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.

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