China’s indigenous brand policy backfires

The Financial Times, May 5, 2014

Even the most ardent car lovers would struggle to identify some of the vehicles built by major multinational auto companies in China.

A BMW Brilliance Zinoro, an SGMW Baojun and a Dongfeng Nissan Venucia are among the “indigenous” brands that the Chinese government requires foreign-invested joint ventures to develop in return for approvals to expand production capacity in the world’s largest auto market.

SGMW – GM’s joint venture with SAIC Motor and Liuzhou Wuling Motors – embraced the dictat by developing popular Baojun sedans and mini-cars. SGMW sold more than 100,000 Baojuns in 2013, up almost 20 per cent.

Priced at just Rmb50,000 ($8,000) to Rmb70,000, Baojun’s success has come primarily at the expense of China’s struggling domestic automakers, suggesting that the policy has had at least one unintended consequence.

“After several decades in China, the earliest models introduced by the foreign joint ventures are now priced as cheaply as Chinese brands,” Liu Bo, vice-president of Chang’an Auto, said at a seminar held in conjunction with April’s Beijing car show. “Their ability to focus global R&D resources on the China market is putting a lot of pressure on us.”

March sales of Chinese brand sedans fell 12 per cent year-on-year, as local automakers lost their market lead in the segment to their German rivals led by VW. “The indigenous brand policy is really dumb because all it does is cannibalise the local Chinese brands,” said Janet Lewis, head of Macquarie Securities industrials research team in Hong Kong.

The damage that Baojun and other joint ventures’ indigenous brands, such as Nissan and Dongfeng Motors’ Venucia, are inflicting on Chinese car companies could explain why the government does not appear to be putting much pressure on multinationals who have only done the bare minimum.

BMW’s joint venture with Brilliance Auto “rebadged” the German company’s X1 and electrified it for China’s anaemic new energy vehicle market – thus avoiding confusion with its better selling conventional cars – while Ford has yet to reveal its local contribution to the market.

“Zinoro is a brand of our joint venture here in China,” Karsten Engel, BMW’s country head, said at the Beijing car show. “It’s a brand only for China. It’s based a little bit on the BMW X1.”

BMW chose not to display the Zinoro at the show, instead highlighting its premium i3 electric car. “BMW’s i3 could generate interest in China,” said Bill Russo, founder of industry consultancy Synergistics. “Zinoro doesn’t have the brand panache. Even if it’s an X1 [customers] want to be able to call it what it is.”

The Chinese government’s indigenous brand requirement is particularly challenging for Ford as it runs counter to outgoing chief executive Alan Mulally’s “one Ford” strategy, under which the company jettisoned brands such as Jaguar Land Rover and Volvo Cars to focus on a narrower portfolio.

“We were trying to be world class at so many things,” said Mr Mulally, adding that the strategy was in keeping with the vision of the company’s eponymous founder. “Henry [Ford] wanted to be part of the fabric of economic development in every country in which he operated but he didn’t know that Ford would have a different Ford in every country.”

John Lawler, the head of Ford’s China operations, insisted that the US automaker is in compliance with Chinese government policy mandates, even though it still has not rolled out an indigenous brand.

“We’re satisfying all the requirements from the government but at this point there really isn’t anything for us to announce relative to an indigenous brand or anything along those lines,” said Mr Lawler.

Additional reporting by Wan Li

Click here to read this article at FT.com

Stuck in First Gear: Chinese Car Companies Struggle to Compete with Foreign Brands

CKGSB Knowledge, July 30, 2013

Foreign car makers are under attack in China while Chinese auto manufacturers have yet to achieve real success

Can foreign car makers in China continue to dominate the market while appeasing Chinese car companies?

CCTV, Chinaʼs powerful state-run television broadcaster, unleashed a torrent of faulty vehicle claims against foreign automakers in March. First, the network targeted Volkswagen, alleging transmission issues with some of its cars, which led to the recall of more than 380,000 vehicles at an estimated cost of $618 million. The broadcaster then attacked BMW and Daimler, who were accused of selling cars that produced harmful fumes.

The media’s indictment of foreign car makers dovetails with China’s policy to nurture indigenous players. From removing financial incentives for foreign car makers to requiring they launch Chinese car brands, Beijing has tried to curtail the seemingly endless popularity of non-local autos as domestic brands continue to cede ground to their foreign counterparts. Foreign auto manufacturers first set foot in the Chinese car market 30 years ago, fully aware that the state allowed their entry into the market on the condition that they enter into joint ventures (JVs) with domestic firms, who were expected to benefit from their technical expertise. Despite a lack of complete freedom, they’ve flourished ever since, but the latest round of government-sanctioned media criticisms may force foreign companies to change tack.

Slow Start for Chinese Cars

The Chinese car industry has grown rapidly since the nation opened its doors in 1972, shouldering past the US in 2009 to become the word’s largest. Domestic players have profited from this expansion, but their market share is receding compared to foreign car makers: the 30% portion held by Chinese car brands at the end of 2009 fell to 26% in 2012 according to financial research firm Sanford C. Bernstein.

This is not the turn of events China hoped for when it granted foreign auto manufacturers market access in 1984. Beijing knew its car makers were behind the curve on precision manufacturing, so it encouraged JVs with foreign firms to bolster domestic tech-expertise, hopefully leading to a globally recognized national champion.

“The joint venture policy towards the auto businesses in China has always been one of ‘youʼre a guest, youʼre invited and we will tell you the rules by which you must play,ʼ” says William Russo, (formerly a) Senior Advisor at consulting company Booz & Co.

In 1984, Zhao Ziyang, Chinaʼs then premier, said JVs would facilitate the consolidation of the auto market into three large and three small producers, with high levels of local content. Zhaoʼs vision has not come to pass. Different outlets give different estimates—The Wall Street Journal said there were 170 Chinese car makers as of April this year, while the International Business Times cited only 115 companies as of 2012, neither news outlet divulging the source of their information—the China Association of Automobile Manufacturers declined to confirm any specific figure. Either way, even the ballpark is well off from Zhaoʼs prescription.

Not only has consolidation not occurred, but local car makers also remain umbilically dependent on their foreign JVs for profits. Shanghai Automotive Industry Corporation (SAIC), Chinaʼs largest car manufacturer, owes 90% of its sales to its foreign JVs, according to a research paper from January this year called “Case Study: SAIC Motor Corporation” published by the US think tank Center for Strategic and International Studies (CSIS). And no Chinese car maker has managed to design and produce a single car that has won global acclaim.

In stark contrast, foreign car makers have thrived. “The Chinese car market is very orientated towards foreign brands. Three out of every four cars sold in China carry a foreign brand,” says Russo.

The China car market, now General Motorʼs (GM) largest, was the US companyʼs savior during the financial crisis, as sales in the nation helped it heave itself out of bankruptcy proceedings in 2009. Since the firm tied itself to SAIC nine years ago, it has amassed 14.7% of Chinaʼs market share, earning a profit of $1.5 billion in 2011 from its joint venture, according to GM China reports. Still confident of its position in China, GM aims to increase sales by 75% in two years to 5 million cars.

China is also Audiʼs most lucrative market. The German manufacturerʼs sales increased by 14.2% in the first quarter of 2013, to almost 103,000 vehicles and it is planning to open a new plant in Foshan, Guangdong province, which will have a manufacturing capacity of 150,000 cars annually when it opens for production at the end of this year according to state-run China Daily.

Still Second Choice

Chinese consumers are buying foreign brands over local ones, because domestic makers are finding it hard to shake off poor repute. “The challenge that Chinese car companies have is convincing their own consumers that Chinese companies in fact can make good cars,” says Russo.

A number of Chinese brand cars have failed foreign safety standards, sullying the reputation of Chinese car makers and making it difficult for indigenous brands to market themselves at home and abroad. Brilliance China Automotive, a firm tied to both Bayerische and Toyota, tried to sell its BS6 sedan in Europe in 2007, but earned only one out of five stars for safety from a German car association, which said the driver would have little chance of surviving a side collision.


(Source: Youtube, Youku video here.)

Chinese car companies find it tough to ratchet up the quality, in part because they lag on research and development spending. “Most Chinese companies are thinking five to six years out with their R&D spending and trying to compete with international companies that are already thinking 20 to 25 years out,” says Nat Ahrens, Deputy Director and Fellow of the Hills Program on Governance at CSIS.

This thrifty approach means Chinese car companies have less to spend on nurturing innovative engineering and design. Instead of creating a car from scratch, which would allow them to claim half the patent rights, Chinese JV partners take existing foreign vehicle blueprints, make a few changes and call it a new JV auto: GM and SAICʼs first JV car, Baojun 630, is built on the old Buick Excelle, while Dongfeng and Nissanʼs fi rst Venucia vehicle is fashioned after Tiida. By taking the path of least resistance, Chinese JV companies demonstrate to the consumer their reliance on foreign tech for quality, which does little to raise confidence in their own brands.

Chinese brands are gaining ground on locally made foreign brands as sales have grown steadily in 2012

Driven to Distraction
The relative success of Western brands against languid domestic ones has sparked indignation and embarrassment among Chinese commentators. In January, Communist Party mouthpiece The Peopleʼs Daily blamed foreign companies for the sluggish performance of domestic players, writing, “Most Chinese car companies involved with JVs have not received the technology they were promised.” In September last year, former machinery and industry minister He Guangyuan said JVs are “like opium” and likened Chinaʼs JV policy to a negative addiction. “So many years have passed and we donʼt even have one brand that can be competitive in the auto word,” He said.

But some feel that Chinaʼs expectations of tech transfer were too high. “I donʼt think any promises were broken, these contracts are laid out very clearly on what was going to be transferred and what wasnʼt… I donʼt think that there was any deception on the part of the foreign partners,” says Ahrens. “You canʼt force technology transfer.”

Market Remodel

As the strength of Western brands has grown, China has pushed back by trimming the incentives and freedoms of foreign automakers. In January last year, China said it would no longer promote investments from foreign car makers through preferential tax treatment and streamlined approval processes, increasing costs for foreign manufacturers.

The month after, Beijing excluded foreign car makers from a newly released list of approved vehicles for government use. While this measure will have little impact on the profits of foreign car makers such as Audi and Mercedes (brands that were included on previous lists), it signaled Beijingʼs determination to freeze out nonlocal competition. In April of the same year, Maxime Picat, the Director General of Peugeot-Citroenʼs Chinese joint venture, said Beijing was threatening to restrict the firmʼs manufacturing expansion plans unless it launched local brands.

The squeeze on foreign auto manufacturers is likely to put a strain on existing JV relationships, making the negotiation process for new deals increasingly delicate. The conflict inherent in a joint venture between two would-be competitors is clear. “A foreign companyʼs interest is not to nurture a local company so that it is as successful or more successful than itself. It will undoubtedly withhold some of its crucial technology,” says Teng Bingsheng, Associate Professor of Strategic Management at the Cheung Kong Graduate School of Business. At the same time, domestic firms are bartering with access to the largest auto market in the world at a time when foreign firms, whose own markets are drying up, can ill afford to be choosy. Under government pressure, the biggest challenge for an existing foreign JV partner will be how to relinquish enough intellectual property to placate Beijing, while at the same time, invest sufficient amounts in R&D to maintain its lead over local and other international players.

But Chinaʼs actions are not likely to wean consumers off foreign brands as the central issue is one of demand not supply. “Government policy cannot change the nature of demand. Chinese consumers will spend their money on the brands they prefer and there is very little that can be done to force Chinese consumers to buy Chinese brands,” says Russo.

This Chinese consumer preference is likely why state media reports went after foreign car makers to begin with, to damage their brand equity in hopes of restoring balance between foreign and domestic brand preference. But it will take more than a few quality-control reports to undo the brand resonance of foreign cars. Chinese brands will have to spend a significant amount of time garnering consumer confidence before they become as popular as well known international car makers.

The Chinese government’s distortion of the market may also have unintended consequences. The launch of new domestic brands by forcing JVs will add another level of competition to an already fragmented market and take business away from Chinese companies who are already struggling to build their market share. By ramping up competition, China in fact weakens the position of wholly domestic brands like Chery and BYD, thus stifling their own plans for a national champion.

“For example, if GM launches a domestic brand, customers that would otherwise be buying a Chery or BYD car will see a car coming from Shanghai General Motors [the GM joint venture with SAIC] and will buy that instead,” says Russo. “So they [the State] are going to eat their own young.”

Just a Fender Bender

Despite Beijingʼs cooling approach to foreign car makers, the countryʼs leaders are unlikely to stifle them completely. “At the end of the day, the government wants to see the domestic car industry succeed, but many of the Chinese companies depend on successful foreign joint ventures to contribute to their profitability and they wonʼt do anything to harm those companies, because that would ultimately harm the whole industry,” says Russo.

In spite of the complications, foreign car makers are finding their tie-ups beneficial in some ways. GM is using SAICʼs low-cost vehicle technology to vault into emerging Asian markets. SAICʼs technology for producing cars priced as low as $4,800 is central to GMʼs plans to plugmiddle-class needs in India and Indonesia. Also it has been reported that BMW and Chinese Brilliance brand Zhi Nuo—which roughly translates as “The Promise”—may start exporting their vehicles to Europe.

The governmentʼs latest measures to suckle a national auto champion are unlikely to seriously dent foreign makersʼ prospects in the short-term. Ultimately, consumer choice determines the winners and losers and the Chinese are increasingly buying foreign brand vehicles. Also, the structure of the market is so dependent on symbiotic JVs that separation in the near term would damage both parties.

The biggest long-term threat to foreign car makers in China is competition from increasingly sophisticated Chinese brands, whose manufacturing skills are developing steadily. Nissan and Honda, two Japanese brands known for their attention to detail, stated publicly that they now outsource heavily to local Chinese suppliers. Quintessentially precise Mercedes-Benz-manufacturer Daimler opened a trial engine production plant in China in May. A decade ago, this would have been unthinkable given the quality of production in China.

Experts draw comparisons between the fledgling Chinese car market and the early Japanese one. In the 1970s, consumers largely thought of Japanese cars as cheap machines. Now, Japanese manufacturers produce premium lines. Hyundai was originally well known for its affordably priced cars, and now makes very innovative, high-quality products. “Great Wall, Geely and Shanghai Auto are capable of making good, quality cars and give an indication that the Chinese car industry will be able to produce a globally competitive car company,” says Russo. “Itʼs a question of time.”

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GM Said to Seek Deals in China to Reach 5 Million Goal

Bloomberg Business Week, February 5, 2013

A General Motors Co. SAIC-GM-Wuling Automotive Co. Baojun 630 sedan 

is displayed  at the 2011 Auto Shanghai car show in Shanghai.

The Chinese auto industry is overdue for consolidation and General Motors Co. (GM), with local partner SAIC Motor Corp., is interested in acquiring ailing automakers, according to four people familiar with the companies’ thinking.

GM, already the top foreign carmaker in China, aims to increase sales by about 75 percent by 2015 to 5 million, and a deal with another automaker is one possible way its ventures can expand, said the people, who didn’t want to be identified because the plans are private.

China’s government wants to preserve jobs even as it encourages consolidation that echoes the auto industry’s contraction a century ago that made the Detroit-based carmaker the world’s largest for eight decades.

Expanding in China isn’t as simple as going out and buying another plant. Foreign companies face restrictions on the number of partners they can have or how much of a factory they can own. Last year, China said it wouldn’t give incentives for further foreign-owned auto plants. That started raising the value of underused auto plants, of which there are plenty: 10 of China’s 71 automakers didn’t sell a vehicle last year.

“It is much easier to get the government to sign off on their acquisition than to approve new capacity,” said Han Weiqi, an analyst with CSC International Holdings Ltd. in Shanghai. “It is in line with the government’s mandate of consolidating the industry and reducing the number of players.”

Most Overcapacity

Two calls to the media office of the National Development and Reform Commission, China’s top economic planning body, weren’t answered. 

China has the world’s most overcapacity. Factories in China are able to produce about 10 million more vehicles than they currently make, according to LMC Automotive. That’s more than the number of autos made in any country other than China or the U.S.

GM and SAIC have plans to open two assembly plants in China in 2014. Even then, their joint ventures may be capable of making only about 4 million cars, sport-utility vehicles and microvans a year. One way to stay on track with the 5 million target set when growth was more exuberant would be by taking over assembly plants that aren’t operating at full production.

GM has built up what it calls a fortress balance sheet with more than $23 billion in cash that gives it flexibility to make acquisitions.

“There are no current plans to increase GM’s manufacturing capacity through acquisition or consolidation,” Dayna Hart, a GM spokeswoman in China, said this week in an e-mail.

SAIC, based in Shanghai, declined to comment.

China passed the U.S. in 2009 to become the world’s largest vehicle market and still has room to grow: While 627 in 1,000 in the U.S. own a car and 517 in Germany, according to the World Bank, in China, it’s only 44.

Best Month

The recovery of residential property prices in China’s major cities has accelerated since early 2012, potentially increasing demand for new passenger vehicles, said Kevin Tynan, Bloomberg Industries automotive analyst. GM sales in China last month soared 26 percent from a year earlier to 310,765, its best month ever. Buick and Chevrolet sales each gained 22 percent.

GM has been the largest foreign automaker in China for the past nine years, with about 14.7 percent of the market in 2012. GM said it earned $1.5 billion in 2011 from its joint ventures in China, or almost a sixth of the company’s $9.19 billion (GM) profit that year. Analysts project the automaker, which emerged from a government-financed bankruptcy in 2009, will report its 12th straight quarterly profit (GM) on Feb. 14.

While GM has many opportunities among Chinese automakers, which of them is the most probable target is a complex equation that depends on proximity to markets, ease of transportation and incentives offered by local governments in return for the investments, said Han, the Shanghai-based analyst.

Detroit, Chicago

Some local governments may resist investment and management from overseas or even from another city in China.

“Consolidation does not come easily in China because the governments, central and local, own 50 percent or more of most of the ventures,” Michael Dunne, head of industry researcher Dunne & Co., said in an e-mail. “It might be a good idea for Chicago to take over management/ownership of Detroit but getting there is not easy, even unthinkable.”

China signaled in late 2011 that it would be less inclined to sign off on new plants when it said foreign automakers would only be eligible for incentives on new factories approved before Jan. 30, 2012.

A struggling domestic manufacturer’s ability to build cars in China “becomes an asset,” said Matthew Stover, an analyst with Guggenheim Securities LLC based in Boston. “You’ve got a license, you may not be making many cars with it and your facilities may need a lot of help. But you have a license, so you then become an acquisition.”

Volkswagen’s Push

GM needs to remain aggressive in China. It faces increased competition from Volkswagen AG as the German company aims to become the top-selling automaker in the world by 2018. Among non-U.S. foreign automakers, Wolfsburg, Germany-based VW has fared best in China, almost dethroning GM as the best-selling foreign car company in the country last year.

VW, which, unlike GM, includes Hong Kong in its China tallies, said deliveries climbed 24.5 percent to 2.81 million while sales of GM and its Chinese joint venture gained 11 percent to a record 2.84 million.

VW’s sales were helped by the introduction of new versions of its Lavida and Audi A4L in the third quarter and from a territorial dispute that fueled anti-Japan sentiment. In September, Toyota Motor Corp. and Nissan Motor Co. reported the steepest drop in sales in China since at least 2008.

Ford, Infiniti

Other foreign automakers have ambitions for China as well. Nissan, for example, moved the headquarters of its Infiniti brand to Hong Kong to try to gain share in Asia. Ford, which has been a laggard in China, says that breaking into that market is a priority. The Dearborn, Michigan automaker, which sold 626,616 vehicles in China last year, a 21 percent gain, is seeing some early success: Its Focus compact rose to the best-selling sedan in China last year from 10th in 2011.

Hyundai Motor Co. and affiliate Kia Motors Corp., both based in Seoul, also see potential in China, with their combined sales rising 14 percent in 2012.

All of this growth comes as auto sales continue to gain, if not at the same pace as in the past. Auto deliveries may increase 7 percent to 20.65 million this year, the China Association of Automobile Manufacturers said in January. A consensus is forming that sales may rise to as many as 30 million vehicles by 2020, said Bob Socia, GM China president.

“You need to stay ahead of the curve,” he told reporters last month in Detroit. “Are we ready to announce another plant? No, but clearly we’re looking at what we’re going to need to handle our expansion.”

He declined to say how GM is looking to expand beyond two new plants planned to be completed 2014.

U.S. Consolidation

The idea of GM growing through acquisition harkens back to GM’s origins, when founder Billy Durant used his company’s coffers to gobble up rivals as the nascent U.S. industry was consolidating. Few Americans today remember Winton Motor Carriage Co., the Oakland Motor Car Co. or other automakers, also called original equipment manufacturers (OEMS or OEs), of the early 1900s.

China is ripe for a similar reckoning, Wilbur Ross, the billionaire owner of parts supplier International Automotive Components Group, said in Detroit last month during a presentation at the Automotive News World Congress.

“The U.S. once had 125 domestic OEs, but has devolved down to a small handful,” Ross said. “At present, China has about 100 OEs, many of which are marginal and lack manufacturing and distribution scale and have limited market shares.”

China’s Capacity

China, with more than 110 auto brands, has about 36 percent of its car-making capacity unused, the equivalent of 10 million vehicles worth of over-capacity, according to LMC Automotive.

Of the 71 automakers tracked by the China Association of Automobile Manufacturers, 36 companies sold fewer than 10,000 vehicles in 2012.

Jilin Tongtian Automobile Co., Jiangxi Huaxiang Fuqi Motor Co. and Liaoning Huanghai Commercial Vehicle Manufacturing Co. are among the 10 that didn’t sell any vehicles last year, according to association data. Han, the CSC analyst, said those aren’t ideal acquisition targets.

Local China automakers don’t spend as much to develop new vehicles as global automakers do, Ross said. As a result, the 41 percent of the market they divvied up last year is shrinking, he said.

Future Unclear

While there may be agreement from industrialists such as Ross to China’s Communist Party that automakers need to consolidate, how such a thing would happen is wide open to speculation, debate and innovation.

One notion is that foreign automakers would need to grow through their local partners, which might be better able to negotiate a fair market value for state-owned assets, said Bill Russo, president of auto industry consultancy Synergistics Ltd.

“A more likely scenario will be partnerships among local automakers to allow assets to be shared or transferred,” he said in an e-mail. “In such a scenario, foreign OEMs might work with their local partner to absorb under-performing assets into their existing Chinese JV.”

Alternatively, foreign automakers may not want some local capacity in its current form, Jeff Schuster, an industry analyst with LMC Automotive. An acquiring company may be able to win approval to replace outdated factories to create jobs.

“More likely they will continue to come in and build new capacity and much of the old will be shuttered if consolidation takes place,” he said in an e-mail.

Partnership Acquisitions

The GM-SAIC partnership has acquired money-losing factories in China in the past, including assets related to Daewoo Motor Co. after GM bought a controlling stake in the bankrupt South Korean automaker.

GM and SAIC are partnered on Wuling and its Baojun car brand as part of a strategy to sell vehicles to an emerging working class outside of the major cities, such as Shanghai.

Last year, GM added 700 new stores in China and expects to open another 400 this year to have a total of 4,200 locations, Socia, the division president, said.

GM’s five-year China plan announced in April 2011 called on doubling its sales to about 5 million in the country from 2.35 million in 2010 and introducing 60 new or refreshed vehicles in there within the same time period.

The announcement followed years in which GM’s China sales increased 68 percent in 2009 and 29 percent in 2010, before the country’s rapid economic growth slowed.

With its Chinese partners, GM has eight production centers in China with the capacity of building 3.35 million vehicles this year, according to researcher IHS Automotive.

More Growth

GM, which strives to build vehicles where they’re sold, will have straight-time capacity to build as many 4 million units in 2015 in China, according to IHS estimates. That includes the two new factories in Wuhan and Chongqing coming online in 2014, said the Northville, Michigan-based research firm.

The automaker aims to outpace the market again in 2013, Socia told reporters in Detroit.

“You have lots of people that the government wants to move into the middle class,” he said. “You’ve got 150 cities that are over a million in population. It’s pretty ripe for further expansion.”

To contact the reporters on this story: Tim Higgins in Detroit at thiggins21@bloomberg.net; Tian Ying in Beijing at ytian@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

Click here to read the article at businessweek.com

Driving Into the Chinese Market

Vertu Select Magazine, September 2011


Russo quote:


"These indigenous brands can be used as a means of accessing the low-cost end of the domestic market, which has historically been the domain of the Chinese independent companies", says William Russo, president of auto consultancy Synergistics.


This is not an entirely new development.  Volkswagen has sold simultaneously three generations of Jetta and Passat, the oldest dating back to the eighties and targeting fleet users and cost-conscious buyers.  New brands, though, are the result of "a policy to encourage multi-national car companies to introduce indigenous Chinese brands", Russo states.

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.

NO-FRILLS

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.

GM BATTLES KING KONG

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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Presentation: General Motors in China

Analyst Presentation, June 21, 2011

General Motors in China

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GM Takes on Geely in China's Poorer Cities With `Treasured Horse' Models

Bloomberg News, January 27, 2011

An undated handout photograph shows an SAIC-GM-Wuling Automobile Co. Ltd. Baojun 630 passenger vehicleSource: SAIC-GM-Wuling Automobile Co. Ltd.

Tour guide Chen Libin is waiting for General Motors Co. and Honda Motor Co. to roll out their new China-only brands before replacing his Xiali A+ sedan.

Chen will spend up to 80,000 yuan ($12,153) on a car he’ll drive 300 kilometers a day around the Inner Mongolia grasslands. Models by domestic automakers like Tianjin FAW Xiali Automobile Co. start breaking down after two years, while foreign cars go at least five years without major problems, he said.

“These brands are definitely something I will consider,” Chen, 30, said of GM’s Baojun and Honda’s Li Nian marques. “Foreign technology offers drivers more comfort, fuel efficiency and a lower cost of maintenance.”

GM, Honda and Nissan Motor Co. are creating unique brands for the world’s biggest car market as they try to boost sales in China’s interior, where incomes rose almost 11 percent last year. The cheaper nameplates will help them compete on price against local manufacturers without diluting their cache among Chinese buyers, said John Zeng, an industry analyst at J.D. Power & Associates in Shanghai.

“It’s a win-win situation,” Zeng said. “Consumers pay a lower price for foreign-brand technology, and the foreign makers benefit from an increase in sales volume without hurting their brand image.”

BYD, Chery Competition

These “low-budget cars” will use older model platforms and have few extra features, said Leah Jiang, an analyst with Macquarie Research Ltd. in Shanghai. Anti-lock brakes, automatic air-conditioning and reclining seats may be excluded to keep prices as low as 50,000 yuan, said Koji Endo, an auto analyst at Advanced Research Japan in Tokyo.

That market segment is dominated by domestic automakers BYD Co., Geely Automobile Holdings and Chery Automobile Co. Local brands sold three of every four cars priced below 50,000 yuan, and more than half of those costing between 50,000 and 80,000 yuan, according to Jiang.

“I’m not worried about these new brands at all,” said Jin Yibo, assistant general manager for Wuhu-based Chery, whose sales increased 36 percent last year. “Chinese cars offer better value for money, and we understand the local market and consumer very well.”

18 Million Sold

Vehicle sales grew more than 32 percent to almost 18.1 million in 2010. Sales are expected to grow about 15 percent this year, with about two-thirds of buyers coming from cities where the average annual income is less than $5,000, according to JD Power figures.

“If these brands are successful, they are going to have a much higher growth rate,” said Bill Russo, a Beijing-based senior adviser at Booz & Co. “The number of people that can shop at that price point is much larger.”

Consumer purchasing power was boosted by economic growth of 10.3 percent last year, the government said. Per capita net income in rural areas rose 10.9 percent -- the biggest gain since 1984.

The economy likely will grow 9.8 percent this year, the state-run China Daily newspaper reported this week, citing a government academy. Government officials have indicated that the country’s upcoming five-year plan will make a renewed push to boost domestic consumption.

‘Treasured Horse’

GM, the largest foreign automaker in China, will start selling the four-door Baojun 630 compact sedan early this year through its SAIC-GM-Wuling Automotive Co. joint venture. The car will be available at more than 100 dealers, the company said.

GM, which hasn’t announced Baojun prices, is targeting 15 percent growth next year after sales increased 29 percent last year to 2.35 million vehicles. The Detroit-based company’s shares have gained about 15 percent since a November initial public offering.

“There is tremendous potential in tier-two and tier-three cities,” Kevin Wale, GM’s China president, said last month after unveiling the Baojun, which means “Treasured Horse.”

First-tier cities include wealthier Shanghai, Beijing and Guangzhou, according to the National Bureau of Statistics. The second tier includes provincial capitals and the third includes smaller cities.

Honda, Japan’s second-largest carmaker, and local partner Guangzhou Automobile Group Co. expect to start selling the Li Nian S1 sedan early this year. The brand, which means “Ideal,” uses the City platform and targets entry-level consumers with 1.3-liter and 1.5-liter engines, the Tokyo-based company said.

‘Morning Star’

“We are aiming that these Li Nian users will step up to the Honda brand,” said Takayuki Fujii, a Beijing-based spokesman for Honda.

The company declined to comment on the price. Honda sales in China increased 12 percent last year are expected to grow 10 percent this year, the company said.

Nissan, Japan’s third-largest automaker, and local partner Dongfeng Motor Group Co. said their upcoming Qi Chen, or “Morning Star,” will meet rising demand for cheaper models. They wouldn’t comment on price, though Endo said it likely will be priced between 50,000 and 70,000 yuan.

The car will have the “technologies, quality level, engineering standards” of a foreign brand, said Toshiyuki Shiga, chief operating officer of the Yokohama, Japan-based company.

“I can see some optimistic forecast in this market,” Shiga said last month.

Volkswagen AG, China’s second-largest foreign car manufacturer, and local partners SAIC Motor Corp. and China FAW Group Corp. also may create a China-specific brand, Karl-Thomas Neumann, the company’s China chief executive, said last week.

Hao Hongfu, 32, is waiting for the Baojun before deciding on a replacement for his Beiqi Foton Motor Co. pickup truck.

“I want to buy the car because I think cars made by companies backed up by foreign automakers have better quality,” said Hao, a fruit wholesaler in Shandong province. “I have been driving local automakers’ vehicles and would very much like a change.”

--Liza Lin. With assistance from Tian Ying, Li Yanping in Beijing. Editors: Michael Tighe, Bret Okeson.

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at +86-21-6104-3047 orllin15@bloomberg.net

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net