China’s Dash for Growth Slowed by Costs, Capacity Issues

Ward's Auto World, November 8, 2011

SHANGHAI – After experiencing rapid development in the past decade, China’s auto industry now faces tough challenges: overcapacity, rising material costs and slumping sales.  

That’s the consensus among experts attending the ninth annual automotive industry forum held here by the China Europe International Business School.  Annual production and sales growth in China likely will drop 5%-10% this year and next, with some estimates as low as 5%, from previous highs of 25%, says Dong Yang, vice president- China Association of Automobile Manufacturers.

CAAM says industry sales reached RMB4.35 trillion ($684.4 billion) in 2010. But 2011 is proving to be difficult, with rising inflation and an appreciating yuan.

This is particularly the case for FAW Group, the third-largest auto maker in China, which has just revealed a third-quarter loss of RMB49 million ($7.7 million). FAW says its business was seriously affected by “tight monetary policy, inflation and the end of the government’s (vehicle-replacement) incentives program.”

Financing remains tight as Chinese banks are reluctant to lend, given the central bank has raised the 1-year deposit rate and lending rate by 25 points to 3.5% and 6.6%, respectively.

China’s consumer price index, which has been running high this year, rose 6.1% year-on-year in September. The Chinese government predicted the CPI would climb 5.5% this year from 2010.

What short-term succour exists for the Chinese auto makers comes with a green tinge: Local governments in six major cities – Changchun, Beijing, Shanghai, Hangzhou, Hefei and Shenzhen – now are offering subsidies up to RMB60,000 ($9,440) for consumers buying electric vehicles, sending a clear message that clean-energy cars should be the industry’s next big thing.

GM recently launched ’12 Buick LaCrosse with eAssist.
First in line, Shenzhen-based BYD launched China’s first all-electric passenger car, the e6 in October. The car is priced at RMB369,800 ($58,179) before local subsidies.

Foreign auto makers stress at the conference here plans to push into China’s EV market. Nissan Chief Operating Officer Toshiyuki Shiga notes his company’s electric Leaf, which is priced at about RMB208,356 ($32,780) in the U.S., recently received sales approval from the Chinese government.

EVs will not be the only alternative-propulsion vehicles in China in the next decade, says Zhang Jinhua, vice secretary general of the Society of Automotive of Engineers of China. Others, including hydrogen fuel-cell cars and hybrid vehicles, will generate significant sales by 2020.

“While electric cars are zero emission, hybrid cars are less-demanding on the infrastructure, and fuel-cell (vehicles) can be used for a long-distance drive,” he says. “They all have their own advantages.”

General Motors with joint-venture partner SAIC recently introduced a Buick LaCrosse with eAssist, which the auto maker says could lower average fuel consumption 20%.

Priced at RMB265,000 ($41,692), it also is the first model targeting the Chinese middle class that sells for less than RMB300,000 ($47,198). GM-SAIC plans to add capacity to build 410,000 vehicles a year in order to produce 1.9 million units annually by 2015.

FAW is adding capacity to produce 960,000 units annually by 2015, while Volvo-owner Geely plans to add capacity to manufacture 1 million vehicles, in order to reach 1.68 million units annually by 2015. Great Wall and Chang’an will add 1.3 million and 900,000 units of capacity, respectively, in the same timeframe.

The risk here of course, especially given falling demand and rising material costs, is overcapacity, especially for those auto makers that fail to improve marketing and research-and- development skills.

These are the key challenges facing Chinese auto makers in the coming years, says Bill Russo, head of the Booz-Allen global-strategy firm’s automotive practice in Beijing.

Russo, a former Chrysler China executive, tells WardsAuto the market’s future will be decided by which auto makers get sales-and-service networks in place in the emerging second-tier cities.

This is where the bulk of new sales are expected to emerge as Beijing, Shanghai and Guangzhou restrict car sales to cut down on traffic congestion.

Russo predicts annual sales will hit 20 million vehicles by 2015, but he sees international brands’ local joint ventures retaining their dominance. The domestics’ biggest challenge will be overcapacity, he says. “Lower utilization at local marques will drive their manufacturing costs upwards.”

Exports offer one way out for brands saddled with excess capacity, and certain OEMs, such as Great Wall, have been aggressively expanding overseas sales. But there are issues to overcome. Marketing abilities remain a particular challenge for local brands both in export and domestic sales. Developing reliable parts and service networks are other weaknesses.

These issues partly could be addressed by foreign acquisitions, experts here say. Hangzhou-based Geely, for example, plans to sell 200,000 Volvos in China by 2015. And Tangshan-based Pang Da Automobile Trading and Jinhua-based auto maker Youngman are jointly paying €100 million ($138 million) to buy Sweden’s Saab. The deal is waiting for regulatory approval.

But Dong, of CAAM, warns going abroad is risky and requires a lot of research and negotiations. “You have to show the foreign government what kind of benefits you are going to bring them and comply with local regulations,” he says.

Auto makers in China believe increasing competitiveness will see profitability squeezed further, compelling them to expand their portfolios while also refreshing existing models.

Hua Ming, who runs a Volkswagen dealership in Beijing’s business district, has seen a 20% drop in sales so far this year, which he blames on the city’s new limits on car ownership. To compensate, he has opened a dealership in Shijiazhuang, the capital of neighbouring Hebei province.

Hua says Chinese auto makers have a chance to capture market share if they’re faster in expanding sales-and-service operations to lower-tier cities, where average per-capita income stands at half the Beijing urban average of RMB120,768 ($19,000).

“But all brands have to understand rural preferences for more durability and less fancy electronics and features,” he says.

– with Mark Godfrey in Beijing


Buffett-Backed BYD E6 No Match for BMW Where Price Matters

Bloomberg Business Week, November 7, 2011

By Bloomberg News
Nov. 7 (Bloomberg) -- For the price of BYD Co.’s electric vehicle, Chinese consumers could buy a BMW and still have enough spare cash for more than one year’s worth of gas.
BYD’s E6, used in Shenzhen as taxis, has been on sale since Oct. 26 to individuals for 249,800 yuan ($39,300) -- after government subsidies. That’s 36 percent more expensive than Bayerische Motoren Werke AG’s 120i and 16 percent higher than Audi’s A3 Sportback.
The price, coupled with a lack of charging stations, illustrates why the Chinese carmaker partly owned by Warren Buffett’s Berkshire Hathaway Inc. may turn off consumers. BYD is counting on electric cars for future growth as it faces slowing demand and mounting competition with gasoline-run automobiles in a country where the average household makes less than 60,000 yuan in disposable income a year.
“It will take 5-to-10 years and further development of the technology and infrastructure before retail consumers will consider” purchasing electric vehicles, said Bill Russo, a senior adviser at Booz & Co. in Beijing. “Saving the planet is not their priority.”
China, the world’s largest polluter, is promoting alternative-energy vehicles to reduce emissions and fuel imports. The government has a five-year plan that calls for 1 million electric-powered automobiles to be on its roads by 2015, according the Ministry of Science and Technology.
The central government is offering anyone who buys an energy-efficient car in Shanghai, Shenzhen and four other Chinese cities, a 60,000 yuan subsidy.
Electric Cars
BYD says customers will get their money’s worth. The five- seater E6 can run for 300 kilometers (186 miles) per charge, comes equipped with keyless ignition, an onboard navigation system and rear-view cameras, according to the company. The car is available at nine dealerships in Shenzhen, where BYD has its headquarters, and its availability will be expanded to other cities, according to the company.
“We are confident that E6’s quality will appeal to consumers,” Senior Vice President Lian Yubo said in an interview in Shenzhen on Oct. 26, declining to give a sales target. “There is limited production capacity and supply of the car so we think the price is appropriate.”
The E6 will cost $672 a year in power bills, compared with $1,571 in fuel costs for an equivalent family sedan that runs on gasoline, according to BYD projections based on annual mileage of 15,000 miles. BYD’s self-developed iron-phosphate battery takes 40 minutes to fully charge at public stations and as long as six hours when plugged in at home.
First Mover
Development of electric cars is a “key strategy for BYD,” the company said in an e-mail. The first major domestic automaker to offer electric vehicles to individual buyers in China, BYD has failed to translate head starts into market share in the past.
In 2008, it introduced the plug-in hybrid car F3DM in China from 149,800 yuan, compared with 59,800 yuan for the gasoline version. The automaker sold 906 of the dual-powered cars as of September, according to the China Association of Automobile Manufacturers.
BYD, formed 16 years ago as a battery maker, began developing electric cars in 2003, when the company expanded into automobile manufacturing. Its investments in the technology include a 1.5 billion yuan production line in Huizhou, Guangdong province, to make rechargeable batteries for cars, according to spokeswoman Veronica Jiang. She declined to give an investment amount for the E6.
MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway, in July 2009 bought 9.9 percent of BYD for HK$1.8 billion, or HK$8 apiece. The stock climbed to as high as HK$85.50 in October that year and has since declined 78 percent in Hong Kong, last closing at HK$18.96.
Profit Plunge
Earnings are falling too. The company said Oct. 28 it expects profit to decline by as much as 65 percent this year after dropping 89 percent during the first half. China’s end to tax breaks for small cars led to 13 straight months of lower sales at BYD before a rebound in September, according to the nation’s auto manufacturers’ association.
The Chinese automaker faces a difficult task in convincing consumers to choose the E6 over entry-level luxury cars from companies such as BMW and Volkswagen AG’s Audi in the world’s largest car market, said George Yin, an analyst with BOCOM International Holdings Co. in Beijing.
“There are way too many choices for Chinese consumers to shop for both foreign and local brands,” he said. “It’s a bad strategy to start as a taxi before expanding to retail sales if BYD really wants to make the E6 a volume product.”
Lexus, Audi
Audi’s A3, equipped with a guiding system that helps drivers parallel park, starts from 216,000 yuan, according to Cheshi.com, a pricing guide tracking more than 3,000 dealers in the country. The BMW 120i hatchback sells from 184,000 yuan, according to the website.
Still, the E6 is cheaper than Toyota Motor Corp.’s Lexus CT 200h hybrid hatchback, which was introduced in China on the day BYD unveiled the E6 and starts at 279,000 yuan. The car features a voice-activated GPS navigation system and radar cruise control.
BYD is counting on the government to help boost the popularity of the E6.
The city government will strive to facilitate the usage of electric vehicles and promote the E6, Li Ganming, a deputy director of the National Development and Reform Commission’s Shenzhen branch, said at last month’s BYD event, without elaborating.
The fleet of E6 taxis, operated by Pengcheng Electric Taxi Co., has clocked 600,000 kilometers since they were introduced in Shenzhen in May 2010, the company said on its website.
Domestic rivals say they’re in no rush to sell their own electric vehicles. Anhui Jianghuai Automobile Group Co., China’s biggest exporter of light trucks, will wait for the government to build more charging stations before starting sales of EVs to the public, Yang Jun, a deputy general manager with the automaker, said last month. The automaker has sold 550 electric vehicles to its employees.
Shenzhen, which spans across 1,953 square kilometers, has 60 charging stations. By comparison, neighboring Hong Kong, whose area is 43 percent smaller, plans to triple its number of charging stations to 1,000 in a year, Edward Yau, the city’s environment secretary, said in September.
“While being first carries the benefits for building an image as a technology leader, I believe we have already seen how quickly that can turn into a burden,” said Booz’s Russo. “The price needs to come down substantially in order to attract retail consumers.”