Peugeot agrees main terms of tie-up with China’s Dongfeng

The Financial Times, December 11, 2013

• 1810: The Peugeot family business begins to put down its engineering roots as brothers Jean-Pierre Peugeot II and Jean-Frédéric turn their father’s grain mill into a steel foundry, making everything from coffee grinders to umbrella frames
• 1882: The company turns to transport, making bicycles. The first was Armand Peugeot’s ‘Le Grand Bi’, or penny farthing bike
• 1893: The Peugeot Type 5, which was powered by a two-horsepower engine, was produced from 1893 to 1896
• 1913: The Peugeot 153, whose 2.6-litre, four-cylinder engine produced 12 horsepower, was made in various forms until 1925
• 1929: Peugeot unveils its first mass-produced car, the 201, but sales were are hit by the Depression
• 1934: The top-of-the-range Peugeot 601 rolled off production lines in 1934
• 1940: After the Peugeot 402, produced from 1935 to 1942, the company is forced to build cars and weapons for the German war effort
• 1962: The stylish Peugeot 404 cabriolet became a 1960s icon
• 2010: Peugeot starts production of the fully electric iOn city car
• Today: Robert Peugeot is chairman of FFP, an investment company through which the Peugeot family controls a 25 per cent stake in the car company ©Reuters

PSA Peugeot Citroën and China’s state-owned carmaker Dongfeng Motor have agreed the main terms of an industrial and commercial partnership that will include a large capital injection into the French group in return for technology sharing.

The two carmakers are still hammering out the details but the agreement is expected to involve a €3bn-€4bn capital raising by Peugeot and an agreement for the two groups jointly to develop and produce low-cost small cars for southeast Asian markets.

Peugeot hopes to be able to have the deal announced in the first quarter of next year, according to two people briefed on the discussions.

The French group is desperate to lower its over-dependence on the moribund European car market and is rapidly burning through its capital reserves. Both Peugeot and Dongfeng declined to comment.

Peugeot closed down the first large car factory in France for 30 years this year and reduced its workforce as it seeks to reduce the €3bn cash burn it suffered in the full year 2012. It recently hired a former Renault executive to lead a more globalised push.

The company already has a successful joint venture with Dongfeng building cars in China, but trails rivals such as Fiat and Volkswagen in markets such as South America, and Renault-Nissan in tapping growth in southeast Asian markets.

Carmakers have increasingly turned to alliances and joint ventures to increase their scale and cost efficiencies, but a deal between Peugeot and General Motors to share some products and suppliers has failed to live up to the French carmaker’s hopes.

There are expected to be 5.5m cars and light vehicles sold in southeast Asia this year, roughly half the size of western Europe. But the region’s market is expected to grow by more than half by the end of the decade, versus flat or marginal growth in Europe.

Negotiations are continuing between Dongfeng and Peugeot about exactly how much the Chinese group will pay for what percentage of Peugeot.

The people briefed on the discussions, who declined to be named as the talks were private, added that it could still all fall apart, although this was looking less and less likely.

The French state is contemplating matching any investment made by the Chinese group to maintain French influence over the company.

The most likely investment by Dongfeng and the French state would give the Chinese carmaker and Paris 17.6 per cent each, according to research by Macquarie, with the Peugeot family holding 16.5 per cent and GM 4.5 per cent.

An injection of that size would result in the Peugeot family losing control of the business it founded in 1882.

Based in Wuhan, in central China, Dongfeng is one of China’s largest car manufacturers with annual revenues of $63bn. It already operates a manufacturing joint venture with Peugeot alongside three others – Honda, Kia and Nissan – and last week signed a fifth joint venture agreement with Peugeot’s French rival Renault.

If completed and approved by Beijing, Dongfeng’s tie-up with Peugeot could catapult it on to the global stage – something that no Chinese state-owned carmaker has yet been able to achieve. Hangzhou-based Geely, which purchased Volvo Cars from Ford in 2010, is privately owned.

“Whatever they pay for the shareholding, they’re probably going to get justification in knowhow,” said Bill Russo, a Beijing-based automotive consultant. “Peugeot’s global distribution capacity would also be an advantage for Dongfeng.”

Peugeot accounts for 60 per cent of France’s car production and employs close to 100,000 people locally.

Additional reporting by Tom Mitchell in Beijing

GM to shift overseas operations from Shanghai to Singapore

The Financial Times, November 13, 2013

By Jeremy Grant in Singapore

General Motors will shift the bulk of its non-Chinese international operations from Shanghai to Singapore in 2014, marking a coup for the Asian city-state as it lures an increasing number of multinational companies with tax breaks and other incentives.

The Detroit-based carmaker said it would locate 120 staff in Singapore to oversee markets in the Association of Southeast Asian Nations (Asean), Africa, India, South Korea and the Middle East, as well as the European operations of Chevrolet – its best-selling brand – and Cadillac, its luxury marque.

The shift is the latest success in Singapore’s efforts to encourage multinational companies to establish regional headquarters, as it takes advantage of companies’ desire to tap into the region’s rapidly growing markets.

It also marks GM’s return to Singapore after a decade. The company moved its Asia-Pacific headquarters from Singapore – where it had been since 1993 – to Shanghai in 2004.

That coincided with the rapid emergence of China’s car market, where GM around that time started selling more units of its Buick brand than in the US.

By making the decision to shift its “consolidated international operations” (CIO) to Singapore, GM is in effect carving out a separate unit from its now much larger businesses in China and South Korea.

GM said decisions about its CIO markets would now be made “in the interest of growing our business while allowing us to focus even more intently on China”.

The company plans to retain 250 staff in Shanghai to oversee China, while 245 staff will remain in Seoul.

GM’s light vehicle sales in China have risen by an average annual rate of 27 per cent over the past five years, from 1.1m units in 2008 to almost 3m in 2012, making the country its largest market.

Its operations there include four manufacturing joint ventures, an research and development centre and four sales and service operations. “GM has achieved a very deep level of localisation in China,” said Bill Russo, a Beijing-based automotive consultant.

Stefan Jacoby, vice-president at the CIO unit, said of the shift to Singapore: “It will help us to create a renewed identity . . . and lead GM’s umbrella strategy for the region. We are looking forward to being an important part of the Singapore business community.”

The 10-nation Asean bloc, of which Singapore is a member, is home to a population of about 600m and has a combined gross domestic product just behind those of China and Japan.

Singapore ranks among one of the most business-friendly cities in the world, offering a corporate tax rate of 17 per cent, political stability, a UK-based legal system and sophisticated financial services.

Consumer goods companies, whose revenues are increasingly coming from emerging markets in Asia such as Indonesia and Vietnam, have also been expanding in Singapore.

McDonald’s, the US fast food company, recently upgraded its regional hub there as the operational base for Asia, the Middle East and Africa.

Procter & Gamble runs its global Pampers nappies business from Singapore, and is poised to open a research and development centre in March that will be the largest commercially run such facility in Singapore.

Rival Unilever, maker of Dove soap and Lipton tea, operates a global operations hub out of the city-state, where it bases its group chief operating officer.

Similarly, suppliers are also expanding in Singapore. In June, Givaudan broke ground for a new fragrance manufacturing facility and “perfumery school” in Singapore to develop scents and flavours that cater to Asian preferences.

However, some foreign companies are having increasing difficulty hiring workers with certain skills after the Singapore government this year tightened up on the influx of foreign workers.

Additional reporting by Tom Mitchell in Beijing

Click here to read this article at FT.com

Bill Russo Named Vice President, Corporate Development for HARMAN’s North East Asia & China Operations

Press Release

03 December 2013 – FOR IMMEDIATE RELEASE

STAMFORD, Connecticut – HARMAN International Industries, Incorporated (NYSE:HAR), the premium global audio and infotainment group, today announced that Bill Russo has joined the company as Vice President of Corporate Development for Harman’s North East Asia & China operations, with primary reporting to David Jin, Chairman & President of Harman North East Asia & China.  Mr. Russo also reports to Sandra Rowland, Vice President, Corporate Development and Investor Relations for Harman International.  He has responsibility for new business development, regional growth initiatives, strategy deployment and related communications.

“Bill comes to Harman with more than 25 years of automotive industry experience, including 10 years in China.  His deep knowledge of the automotive sector and extensive networks will help accelerate Harman’s plans to grow our share of the automotive markets, including infotainment, branded audio and integration services,” said Jin.   “We are confident Bill will help strengthen our relationships in the region and make significant contributions to our business.” 

Mr. Russo most recently was President and CEO of Synergistics Limited, an Asia-based business development advisory firm.  From 2004 to 2008, he served as Vice President of Chrysler Group’s North East Asia business, where he directed operations for the regional markets.  While at Chrysler, he served in roles of increasing responsibility, including oversight of Product and Business Strategy.  Earlier in his career, he worked in the global services and technology divisions for IBM Corporation. 

Mr. Russo has published numerous articles and is a frequently quoted expert in the major financial media on developments occurring in the global automotive industry.  He regularly speaks at major automotive industry conferences and events.

Mr. Russo holds a Master of Science degree in Manufacturing Systems Engineering from Lehigh University and a Bachelor of Science degree in Chemical Engineering from Columbia University.

Mr. Russo will be based at Harman’s North East Asia headquarters in Shanghai, China. 

About HARMAN

HARMAN (www.HARMAN.com) designs, manufactures, and markets a wide range of infotainment and audio solutions for the automotive, consumer, and professional markets. It is a recognized world leader across its customer segments with premium brands including AKG®, Harman Kardon®, Infinity®, JBL®, Lexicon®, and Mark Levinson® and leading-edge connectivity, safety and audio technologies. The company is admired by audiophiles across multiple generations and supports leading professional entertainers and the venues where they perform. More than 25 million automobiles on the road today are equipped with HARMAN audio and infotainment systems. HARMAN has a workforce of about 14,000 people across the Americas, Europe, and Asia and reported sales of $4.3 billion for the fiscal year ended June 30, 2013.

Worldsteel Promotes Green Manufacturing in China

Guangzhou, China, November 26, 2013

Click here for a link to Bill Russo's presentation titled "Towards A Green Automotive Industry"

The World Steel Association (worldsteel) co-hosted with the China Iron and Steel Association (CISA) and the China Council for the Promotion of International Trade, Automotive Industry Committee (CCPIT-Auto) a major one day conference on “Green Manufacturing, the Future of Steel and Automotive”. 

Held at the Sheraton Guangzhou Hotel, the conference was opened by Joon-Yang Chung, Chairman of worldsteel and Chairman and CEO of POSCO. CISA Chairman Lejiang Xu delivered a welcome speech and the keynote speaker Jimin Zhu, Executive Vice Chairman of CISA, addressed delegates on the current market and policy trends of the steel industry in China. 

More than 140 representatives of the automotive and steel industry listened to presentations addressing Life Cycle Assessment as the key to future environmental management.

Edwin Basson, Director General of worldsteel said: “With the increasingly stringent emissions and crash safety requirements around the world, the automotive industry will be constantly looking for ways to meet the opposing challenges of lightweight vehicles that improve crash safety and reduce environmental impact. Therefore, it is critical for steel producers to work with car manufacturers in optimising design for both steel applications and future steel vehicles. The steel industry has taken the responsibility to lead the way in demonstrating the use of steel and life cycle assessment to reduce a vehicle carbon footprint and has invested more than $US80 million in future steel vehicle design.”

“We believe that a life cycle assessment (LCA) of emissions is critical to a complete picture of a vehicle carbon footprint. It will primarily assist automakers in evaluating and reducing their total energy consumption as well as greenhouse gas emissions throughout the product’s life cycle. The introduction of LCA in vehicle emissions regulations is a step forward for green manufacturing.”

Cees ten Broek, Director, WorldAutoSteel, the worldsteel’s automotive group, said: “We are committed to helping our customers to meet mass reduction challenges using steel. The steel industry continues to develop new generations of steel that are stronger, lighter and form easily to meet future requirements. We are continually reinventing steel and this is why advanced and ultra-high-strength steels have emerged and grown to become the fastest growing materials in the automotive sector.”

“Steel provides a nearly limitless number of combinations of grades and gauges that allow engineers to place specific materials exactly where they are needed in a car body structure. No other material offers that kind of flexibility.”

China Council for the Promotion of International Trade, Automotive Industry Committee (CCPIT-Auto) commented: “We believe that the unique properties of steel enable it to continue to be the optimal material choice for the automotive sector in the next decades. We are delighted to see that our partners in the steel industry have been making substantial progress in advancing the performance of steels which will support the automotive industry’s drive towards green manufacturing.”

Presentations and keynote speeches of the conference can be downloaded from worldsteel.org. 

Click here to view the original press release at worldautosteel.org

China Looks to Global EVs for Its Local Electric Compliance Cars

PlugInCars.com, November 27, 2013

By Alysha Webb 

It's a Nissan LEAF, but re-badged with the Chinese Venucia brand.

Familiar-looking plug-in electric vehicles may be seen on roads in China in the next few years. Among the vehicles on display at the recent Guangzhou Auto Show in southern China were a Chinese version of the Nissan LEAF and an electric version of the BMW X1. Both were produced via the foreign automakers’ joint ventures in China. Also the latest iteration of the Denza pure electric vehicle, produced at the Daimler-BYD joint venture, was on display.

Does this mean foreign automakers believe China will be a hotbed for electric vehicle sales? Probably not. These vehicles are more likely “compliance cars,” produced to please the Chinese government, which is promoting vehicle electrification in China. Producing the cars domestically through a joint venture will qualify the vehicles for government subsidies.

“It seems the strategy in play is to leverage the JV brand mandate to add foreign EV technology to the market,” Bill Russo, president of consultancy Synergistics Ltd. told PluginCars.com. “This helps the Chinese access the foreign EV technology while the foreign player has a way to access the EV subsidies with a local brand.”

China has been pursuing electrification for more than a decade, and has released a series of plans that set target production and sales goals and subsidies for purchase of electric vehicles. The most recent plan, which covers 2013-2015, was released a few months ago.

Only Via Joint Efforts

In that plan, battery electric passenger cars are eligible for incentives of up to 60,000 RMB or $9,848 at current exchange rates. Buyers of plug-in hybrid electric passenger vehicles can receive up to 35,000 RMB or $4,103 in 2013. Those amounts will decrease by 10 percent in 2014, and by 20 percent in 2015. 

To be eligible to receive those subsidies, however, the vehicle must be domestically produced. Imported EVs are subject to high import tariffs.

Foreign automakers who want to produce cars to sell in China must do so through a joint venture with a Chinese automaker anyway. That rule was introduced to allow the Chinese companies to access advanced technology. Now, as Russo pointed out, that has been extended to electric vehicle technology.

So Nissan, after some hesitation, will now produce a Chinese version of the LEAF through the Venucia brand, a local brand produced only in China through its JV with Dongfeng, with whom Nissan also produces regular gas-powered vehicles. BMW is doing the same, producing a EV under a local brand, Zinoro, with its partner Brilliance. Daimler does not produce non-electric passenger vehicles with BYD; the Denza joint venture was formed in 2010 specifically to produce electric vehicles.

A BMW EV, but with the Zinoro brand.

The complication with all these joint venture EV launches, said Russo, “is it will only add more competition for the independent carmakers who are trying to develop their own EV products.” That includes BYD and Geely, as well as SUV maker Zhongtai (aka Zotye). The joint venture models will also compete with electric vehicles launched by the state-owned partners, most of whom have launched their own electric vehicles. For example, Dongfeng has showed its own brand EV at other auto shows in China.

For Appearances Only

Whether the local automakers expect to actually sell any of their EVs to Chinese consumers in the near term is a question, however. Supplier sources in China say that much of the activity is more show than substance. And after enthusiastically introducing electric vehicles of at auto shows in China the past few years, at the Guangzhou show this year “most of the local EV products are no longer front and center at the auto show stands,” said Russo.

To be sure, Chinese consumers are generally more interested in buying cars with a foreign badge, assuming that will mean a higher-quality product. But they haven’t been enthusiastic about buying electric vehicles of any brand.

So just having some foreign automaker DNA won’t make EVs much more alluring to Chinese consumers, Yale Zhang, principal at consultancy Auto Foresight in Shanghai told PluginCars.com. “It does not matter who produces EVs, the sales volume will be limited,” he said.

Click here to read this article at PluginCars.com

Great wall of China: Why Indian companies grapple to operate there

The Economic Times of India, November 28, 2013

It was a big reason why Apollo Tyres made the bold move this July to acquire American company Cooper Tire—an operation twice its size—and now it's a reason why it is looking to renegotiate or break that agreement: China. It's the world's largest market. It's also a market with rules and a mind of its own. Apollo is finding that out: workers of Cooper's Chinese subsidiary have slammed the deal, saying it does not comply with the country's laws, and its Chinese partner has offered a buyout.

Three others from the broad Indian auto sector who ventured into China in the past decade— Sundram Fasteners, Mahindra & Mahindra and Bharat Forge—have found out the hard way. Each is struggling to scale up and become relevant. "The China tractor acquisition was part of our growth plan to get a foothold into the world's second-largest tractor market," says Pawan Goenka, ED and president, Mahindra & Mahindra. "We could not have ignored our presence there."

But China, where the state is never far away, is not falling over itself to have Indian companies. Li Jia of IHS, a research firm in China, says Indian companies don't offer anything unique. "New entrants need to show their clients reasons to buy their product, which can be based on lower price, superior technology, better quality, etc," she says. Indian companies, she adds, have neither the brand pull of American and European companies, nor the immaculate cost management of Chinese companies.

Global auto majors started entering China in 1984, when it opened its auto sector. According to Synergistics, a China-based auto consultancy, only four JVs have disbanded, while 23 survive. Bill Russo, president of Synergistics, says China caps a foreign company's share in new auto JVs at 50%, but places no such restrictions on component ventures.

Indian companies have tried operating in this framework, but have faced a perception bias, cultural and integration issues, and lack of skilled labour. "Indian companies have been unable to build scale, and being over-calculative has left them with lower profits," says VG Ramakrishnan, MD of Frost & Sullivan, a consultancy. "They would rather invest in Latin America and Southeast Asia." China remains a long haul.

Mahindra & Mahindra

When Mahindra & Mahindra made its two drives into China, first in 2004 and then in 2009, it entered a market that was large but also incredibly crowded, with about 200 manufacturers rubbing tyres. Its first acquisition was that of Jiangling Tractors, a maker of low-horsepower tractors (18-33 hp).

M&M's plan was to ship Jiangling's low hp tractors to India and use China to develop business in Europe, US and Australia. But the low hp tractors did not take off in India and the Chinese market started shifting to higher hp tractors.

"Despite M&M's long-term commitment in China, there seems to be a management reluctance to go for the big investment," says Mahantesh Sabarad, senior analyst at Fortune Financials.

China, in tractors, has several common aggregate manufacturers, who are akin to contract manufacturers. Many have scale and are used by tractor companies to source aggregates (like engines, hydraulics and axles). "It is difficult to differentiate your product from that of a relatively small manufacturer," says Ruzbeh Irani, CEO of international operations at M&M.

Complicating this is the regulatory landscape. Agriculture in China is subsidy driven and influences tractor economics. In 2012, crop prices were lower, so were subsidies. Tractor companies had to resort to discounting, reducing profitability.

"The tractor utilisation window is also very short, given the cold climate in most of the country, especially the north," adds Irani. "Coping with the strain on the system in season time was a challenge."

The Huanghai Jinma brand—manufactured by the Mahindra Yueda JV, its second and bigger venture in China—is well known and sold through a network of 250 dealers. M&M is pulling levers: a new and more modern plant, improving quality, and new and more powerful tractors.

Going forward, M&M plans to strengthen its 100 hp-plus range and invest more in R&D. It even plans to import its Arjun range from India, something that Irani is looking forward to. "We will also be looking at the possibility of localising the tractor, with Chinese aggregates and components, as also with our own Chinaproduced engine," he says. Meanwhile, both ventures are making losses.

Bharat Forge

Bharat Forge's entry into China was part of a new strategy it unravelled for itself between 2004 and 2005. This saw the world's second-largest manufacturer of forging products spend $140 million to buy auto-component companies in Germany, Sweden, Scotland and the US, and form a joint venture in China with one of the nine state-owned groups there.

The essence of that strategy, termed 'dual shoring' by Bharat Forge chairman Baba Kalyani, was to establish manufacturing beachheads close to customer facilities to minimise risk of supply disruption and win larger contracts.

In this new scheme of things, China, a large auto market and fast becoming a magnet for global auto majors, was crucial.

The Bharat Forge management saw China, along with India, as a low-cost production base. However, its Chinese joint venture, with the FAW Corporation, has been struggling to deal with the pull back in demand, first that happened in the wake of the 2008-09 global financial crisis and, more recently, in China itself.

While Kalyani did not reply to an email questionnaire for this story, a senior company official who spoke on the condition of anonymity, says FAW Bharat Forging, in calendar 2012, has been affected by the fall in the commercial vehicle and construction markets in China.

Mahantesh Sabarad, senior analyst at Fortune Financials, a brokerage, says officials of the Indian company have told him that, because of the language barrier, they are unable to convey ideas to Chinese executives in the joint venture and implement strategies for growth.

By itself, FAW Corporation has good pedigree in China, partly because of its state lineage. It makes cars, trucks, buses and auto parts. It has JVs with Toyota, Vokswagen,General Motors and Mazda, among others. While that state connection can be an asset, it can also be a liability, says Sabarad.

Companies doing business with Chinese state-owned enterprises, he adds, must come to terms with their interests and priorities, which are heavily shaped by policy directives and are intuitively resistant to organisational changes. Many among the senior management are more 'state cadres' than professional executives.

"While there was a clear improvement opportunity for the JV, there was also a significant resistance to implementation," says Sabarad. "The excess manpower issue also could not be resolved."

Sundram Fasteners

Sundram Fasteners was one of the earliest Indian entrants into China, in 2003, when the world was feeling the first stirrings of the next economic powerhouse.

Back then, Sundram invested $13 million to set up a plant to manufacture high-tensile fasteners and bearings. This unit delivered revenues of Rs 97 crore in 2012—or 3.7% of the company's consolidated revenues of Rs 2,651 crore in 2012-13— and Rs 93 crore profits.

Those are small pickings and Sundram has no major capital expenditure plans in the near future. "While we had a firstmover advantage, China is a slow innings for us. And we are okay with it," says Arundathi Krishna, deputy managing director of the company. "China is a test match for us and not a 20:20."

Sundram drove into China with a threephase strategy in mind. The first was to tap China's capabilities as a low-cost manufacturing base, and export products to its existing global customers. The second was to start supplying to global auto majors for their units in China. And the third was to supply to Chinese auto companies.

According to Arundathi Krishna, the company has broken ground in the first two sets and it is now focusing on the third. "It's challenging as these companies generally like to buy from Chinese suppliers," she says. Adds Suresh Krishna, chairman: "This is taking a little longer than expected as customers are not readily known to us. It will take some marketing effort before successful penetration can occur."

The promoters say their current investment is in line with demand, and that they don't want to over-invest and then wait for orders. "Because of the global recession, there is a slowdown in the Chinese economy. But we are confident it is a passing phase," says Suresh Krishna. "For now, the profitability is adequate and we are sanguine that it will continue to grow."

Click here to read this article at economic times.com