China carmakers in great leap forward to luxury

Financial Times, April 23, 2010

Click here to view the article at FT.com

By Patti Waldmeir in Beijing

Published: April 23 2010 19:02 | Last updated: April 23 2010 19:

Near the entrance of the Beijing Auto Show, which opened on Friday, stands a replica of the 1958 “Red Flag” limousine, built by China’s First Auto Works because Mao Zedong insisted that China needed its own luxury brand. Now, 52 years later, the Communist leader’s dream is finally being fulfilled – in ways he could never have imagined.

Everywhere in the show, which runs through next week, is evidence of the ways in which Chinese carmakers are trying to climb the ladder of luxury up to the premium levels previously dominated by companies like Audi and Mercedes. The most striking example of this, of course, was the recent purchase of Volvo of Sweden by Geely, the private Chinese carmaker, for $1.8bn. Beijing Automotive (BAIC) also recently bought Saab technology from GM.

But the Chinese original equipment manufacturers are not just buying in their premium models from overseas, they are also creating luxury at home. Virtually every Chinese company at the show is showing a wide range of own-branded products, from the tiniest urban runabout to sport utility vehicles that are catching on in China at exactly the moment they have fallen out of favour in the west.

China is even remaking the iconic London black cab, which is now made in a joint venture with Geely. The Chinese group on Friday displayed a concept taxi, complete with front rumble seat that folds away to allow back seat passengers to stretch their legs.

“The Chinese get accused of just copying other people’s designs, but this demonstrates their creativity and flair,” says John Russell, chief executive of Manganese Bronze, which makes London taxis with Geely.

Ironically, at exactly the same moment the Chinese carmakers are trying to go upmarket, the foreign carmakers are reaching down the chain to the smaller, cheaper cars that appeal to China’s mass of first-time car buyers.

And from the bottom of the range to the top, foreign car companies are throwing all they have at China: the best technology, the best designs, whatever it takes to woo customers in what is now the world’s largest car market.

They call it the “C” factor: design features that appeal to Chinese consumers. This means everything from slanting headlamps and extra chrome, to extra leg-room for chauffeur-driven vehicles.

“VW has taken an entire pavilion [at the show]. I have never heard of anyone doing that before,” says Bill Russo of Synergistics, a Beijing auto consultancy, and a former head of Chrysler in China. Numerous global debuts took place at the show – rather than at Detroit or Geneva. “The only true global car shows these days are in China,” says Kevin Wale, head of GM in China.

This is still a car show with decidedly Chinese characteristics: it is hard to imagine such low necklines or high skirt slits at any other show. But it also a show infused with a kind of optimism and passion that went out of fashion in the west decades ago, says Simon Loasby, head of design for Volkswagen in China.

Li Shufu, head of Geely, told the Financial Times at the show that Chinese carmakers are at least a decade behind the west in the quality of their technology. But no one is doubting that they are catching up fast.

Is Growth Of China's Auto Market Sustainable?

Financial Times, April 22, 2010

Apr 22: Is growth of China's auto market sustainable?
Apr 22: Is growth of China's auto market sustainable?
Bill Russo says growth isn't fueled by tax cuts

Russo Says China Car Market Has `Great Upside' Potential: Video

Bloomberg TV's Asia Morning Call, April 23, 2010

Bill Russo, a Beijing-based senior adviser at Booz & Co., talks with Bloomberg's Rishaad Salamat and Susan Li about the Beijing Auto Show and outlook for China's car market. (Source: Bloomberg)

Clean Energy Vehicles Face Barriers in China Auto Market: Video

Bloomberg Network, April 22, 2010

Bloomberg's Stephen Engle reports on the Beijing Auto Show. As many as 89 vehicle models will make their worldwide debuts today at the show as the industry trade fair kicks off in the Chinese capital, according to an estimate by HIS Global Insight. Automakers including General Motors Co. and Nissan Motor Co. plan to display a record 95 alternative energy-powered models at the show. While Chinas government has touted less-polluting cars as a way to improve air quality and cut reliance on imported oil, it has delayed a plan to introduce subsidies that may put the models within reach for buyers. (Source: Bloomberg)

Bill Russo appears twice in this video

Video Story: China embraces car culture

FT.com, April 22, 2010

The American-style cult of the automobile is catching on in China. And all the world’s automakers want to get in on the bonanza; none more so than China's homegrown automakers. Patti Waldmeir, FT Shanghai correspondent, reports. Additional reporting by Shirley Chen. Produced and edited by Edward Cheng (3m 46sec)

Includes quote from Bill Russo


Ford-Geely deal spells out tech sharing

The Detroit News, April 22, 2010

Volvo pact to show if China's carmakers will play by the rules

From The Detroit News:


Although China joined the World Trade Organization in 2001, foreigners working there say the protection of intellectual property remains a concern.

"There's a well-articulated set of intellectual property guidelines and laws, but there hasn't been consistent enforcement of those laws," said Bill Russo, a Beijing-based consultant with Booz & Co.

Auto analysts say the Volvo acquisition will help Geely gain expertise in vehicle development -- an area where China's fledgling carmakers are all weak. Geely has only been making cars since 1998, while expertise in vehicle development is built over five-year product cycles.

"It's like you can go to medical school and be a straight-A student, but until you've been a doctor for 10 years, you're not going to be that good at it," Russo said.

Chinese aim to be kings of the road

Financial Times, April 21, 2010

Click here to view the article at FT.com

For every 1,000 people in China, 30 own a car. In the US, the figure is 700 or 800. Selling cars to the bicycling masses of China is a prospect to make any carmaker salivate.

On Friday, car companies from distressed Detroit to stagnant Stuttgart will bring their best new models to the Beijing auto show, eager to grab a share of the world’s largest and fastest growing car market.

But for the first time, some of the most closely watched companies exhibiting there will be Chinese.

Of the 89 models making their debut at the show, 75 will be domestic Chinese brands.

It has been a watershed year for Chinese carmakers in which Geely, the private carmaker, bought Ford’s Volvo for $1.8bn, and General Motors failed to sellHummer to a little-known Chinese buyer.

Now car market analysts are watching for the moment when car brand China comes of age.

That time has not yet come. Most Chinese carmakers are years behind their western counterparts in terms of quality, technology and service.

Their models are still mostly based on western or Japanese ones.

And while they are pleasingly cheap, the doors clang rather than clunk when you close them.

Last year, China’s car market grew 45 per cent. Chinese companies’ share of the market leapt from 21 per cent in 2004 to 32 per cent in 2009, according to Ivo Naumann of AlixPartners, the automotive advisers.

Mr Naumann says carmakers that previously had a limited range can now span the full spectrum, with the number of domestic models rising from 53 in 2006 to 159 last year.

By 2015, he expects Chinese carmakers to add another 5 percentage points to their share of a rapidly growing market.

Total vehicle sales rose 72 per cent in the first quarter of this year from the year earlier period.

Most analysts predict growth of 10-25 per cent this year, with double-digit growth for the foreseeable future.

Beijing hopes that by forcing its highly fragmented industry to consolidate, it can capitalise on that growth to propel one of China’s 25 or so carmakers to global superpower status within a decade.

And after a year of having been proved wrong with every forecast, few industry analysts are willing to bet against them.

They point to the fact that when China last year became the world’s largest car market, it got there 10 years early.

It had been expected to happen in 2020. GM recently announced that it would this year break the 2m sales barrier in China, four years ahead of schedule.

The Beijing show will be saturated with new domestic models.

Geely will bring 39, of which 11 are being shown for the first time.

Chery will bring 29 and Great Wall will bring 10 new or refreshed models.

Klaus Paur of TNS Auto in Shanghai says: “We have an inflation of new models at these auto shows, but are they really ready to be mass produced?

“It is not so difficult to put a prototype in an auto show but it is a different matter to produce 50,000-100,000 cars with a level of quality that does not change with every car.”

Analysts and industry insiders used to say that it would take Chinese carmakers a generation to reach globally competitive status. Now they tend to say 10 years, or maybe five.

Bill Russo of Synergistics, the consultancy, says: “It took the Japanese decades, it took the Koreans a decade, it probably will take the Chinese less.

“One or two product cycles – in five-10 years – we will see Chinese branded cars in the mature markets.”

But he adds that selling value-priced cars to a generation of consumers who have never bought a car before “is a far step away from selling cars in a market that has been buying multinational branded vehicles for decades”.

China will continue looking for technology or even whole brands that it can pick up overseas – but not indiscriminately.

Beijing refused to allow Sichuan Tengzhong, a heavy equipment manufacturer, to buy Hummer recently. Geely’s purchase of Volvo has yet to prove its worth.

Mr Naumann says: “Geely has bought a company that is several times its size, that has been losing money for years and that has a limited presence in China. Geely will have its hands full figuring that out.”

In the meantime, Chinese original equipment manufacturers are snapping up foreign-trained talent, especially Chinese nationals who have worked for the overseas majors.

In Beijing, the opening of a motor show with decidedly Chinese characteristics – full of leggy models wearing bustieres of a sort that have fallen out of favour at more politically correct shows – underlines once again the shift in the centre of gravity of the global car industry to the east.

Chinese carmakers want to make sure that they – not GM and VW and other foreign original equipment manufacturers with a strong China presence – will benefit most from the new balance of power.

China Drivers Shun Hybrids, Electric Cars on Lack of Subsidy

Business Week, April 22, 2010

Click here to view article at BusinessWeek.com

By Bloomberg News

April 22 (Bloomberg) -- Huang Jihai considered buying his 28-year-old daughter the world's first plug-in hybrid as a wedding gift in Beijing before choosing to save 16,900 yuan ($2,500) with a gasoline-powered car instead.

“Some of the hybrids and electric cars look pretty cool, but they are too expensive,” said Huang, 51, who opted for a General Motors Co. Cruze. “I'd rather spend less money on a reliable gasoline car.”

Automakers including GM and Nissan Motor Co. plan to display a record 95 alternative energy-powered models at this year's Beijing Auto Show, which opens to the press tomorrow. While China's government has touted less-polluting cars as a way to improve air quality and cut reliance on imported oil, it has delayed a plan to introduce subsidies that may put the models within reach for buyers like Huang.

A lack of affordability may limit sales of such vehicles by GM, Nissan and Toyota Motor Corp., which have all announced plans to introduce new hybrids and electric cars in China by 2011. The sluggish demand is also curbing investment in less- polluting car technology, prompting domestic automakers to seek foreign alliance partners to help fund development.

“It's unrealistic to expect consumers to jump into the technology.” said Bill Russo, a Beijing-based senior adviser at Booz & Co. “You don't have to be too advanced in math to realize that the gas-powered cars are much cheaper and probably deliver more performance and better range.”

Buffett's BYD

BYD Co., a Shenzhen-based carmaker 10 percent owned by Warren Buffett's Berkshire Hathaway Inc., delivered 48 of its F3DM plug-in hybrids in 2009 at 149,800 yuan apiece. By comparison, the company sold 290,963 of the gasoline-powered F3, which starts at 59,800 yuan and was China's best-selling model.

Toyota sold 271 of its 259,800-yuan Prius cars, the world's top-selling hybrid, in China last year, according to the China Association of Automobile Manufacturers. Overall passenger-car sales in the nation totaled 10.3 million.

Local sales of Honda Motor Co.'s Civic hybrid fell 4.9 percent to 193 units last year, making it the least popular Honda-brand model in China, according to Yoshiyuki Kuroda, a company spokesman. The model is imported from Japan, adding a 25 percent tariff to the price tag.

China's Air Pollution

China, the world's second-largest energy user, bought a record 203.8 million metric tons of crude oil last year as 37,383 new vehicles took to the roads every 24 hours. About 44 percent of Chinese cities have an air quality level of 3 or below, according to the State Information Center. China has five levels of air quality, with 1 indicating the cleanest air, 3 meaning “slight” pollution” and 5 representing “heavy” pollution.

“People in these cities can't avoid a life facing serious pollution, and that air quality is not good for their health,” the State Information Center said in the 2010 China Automobile Market Outlook yearbook.

To fight the pollution and reduce oil dependence, the nation aims to have more than 60,000 alternative-energy vehicles on the roads of 10 cities by 2012, Miao Wei, a vice minister at the Ministry of Industry and Information Technology, said last year. Sales of such cars may account for 15 percent of the market by 2020, according to Miao.

Subsidy Delay

The government was previously scheduled to announce subsidies for alternative energy-powered vehicles in January. It is still working on the details after seeking advice from automakers, Xu Ping, chairman of Dongfeng Motor Group Co., said on April 14. The complexity of determining the standards and amount of subsidies caused the delay and the government is now expected to make an announcement in July, China Economic Times reported on April 8.

“I can't wait until the government announces subsidies,” said Huang, who has worked as a driver for the past 30 years.

Separate subsidies for smaller, conventional cars introduced in early 2009 helped Chinese vehicle sales surge 46 percent last year to 13.6 million, surpassing the U.S. to become the world's largest auto market. In Japan, government rebates for buyers of fuel-efficient cars helped make Toyota's Prius the nation's best-selling vehicle model last year.

China's delay in subsidizing hybrids and electric cars has prompted Geely Automobile Holdings Ltd. to put on hold any plans to sell the vehicles, the company's executive director Lawrence Ang said in March. Demand for electric cars is “fairly small,” he said.

Toyota, GM

Other automakers aren't waiting.

Toyota, based in Toyota City, Japan, said April 12 it started offering a hybrid version of its Camry sedan in China and aims to sell 500 units a month. The model, Toyota's fifth hybrid in the country, is priced from 319,800 yuan, compared with 189,800 yuan for the conventional Camry.

GM said April 12 it plans to sell its Volt plug-in car in China next year. The company, based in Detroit, will display its Cadillac Converj electric concept car and the Cadillac XTS concept car with a plug-in hybrid system at the Beijing auto show.

The show will be China's biggest of its kind, with carmakers from across the globe exhibiting a total of 990 models, 89 of them being presented for the first time.

Nissan will display the Leaf electric car, which the Yokohama, Japan-based carmaker plans to start selling in China from 2011 and may eventually build at its plant in Guangzhou. Munich-based Bayerische Motoren Werke AG will debut its new BMW 7 series hybrid sedan and X6 hybrid sport-utility vehicle.

Domestic Carmakers

Most of China's biggest domestic automakers are also planning to mass-market hybrids and electric cars. About 100 electric models have been approved by the country's government for production.

SAIC Motor Corp., the nation's largest carmaker, will debut its E1 electric concept car at the Beijing show and present a hybrid version of the Roewe 750, which will be in mass production this year.

“All the automakers have rushed in, claiming they have their own vehicles powered by alternative energy,” Liu Lixi, an analyst with Northeast Securities Co. in Shanghai, said of the domestic companies. “But the truth is that their technical strength varies a lot.”

China's government and its automakers have invested less than 10 billion yuan in developing alternative energy-powered vehicles since 2006, including 1.1 billion yuan from the government, Miao of the Ministry of Industry and Information Technology said on Jan. 9. By comparison, Nissan alone expects to spend more than 500 billion yen developing electric cars.

Daimler, Volkswagen Partnerships

“It is impossible to realize mass production of alternative-energy vehicles with such little input,” Miao said of the Chinese investment.

Aiming to accelerate development and promotion of the technology, Chinese automakers and the government are teaming up with foreign partners.

BYD and Daimler AG said in March they will jointly develop an electric vehicle to be sold in China, with total investment that may exceed 100 million euros. BYD also signed an electric- vehicle accord with Volkswagen AG in May to explore cooperation on hybrid cars and lithium-battery powered electric vehicles.

Chery Automobile Co., China's largest maker of own-brand cars, is in talks to cooperate with Better Place LLC, a U.S. start-up that's developing charging stations, Julie Mullins, a spokeswoman for Better Place, said on April 6.

Nissan and Renault SA agreed last year to help the Chinese government develop a battery-charging network to promote electric vehicles.

Subsidy Effect

The government subsidies expected to be announced in July may help the carmakers get a return on their investments, according to Chengwu Duan, a Shanghai-based analyst at consulting company IHS Global Insight.

Incentives “will definitely help the sales of electric and hybrid vehicles in China,” Duan said.

Subsidies may help boost total sales of the vehicles to 40,000 in 2010 and 300,000 in 2011, from about 5,000 units last year, he said. Still, low-cost models may benefit more than the more expensive ones currently being sold, Duan said.

The potential for electric cars may still depend on the extent and nature of subsidies, said Takashi Nishibayashi, a Nissan general manager in charge of China operations.

“Without government incentives, our electric-car business won't take off,” Nishibayashi said. “Without knowing the details of the incentives, it's hard to say how much of an impact they will have.”

For More News and Information: Auto statistics: {ATSL
} Auto-show coverage worldwide: {TNI AUT SHOW } Top transport stories: {TRNT } Most-read stories on alternative energy: {MNI ALTNRG 1W }

--Tian Ying, Makiko Kitamura. Editors: Terje Langeland, Kae Inoue