another five to 10 years before domestic Chinese automakers enter developed Western markets, an analyst says during the 2013 Global Automotive Forum. The West is "not a market where you can fit a lot of competitors," Bill Russo, president-Synergstics, tells attendees during an Oct. 17 panel discussion here.

For more on this topic please read Bill Russo's article The Path to Globalization of China's Automotive Industry

China’s carmakers crank up exports

The Financial Times, December 2, 2012

For the first time, China is expected to export 1m vehicles this year. Faced with rising competition in their home market, the largest in the world, Chinese carmakers are finding it easier to go abroad and sell cars in less sought-after markets such as Iran and Iraq.

China’s car market has slowed along with the domestic economy and passenger car sales rose only 6.9 per cent in the year to October. Domestic carmakers have been particularly hard hit by the abolition of government tax incentives that favoured them, losing market share to US, European and Korean rivals.

Japanese carmakers in China have been forced to cede market share due to a Sino-Japanese territorial dispute that caused public protests against Japanese cars. But very little of that market share has gone to Chinese carmakers who have less than 30 per cent of the market by volume.

They have responded by cranking out exports to some of the world’s less prestigious markets: China’s top car export markets for the first three quarters of this year were Algeria, Iraq, Iran, Russia and Chile. By the end of October, China’s total vehicle exports for the year exceeded the total figure for 2011, and passenger car exports rose 43 per cent year-on-year in October alone.

“It is really a function of domestic demand,” says Bill Russo, head of Synergistics auto consultancy in Beijing and former head of Chrysler in China. “As the market slows, the pressure on inventory goes up and the natural safety valve is to direct cars to the export market.”

“Passenger vehicle exports have become the main driving force for growth for Chinese domestic automakers,” says Namrita Chow of IHS Automotive in Shanghai, adding that “Chinese automakers are foraying into markets generally outside regions targeted by international automakers, allowing them to achieve growth” and offload excess inventory.

With a few notable exceptions, like Great Wall Motors, a well-respected privately owned Chinese group best known for its sport utility vehicles, most Chinese car companies are targeting the lower end of export markets. They have no choice, because they lack products outside that segment.

But it is a risky strategy, says Lin Huaibin of IHS Automotive. “If you enter overseas markets at a low price level, then it is very hard to climb up later . . . they do not want to repeat the mistake they made in China where (domestic) brands are associated with low prices and are finding it hard to move upmarket”.

After decades of exporting mostly cheap, low quality products – and several scandals involving death or injury caused by Chinese exports of pet food, toothpaste and other products – the country’s manufacturers in a range of sectors face the same problem: how to combat the bad image of brand China overseas.

Haier, one of the world’s largest home appliance manufacturers, has partly solved that problem by choosing a name that sounds more German than Chinese. But that will not work for everyone.

Chery, the largest car exporter with 165,000 foreign sales in the first ten months of the year, says 30 per cent of its sales come from overseas, where the company’s lower priced models are the best sellers.

Geely, owner of Volvo and the second-largest exporter so far this year, denies that pressure at home is forcing it to seek export markets. With Geely’s domestic sales expected to grow 10 per cent this year “we don’t need to shift our focus to exports,” says a company spokesman.

Overseas sales now account for about a fifth of Geely total sales “and the proportion will continue to grow as the growth of sales overseas will still be much higher than that at home – we still have a huge market out there to expand in,” the company says. Previously Geely has said it plans to sell as many cars overseas as at home.

Great Wall, the fourth-largest and most upmarket of the Chinese exporters, has a different strategy. “We aim at quality rather than quantity for overseas markets,” a company spokesman says, adding that many Great Wall products overseas are priced at or near the level of similar Western and Japanese products. “We want to build the brand image of Great Wall and change the impression in overseas markets that Chinese cars are low in quality and sell cheap.”

Like Chery, which has started construction of a factory in Brazil, Great Wall is increasingly producing cars overseas for foreign markets. By 2015 Great Wall expects to have 24 overseas production facilities with capacity of 500,000 units.

But Klaus Paur, global head of automotive research at Ipsos, says that for many Chinese automakers, focusing on exports “is not a sustainable strategy” and they must first concentrate on the challenges of increased competition they face back home. “If they are selling well outside China, that may distract them from fixing the problems they have in the China market itself,” he says.

Click here to read the article at FT.com

Chinese carmakers target export markets

The Financial Times, October 31, 2011

China’s automobile industry is planning an overhaul as slowing sales at home spur a boost in vehicle exports, which are up 75 per cent so far this year, compared with last year.

China is hoping for a silver lining to the global financial crisis in the form of a chance to transform itself from a low-cost to a high-added-value economy.

Some car market analysts think the country finally could be on the brink of realising its ambition to become the car factory to the world.

As exports climb, some have begun to wonder if China could even pose a threat to global carmakers such as General Motors, Volkswagen, and Toyota in developed markets such as the US and Europe, or if it will remain stuck selling cheap cars to emerging markets.

Sergio Marchionne, chief executive of Fiat and Chrysler, recently admonished global carmakers to take China’s ambitions seriously.

At an auto industry conference in the US state of Michigan in August, Mr Marchionne said: “Even assuming China were to export only 10 per cent of what it produces” – which some analysts forecast will be 30m vehicles by 2015 and 40m by 2020 – “the risk we face in our home markets is enormous.”

The push by Chinese carmakers for increased sales “in markets outside China is gaining momentum”, says Namrita Chow of IHS Automotive in Shanghai.

Chery, a leading state-owned carmaker, has so far this year boosted exports by more than 80 per cent from last year.

It plans to build a $400m factory to assemble cars in Brazil as well as production facilities elsewhere in Latin America. Chinese carmakers JAC and Lifan both have ambitious plans for overseas expansion and truckmaker Beiqi Foton intends to build a plant in India.

But while excess capacity at home will drive Chinese carmakers to export, analysts say that will not necessarily guarantee success in markets beyond their current mainstays of Latin America, the Middle East and Russia.

“Until ‘Made in China’ can attract more affluent Chinese buyers, it’s unrealistic to expect that [Chinese carmakers] can win over more experienced and discerning consumers in the more mature markets,” says Bill Russo of Synergistics auto consultancy in Beijing, former head of Chrysler in China.

“Until that happens, they will be limited to selling to consumers shopping on price.”

Even the recent sharp rise in exports is deceptive, says Yale Zhang of Auto Foresight, adding that exports are merely recovering from an artificially low base hit amid the 2008 global financial crisis. Most analysts agree that the main force behind the current export boom is that Chinese carmakers are struggling to maintain rapid sales growth in the face of weakening domestic demand. They are even losing market share to the global OEM’s (original equipment manufacturers) during the slowdown.

But any worries of a serious pick-up in competition for global carmakers from Chinese rivals – at least in developed markets – are probably premature. “Even in the domestic market, Chinese cars cannot compete with European and American cars, not to mention in the US and European markets,” says Zhang Junyi of Roland Berger in Shanghai.

Even in emerging markets, the Chinese OEMs are facing intensifying competition in overseas markets from European, American and Japanese carmakers struggling to diversify away from their own slow-growing home markets.

“In the long term, success abroad will have to build on success at home,” says Klaus Paur of Synovate, a Shanghai auto consultancy.

Click here to read the article at FT.com

China needs time to build global car brand

Financial Times, March 9, 2010

By Patti Waldmeir in Beijing

Wang Fengying peeks into the room where the video cameras are waiting for her – and then runs down the hall, trailing public relations people, in search of a place to change her dress.

Ms Wang, 40, is the chief executive of the first Chinese car company to win approval to sell its cars throughout the European Union.

As the centre of gravity of the global car industry shifts to the East – with the emergence of China last year as the world’s largest auto market – this is a woman to be reckoned with in an industry dominated by men.

Her company, Great Wall Motor Company, is a leading seller of that quintessential boy’s toy, the sport utility ve

But Great Wall aims to be more than a peddler of off-road status symbols. It is jockeying for position as the next Hyundai – an Asian exporter of good cars at cheap prices.

In 2008, Great Wall sold nearly half its vehicles overseas (30 per cent last year due to the financial crisis). Ms Wang aims to sell 600,000 vehicles overseas by 2015, out of total forecast production of 1.8m; and she has already expanded beyond SUVs to small cars.

The Western auto industry, its confidence shaken by the global economic crisis, is watching companies such as Great Wall very closely.

Chinese carmakers are still a generation behind the West, but catching up quickly. Analysts say that alternative fuel technology could allow Chinese carmakers to leapfrog the internal combustion generation altogether.

Which Chinese company will be the first to break into the top ranks of global carmakers?

Geely, the independent car company that will shortly buy Volvo from Ford?BYD, the Warren Buffett-backed carmaker that plans to export electric cars to the US this year? SAIC, the state-owned powerhouse? Or could it be Great Wall, which is quietly laying the groundwork for a push into Europe?

Ms Wang advocates the notion that before you sell cars, you have to prove they are worth buying. So she has focused on the lengthy process of getting the EU’s prestigious Whole Vehicle Type approval for four Great Wall models, which permits sales throughout the internal market.

However, she does not think that even such a badge of quality will overcome consumer suspicion of brand China.

“Many consumers around the world have doubts about products made in China,” she says, acknowledging that it scarcely helps to come from a country famous for selling poisoned baby milk.

Such candour endears her to business partners and foreign rivals.

Suppliers say she pays her bills on time (a simple virtue not shared by some competitors), while industry insiders value her lack of bluster.

Great Wall “aims before they fire the gun”, says Bill Russo, head of auto consultancy Synergistics and former head of Chrysler in China.

“Many Chinese auto companies dream beyond their capabilities and there is something to be said for that ... But Great Wall is different: if they are talking about it, they have already done it.”

Ms Wang, who is a delegate at this week’s National People’s Congress in Beijing, says the government must help overcome China’s brand handicap. It must set minimum standards for the “made in China” label. No longer a badge of infamy, made in China must become synonymous with quality.

“People know that Switzerland is famous for its watch industry and Japan is known for manufacturing. China ought to start focusing on the brand building of Chinese automakers,” she says. However, Ms Wang has no illusions that it will be quick or easy to establish her brand in Europe. “Chinese auto brands are not established in those areas. For a product without branding, progress will be slow,” she says.

At a time when many Chinese business people display self-confidence that the country has emerged almost unscathed from the economic crisis, Ms Wang is not predicting that China will take over the automotive world anytime soon.

“Chinese auto companies will need 20 years to become famous in international markets,” says Ms Wang.

They may not take as long as Toyota did – and they will study the Japanese carmaker’s mistakes in the current recall crisis – but building a global automotive powerhouse will take “longer than the outside world thinks”, she says.

Video interview: www.ft.com/greatwall

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