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.

Click here to read the article at moneymorning.com


    Foreign talent sought for Chinese Detroit

    The Financial Times, July 4, 2011

    If there is one thing China does not lack, it is engineers: every year, hundreds of thousands of them graduate from Chinese universities.

    But in May, Beijing Automotive Group (BAIC), the state-owned carmaker, held its first German recruitment fairs in Stuttgart, Munich and Aachen – to hire engineers. In the same month, Dongfeng Motor, another large Chinese carmaker, went to Munich looking for talent, following in the steps of state-owned car manufacturers such as SAIC Motor Corp and ambitious private carmakers such as Geely.

    “Increasing numbers of Chinese carmakers are recruiting overseas, in Detroit, Stuttgart and Nagoya,” says Ivo Naumann, head of consultants AlixPartners in Shanghai"

    Some seem intent on building a second Detroit in China, while others are building research and design operations overseas – including in Detroit itself. Earlier this year, state-owned Chang’an established the first research and development centre by a Chinese carmaker in the US car industry capital. Chang’an also has R&D centres in Italy, Japan and UK.

    This appetite for overseas talent springs from a deep frustration at the failure of domestic carmakers to compete effectively with the foreign carmakers who dominate the world’s largest car market, industry analysts say. “They need to gain market share,” says Namrita Chow at IHS Automotive in Shanghai.

    Beijing’s plan to build a strong indigenous car industry, starting in the early 1980s, has not worked out as planned. Foreign carmakers failed to transfer as much technology and knowhow to the indigenous partners they were forced to take in 50:50 joint ventures, leaving domestic carmakers with under 30 per cent of the local market.

    Last year, according to AlixPartners’ 2011 China Automotive Outlook report, Chinese carmakers such as Geely, state-owned Chery and BYD, which is backed by Warren Buffett, lost market share. Alix forecasts that by 2016 local carmakers will still have only 34 per cent of the market.

    Recently, Beijing has stepped up efforts to attack that foreign dominance through a range of policies including consolidation of the highly fragmented domestic car industry; pressuring multinational carmakers to develop true indigenous brands with their local joint venture partners; and allowing strategic purchases of foreign car assets, like the recent acquisition of Volvo by Geely.

    It is all part of Beijing’s much-touted plan to transform China into a country that designs and creates global brands – rather than merely assembling global products.

    But for that the local car industry needs talent: engineers and especially managers trained overseas and experienced in the global car industry. Zhang Junyi, automotive consultant at Roland Berger in Shanghai, says China especially lacks engineers with the experience to manage other engineers.

    “Sure there are many engineers in China,” says Bill Russo, of Synergistics auto consultancy in Beijing, former head of Chrysler in China.

    “But the talent pool is fairly shallow. 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,” he says.

    “This allows them to fill the talent gap that they are unable to fill with domestic recruiting”.

    BAIC, which went to Germany targeting mostly Chinese job applicants, said it got more German applicants than expected but ended up hiring only one of them, along with just under 40 Chinese.

    But some Chinese carmakers say recruiting overseas also has its pitfalls. SAIC went to Detroit in the wake of the global financial crisis in 2008 to scoop up automotive engineers who had been made redundant. It found that the new recruits, many of them Chinese, had trouble settling in China, especially if they left families overseas.

    Industry insiders say SAIC believes it is worth the cost to have foreign talent work for the company in their home country: SAIC has a “centre of excellence” for engineering and design of MG and its own-brand Roewe cars in Birmingham at the site of the bankrupt MG Rover. Farther north in Nottingham, Chang’an last year opened an R&D centre that will employ 200.

    Car analysts say these firms plan to reverse the globalisation path followed by US and European carmakers, which started with R&D centres in their home countries and built factories overseas. Some Chinese firms are doing the opposite – greatly boosting costs in the short term.

    But companies such as SAIC think expensive overseas R&D will pay off in long-term profits and give Chinese firms a strong position in their homeland market, for the first time in history.

    Additional reporting by Daniel Schaefer in Frankfurt and Shirley Chen in Shanghai

    Click here to read the article at FT.com

    Porsche Cayenne surging in China

    The Korea Herald, July 3, 2011


    China surpassed the U.S. as the world’s largest car market on sales of sedans. Future growth lies with sport-utility vehicles.

    SUV deliveries rose 30 percent this year through May, compared with a 6 percent gain for total passenger-car sales, according to the China Association of Automobile Manufacturers.

    Sales of SUVs in the world’s second-largest economy will increase 33 percent in the two years through 2012, almost twice the pace in the U.S. and four times that of Western Europe, according to Lexington, Massachusetts-based IHS Automotive, an industry consultant. Porsche SE already sells more Cayennes in China than anywhere else in the world.

    “It’s the next great wave of consumer demand in China,” said Bill Russo, Beijing-based senior adviser at consulting company Booz & Co. “First-time buyers buy sedans, second-time buyers look for more variety.”


    Click here to read article at www.koreaherald.com

    Electric Cars Remain Tough Sell in China

    The New York Times, July 3, 2011

    SHENZHEN, CHINA — A pioneering electric-taxi project in this city, China’s southern economic powerhouse, seems to be a success by most accounts. Riders are enthusiastic, there have been no accidents and drivers are termed “gracious” — not a term usually applied to mainland drivers.

    The pilot project, which could be replicated in other cities, underpins China’s ambitious plans to put at least half a million electric vehicles and plug-in hybrids on the road by 2015.

    The country is the world’s biggest emitter of greenhouse gases — which scientists say are causing global warming — from the burning of fossil fuels and other human activities. With the largest and fastest-growing auto market in the world, China’s carbon footprint can only grow.

    To bolster China’s energy security, Beijing has pronounced electric vehicles a top priority. It has earmarked $1.5 billion annually for the industry for the next 10 years in the hope that it can transform the country into one of the leading producers of clean vehicles.

    But even with government support and the enthusiasm of electric-taxi customers, challenges remain if electric vehicles are to gain broader acceptance and widespread use.

    Charging stations are few and far between, repair shops are hard to find and the cars are costly. Even after generous government support, a Shenzhen electric taxi costs 80 percent more than the Volkswagen Santana that ordinarily cruises the streets of Shenzhen.

    “The electric car is still too expensive, and we ended up paying a lot more than for a Santana, even with government subsidies,” said Du Jun, general manager of Pengcheng E-taxi, the operator participating in the pilot project.

    Local automakers like SAIC Motor and Dongfeng Motor Group have pledged large investments in greener vehicles. Global automakers, including BMW and Nissan Motor, are also working with local governments to roll out such vehicles — in these two cases the Mini E and the Leaf, respectively.

    China’s investment in the electric-vehicle industry has no comparable counterpart in the United States, although the U.S. Congress is considering a bill that would allocate $2.9 billion for a program to help develop the infrastructure for widespread use of electric cars.

    Germany’s cabinet agreed on plans in May to encourage the country’s electric auto sector with billions of euros in subsidies, aiming to have one million of the cars on the road by 2020. The subsidies will double state support for research and development to €2 billion, or $2.9 billion, through 2013.

    For China, however, hitting its electric-vehicle targets will mean quickly winning market acceptance for an untested technology.

    “I think it’s going to be a very, very long time, because the Chinese consumer, at the end of the day, is very pragmatic and wants a reliable car with a gasoline engine,” said Michael Dunne, president of the industry consulting firm Dunne & Co. in Hong Kong. “They don’t want to be the ones experimenting.”

    But he said that government fleets and bus companies were more likely to buy electric vehicles.

    The Chinese government picked Shenzhen, along with 12 other cities, in 2009 to lead the migration to green vehicles. Shenzhen and Hangzhou are the only ones attempting to establish e-taxi fleets.

    The state-controlled Pengcheng E-Taxi, partly owned by BYD, a major domestic manufacturer of green vehicles that is backed by Warren E. Buffett, was incorporated in March 2010. Fifty e6 cabs made by BYD hit the roads in the city three months later.

    “People are really interested in the car,” said Zeng Xiweng, one of the top drivers in the company. “Over 90 percent of customers start asking questions, once they get in.”

    “And it’s not just me,” he added. “All my colleagues have similar experiences as well.”

    Daniel Li, a Shenzhen resident, recently took a ride in an electric taxi, one of the red cars with a wavy white band around the body that have been operating in the city for more than a year.

    “I like the car,” Mr. Li, a 32-year-old software engineer, said as he got out of the taxi. “It’s big and sturdy, pretty much like an S.U.V., but not as noisy. It also saves me the 3-yuan fuel surcharge,” Mr. Li said, using a popular term for renminbi and referring to a charge equivalent to 46 cents. “The problem is, there aren’t many out there.”

    BYD is using the pilot project to gather market feedback and make adjustments to the vehicles before rolling out the electric car nationwide.

    “We had anticipated a lot of problems early on, but that did not happen and the data we’ve collected are actually better than what we got in lab tests,” said Stella Li, senior vice president of BYD.

    But for Mr. Du of Pengcheng, the project’s hurdles are apparent. The company is still sitting on a big loss for which Mr. Du blames hefty upfront investments, an insufficient number of charging spots and the limited distance that an electric vehicle can travel per charge.

    And then there is the cost. The BYD e6 taxi costs 179,800 renminbi, counting subsidies, compared with less than 100,000 renminbi for the Santana by Volkswagen.

    In Hangzhou, a similar green pilot program stumbled when all 30 of the city’s electric taxis, which appeared on the streets in late January, were pulled from service in April after one cab’s engine compartment caught fire. The fleet resumed operations in June.

    “Taxis are definitely a smart way for people to gain the kind of practical hands-on, in-the-field experience, but it will be very closely watched,” said William Russo, an industry veteran who runs Synergistics, a consulting firm in Beijing.

    For their part, automakers have decided that China’s green-car effort is a good bet, but BYD has more at stake than others.

    The company, 10 percent of which is owned by Mr. Buffett’s Berkshire Hathaway, has been pushing more aggressively into clean technologies, from plug-in hybrids to energy storage facilities.

    The company recently raised $219 million in an I.P.O. in Shenzhen to help finance battery research.

    It has sold several hundred of the F3DM plug-in hybrids in China so far, more than any other domestic automaker, and its e6 is to be available in showrooms in Beijing and Shenzhen in the second half of the year.

    BYD plans to deliver 250 more e6 cabs to Pengcheng by August. It also plans to provide 200 of its electric buses in coming months to the Shenzhen public transportation system.

    Green cars have yet to take off with ordinary consumers, though, despite consumer subsidies that Beijing started offering last year in some cities.

    Around Shanghai, for example, a metropolitan area with a population of more than 20 million, there are only 10 registered electric cars, while the number in Hangzhou is only slightly higher at 25, according to China Business News.

    “Consumers are less concerned about government interests,” said Mr. Russo of Synergistics. “They are more concerned about the economics and the real practical side of what it means to own an electric vehicle.

    “They are not going to buy an E.V. to save the planet,” he continued. “They will buy it only when it saves them money.”

    Click here to read the article at www.nytimes.com