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

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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".

Click here to read the article at reuters.com