Chinese cars make inroads abroad By Xia Jun (China Daily) Updated: 2004-09-02 14:45
While foreign auto giants launch massive offensives in China, the world's
fastest-growing vehicle market, domestic automakers are going abroad, but in a
much smaller way.
It will take Chinese automakers five to 10 years or a little bit longer to
have a big presence in international markets independently or by joining forces
with foreign partners, although many of them may be washed out by competition.
Chinese automakers have three main paths to go abroad mergers and
acquisitions (M&As), building plants and direct exports.
M&A
M&As represent the boldest way for Chinese automakers to go abroad.
It is a good way to expand swiftly in overseas markets as it will help
Chinese automakers control foreign brands, development capabilities and
production lines of foreign companies.
Shanghai Automotive Industry Corp (SAIC), newly-crowned as one of the world's
top 500 multinationals, has taken the lead in this way.
The biggest and most profitable passenger car maker, SAIC in July signed a
memorandum of understanding with creditors of Ssangyong Motors to buy a majority
48.9 per cent stake in the South Korean automaker.
The final deal is expected to be clinched later this month.
If the deal comes off, SAIC will be the first Chinese automaker to
independently have a controlling stake in a foreign vehicle producer.
In late 2002, SAIC paid US$59.7 million to acquire a 10 per cent stake in
General Motors' venture in South Korea, GM Daewoo Automotive & Technologies
Co Ltd, marking the first overseas acquisition by a Chinese vehicle company.
SAIC, the joint venture partners of GM and Germany's Volkswagen in China, is
also reportedly in merger talks with MG Rover, the biggest British automaker.
However, Chinese automakers should be very prudent because they are novices
in international M&As and they will fall into the mire if they can not
handle M&As smoothly.
Chinese automakers will face problems with foreign M&As, such as
different corporate philosophies, financial burdens, redundant employees and
other uncertainties.
In July, the labour union at Ssangyong waged a strike against the deal with
SAIC.
A Saudi Arabian prince recently expressed his intention to buy Ssangyong for
a higher price than that offered by SAIC.
Chinese automakers should also be wary of pressures on their fund chains from
overseas M&As.
SAIC will pay US$500 million for the Ssangyong acquisition and it has also
promised to invest heavily in Ssangyong after the merger to develop new products
and expand production.
SAIC aims to increase its annual output to 4 million units and become one of
the world's six biggest automakers by 2020. It sold 782,000 vehicles last year.
In addition, M&As appear not to be the mainstream for the world's auto
industry now and in the future, although numerous M&As have been seen in the
past decades.
Problems are emerging in M&As between international auto heavyweights,
such as those between Daimler and Chrysler in 1998, DaimlerChrysler and South
Korea's Hyundai Motor in 2000, and DaimlerChrysler and Mitsubishi Motor of Japan
in 2000.
DaimlerChrysler sold its 10.5 per cent stake in Hyundai last week.
The German-US giant has pulled the plug on further financial aid to embattled
Mitsubishi. It also wants to cut its stake in the Japanese firm from 37 per cent
to 20 to 25 per cent.
Building plants
A slew of domestic automakers is building assembly plants overseas jointly
with foreign partners.
But their existing and planned assembly plants abroad are much smaller than
those of foreign auto giants in China.
Chery, an upstart automaker in East China's Anhui Province, will start to
produce its own brand cars next month at a plant built by its local partner in
Iran with an annual capacity of 50,000 units.
Chery will ship engines and spare parts to the Iranian plant to produce
20,000 cars this year.
The company is also in negotiations with companies in Pakistan and Venezuela
to build new plants there.
Zhongxing Automobile, the joint venture based in North China's Hebei Province
between the Chinese mainland and Taiwan, expects to build four to five plants in
North Africa and South America in coming years.
The venture, making pickup trucks and sport utility vehicles, now has three
plants in Egypt, Viet Nam and Turkey.
Chang'an Motor, China's third largest automaker based in southwestern
Chongqing Municipality, will build a plant in Viet Nam to produce light-duty
trucks.
An affiliate of Chang'an has struck a deal with a Vietnamese partner to
jointly build the plant, which is expected to kick off production during the
first half of 2005 with a planned capacity of 5,000 units within the next two to
three years.
Geely, the privately-owned car maker based in East China's Zhejiang Province,
is also considering building plants overseas.
Building such assembly plants with foreign partners will help domestic
automakers to improve competitiveness in prices, because it will shun tariffs
imposed by those developing countries on vehicle imports. Also, labour costs
there are even lower than in China.
The time is not ripe at present for Chinese automakers to invest heavily or
independently building plants abroad because they are not as strong as foreign
auto giants and are unfamiliar with overseas markets.
In contrast, the world's top nine automakers - GM, Ford, Toyota,
DaimlerChrysler, Volkswagen, Nissan-Renault, PSA Peugeot Citroen, Honda and BMW
- have already built massive production capacity and are investing more in China
to cash in on huge vehicle demand.
Volkswagen, the biggest foreign car maker in China, plans to add an
investment of 60 billion yuan (US$7.2 billion) and double its annual production
capacity to 1.6 million cars in China by 2008.
GM, the No 2 foreign car maker in China, also plans to spend over US$3
billion to more than double its annual production capacity to 1.3 million
vehicles by 2007.
Direct exports
At present, to boost direct vehicle and component exports is the most
practical way for domestic automakers to expand in and get familiar with
international markets.
China's vehicle and component exports are growing significantly, although the
value is much smaller than the nation's vehicle imports.
The nation exported US$3.5 billion of vehicles and components during the
first half of this year, jumping 62.2 per cent from a year earlier.
Meanwhile, China's vehicle and component imports rose by 29 per cent
year-on-year to US$8.7 billion.
The nation exported 156,200 vehicles in the first six months of this year,
skyrocketing 309.1 per cent from a year ago.
But the vehicle export value only increased by 84.4 per cent to US$291
million.
In the first half of this year, China's vehicle imports grew by 6.7 per cent
to 96,800 units with the value up 20.8 per cent to US$2.98 billion.
Low value-added trucks and special-purpose vehicles account for the vast
majority of China's automobile exports.
In the first six months of this year, the nation only exported 3,392
passenger cars worth US$28.7 million.
China's passenger car imports amounted to 64,720 units during the period
valued at US$1.8 billion.
But China is expected to export passenger cars in big volume starting around
2006 as quality and prices of domestically-made vehicles reach international
levels.
Passenger car prices in China remain higher than on international markets but
are declining quickly with mounting competition and growing economies of scales
of domestic manufacturers.
Asia, North America and Europe are three major markets for China's vehicle
and spare parts manufacturers.
The three markets controlled 90 per cent of China's total vehicle and spare
parts exports last year.
Vehicles and components made in China have huge growth potential in Southeast
Asia, in particular, as China and the Association of Southeast Asian Nations
(ASEAN) are expected to build a free trade zone by 2010 which will cut tariffs
on vehicles within the region to 3 per cent.
At the same time, exports to other burgeoning markets, such as Middle East,
South America and Africa are also increasing rapidly.
To boost vehicle and spare parts exports will help further attract foreign
investment, accelerate restructuring and technical innovation of China's
fragmented auto industry, and consolidate the nation's position as a vehicle and
spare parts manufacturing base in Asia.
Foreign spare parts producers have built more than 1,200 plants in China.
There are more than 5,000 spare parts plants and 120 vehicle plants in China
now.
Chinese automakers and foreign giants are speeding up their vehicle exports
from China.
Chery said it aims to export 10,000 cars to Middle East and Central and South
America this year, up from 1,000 units last year.
Geely said it is striving to raise exports to 5,000 cars this year from 400
units last year.
Geely also expects exports will account for one-fourth of its total output
annually within the next five years.
First Automotive Works Corp, one of China's top vehicle makers based in
northeastern Jilin Province, exported 4,100 cars, trucks, mini vans and buses
during the first seven months of this year.
Volkswagen vows to build China up as its exporting base in Asia-Pacific by
2008.
The German automaker said it aims to at least double its annual sales in
Asia-Pacific within the next five years from 807,000 units last year and produce
1.6 million vehicles a year by 2008.
Its joint venture with SAIC in Shanghai started to export the notchback Polo
to Australia at the end of last year.
The venture plans to sell 600 Polos in Australia annually over the next five
years, using Volkswagen networks.
GM's joint venture with SAIC also began exporting Buick commercial wagons to
the Philippines in late 2001.
Dongfeng Motor Co Ltd, the biggest Sino-foreign auto joint venture between
Japan's Nissan and Dongfeng Motor Corp, hopes to export 6,000 to 10,000 trucks
to Asia and Africa a year by 2007.
Japan's Honda Motor has formed an export-oriented car joint venture in South
China's Guangdong Province with Dongfeng Motor Corp and Guangzhou Automobile
Group.
The venture will start to produce small cars later this year with an initial
annual production of 50,000 units, all of which will be exported to Europe and
Southeast Asia.
The Chinese Government is encouraging domestic companies to speed up vehicle
and spare part exports.
The government expects that five to 10 specialized automobile and component
exporting bases with relatively high economies of scales will be built up in
China in several years.
The government is mulling giving domestic manufacturers financial aid to
increase vehicle and component exports.
The Ministry of Commerce has set a target for the nation's automobile and
component exports to reach US$70 billion to US$100 billion a year by 2010,
accounting for 40 per cent of China's total automobile and component sales.
Last year, China vehicle and component exports grew by 34.4 per cent to
US$4.71 billion, accounting for a tiny 0.4 per cent of world's total market.
Domestic producers exporting vehicles and components should set up sales and
service networks abroad independently or collaborate with foreign partners as
soon as possible as part of efforts to build a good image for China-made
products.
Domestic producers should pass all kinds of international quality and
environmental authentications to facilitate their vehicle and spare part
exports.
Act on own abilities
Although going abroad is very important for Chinese automakers, they should
do so in line with their actual capabilities and turn away from blind expansion.
Chinese automakers should take lessons from Daewoo Motor Co, the former
second biggest vehicle manufacturer of South Korea.
Aided by massive bank loans, Daewoo expanded aggressively worldwide through
M&As, building plants and direct exports with much lower prices than US,
European and Japanese rivals in the 1980s and 1990s.
But, ultimately, the company went bankrupt in 2000 because of formidable
debts.
Chinese automakers remain much weaker than the world's auto giants in terms
of financial strength, development capabilities, production volume and quality,
and marketing, sales and services.
They are unable to go head-to-head with foreign big names in international
markets in an all-round way in a short period of time.
The most important objective for them is to improve their own competitiveness
as far as they can through co-operation with foreign partners and practical
engagement into international markets.
Chinese automakers should pay attention mainly to the booming domestic
vehicle market now and in the years to come.
Driven by China's steady economic growth, the auto market volume is expected
to exceed 10 million units annually by 2010 and 16 million units by 2020, which
will give huge room for domestic automakers to play.
Last year, vehicle demand in China stood at nearly 4.5 million
units.
