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    Running out of gas
GONG ZHENGZHENG,China Business Weekly staff
2005-04-21 08:21

The glitz and glamour of China's auto sector appear to be fading, especially for domestic non-auto companies.

Some Chinese firms have abandoned their dreams of motoring into the nation's once highly lucrative auto sector.

AUX, the privately owned home appliance producer in East China's Zhejiang Province, announced last month it had withdrawn from the auto sector.

That announcement came a year after AUX unveiled plans to invest 8 billion yuan (US$966 million) to produce vehicles and build, by 2008, an annual production capacity of 450,000 units.

In late 2003, the company paid 40 million yuan (US$4.8 million) to acquire a 95-per-cent stake of an ailing auto firm, controlled by a local government, in Northeast China's Liaoning Province. AUX planned to produce low-cost sport utility vehicles (SUVs).

Amoi, an electronics company in East China's Fujian Province, decided last January to pull out of its collaboration with Nanjing Automobile Group in Jiangsu Province.

During the first half of last year, Shanghai-listed Amoi announced it would invest 175 million yuan (US$21.1 million) to form a car joint venture with the Nanjing automaker.

The AUX and Amoi withdrawals indicate China's auto sector is not the bonanza many firms anticipated, analysts said.

"Many outsiders rushed into the auto sector in the past, as China's auto market skyrocketed with soaring prices and bumper profits," said Song Bingsheng, an analyst with China Securities Co Ltd.

"But now, things are different. Many less-competitive players have to leave as the market has decelerated greatly and the sector's profit margins have slumped due to increasingly fierce competition and sagging car prices."

Growth in China's auto market declined to 15 per cent last year, from 34 per cent in 2003. Growth of the car segment dived to 15 per cent from more than 70 per cent.

Song said AUX's "pullout is inevitable, as it is a layman in the auto sector and is much weaker than established automakers in China, in terms of funding, technologies and talents.

"AUX was not as lucky as the early entrants as the domestic auto market started to drop suddenly last April, only several months after it kicked off its auto business."

AUX sold a mere 3,000 SUVs in the past year.

In contrast, Geely the former motorcycle producer in Zhejiang Province, which began producing cars in 1998 sold more than 100,000 cars last year, up from 80,000 units in 2003.

"AUX also does not have backing from the government, unlike many bigger State-owned automakers," Song said.

AUX expanded from SUVs, but mainly targeted the car segment. However, it failed to receive approval from regulators to produce and market cars.

"We cannot wait for ever, so we have to quit ... We just had a car dream," AUX spokesman Huang Jiangwei was quoted as saying.

When announcing its withdrawal from the auto sector, AUX said it would focus on the power sector and on manufacturing home appliances and telecommunications equipment.

The Chinese Government has enhanced barriers to stem the flood of domestic firms into the auto sector in an effort to cool overheating in the auto industry.

Under the national auto policy implemented last June, automakers in China that "cannot maintain normal operations" are prohibited from transferring their production permits to non-auto companies, motorcycle producers or individuals.

If an automaker goes bankrupt, its production permits will be revoked.

The policy stipulates the investment in any new auto project in China must be at least 2 billion yuan (US$241 million), including at least 500 million yuan (US$60.4 million) for a research and development (R&D) centre.

Industry statistics indicate Chinese automakers' average profit margin tumbled to 6.8 per cent last year, from 12 per cent in 2003 and 28 per cent in 2002.

The combined profits of more than 100 vehicle producers in China tumbled 78.4 per cent year-on-year, to 1.28 billion yuan (US$154.6 million), during the first two months of this year.

More than half of these automakers lost money last year.

Newcomers

However, in contrast with AUX and Amoi's decisions to withdraw from the industry, some other firms recently decided to venture into China's auto sector.

Macro Link Group Ltd, a Beijing-based industrial investment group, earlier this month joined hands with Changfeng Group a Chinese SUV maker in central China's Hunan Province to buy a pick-up producer in East China's Anhui Province for 85 million yuan (US$10.3 million).

Within the next three years, Macro Link and Changfeng plan to invest more than 500 million yuan (US$60.4 million) to produce 100,000 pick-ups annually.

Macro Link's main businesses currently include alcohol and wine-making, real estate and chemicals.

Lifan, one of China's largest motorcycle producers, based in Southwest China's Chongqing Municipality, revealed a self-developed sedan last month.

Sources from Lifan said the company expects to receive approval from regulators to begin producing and marketing a 1.6-litre sedan this year.

The sedan will be on sale in July and will retail for less than 90,000 yuan (US$10,600), sources said.

Lifan expects to raise 2.4 billion yuan (US$299 million) by using its profits and from the capital market and pending partners for its fledgling car business in the coming years, sources said.

"It's too early to say whether Macro Link and Lifan will be able to succeed in the auto sector," said Jia Xinguang, with China Automotive Industry Consulting and Development Corp.

"However, those who can find market niches for themselves, and who are competitive enough, will be able to have a strong foothold in the sector as China's auto market will continue to grow steadily, although not as high as in 2003 and 2002," Jia said.

Qian Pingfan, with the State Council's Development and Research Centre, said some automakers in China, such as Honda Motor and Hyundai Motor's joint ventures, still enjoy robust sales growth and good profits.

That, Qian said, is because they have attractive products and they do a good job at cutting costs, despite the slowing car market and shrinking profits.

Sales of Hyundai's venture in Beijing skyrocketed almost 160 per cent, to 56,100 cars, in the year's first quarter, making the venture the top ranked Sino-foreign car joint venture in terms of sales.

Qian estimates the profit margin of Hyundai's joint venture stands at 20 per cent or more.

"We have confidence we can develop in the auto sector, as we have a clear and suitable market-positioning strategy, despite the deceleration of the whole market," said Xu Gang, a high-ranking executive of Geely.

"Geely will continue with its strategy of providing average Chinese customers with affordable and good-quality products," Xu said.

Most of the privately owned carmaker's products retail from 40,000 yuan (US$4,830) to 80,000 yuan (US$9,660). This segment is not the focus of foreign auto giants.

China's auto market is widely forecast to grow by double digits to reach 10 million vehicles by 2010. That would be up from 5.1 million units last year.

(China Daily 04/21/2005 page1)

 
                 

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