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Home >> Business
UPDATED: 14:28, October 06, 2004
Fast-growing auto industry draws concerns
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It has been more than five decades since the launch of First Automotive Works Corp (FAW), widely seen as the cradle of China's auto industry, on July 15, 1953.

FAW was built in a desolate area in Changchun, Northeast China's Jilin Province, backed by the former Soviet Union, China Daily reported Thursday.

The first vehicle, a Jiefang (Chinese for liberation) truck named by late paramount leader Mao Zedong, rolled off the assembly line of FAW in 1956. A Dongfeng sedan, the first China-made sedan in the history of the People's Republic of China, was also built at FAW in 1958.

Over the past five decades, especially the past 10 years, the auto industry has grown by leaps and bounds in output volume.

China has become the world's fourth biggest automobile producing country with output reaching 4.4 million units last year, up from only 61 units in 1955.

The private car population has exceeded 10 million in China with considerable improvements to Chinese people's living standards since the nation's reform and opening up in the late 1970s.

The auto industry has become one of the biggest growth engines for China's gross domestic product (GDP), which is expected to reach US$4,000 billion by 2020.

Sales income of the auto industry, which has a total work force of more than 12 million, and closely-related sectors, reached 680 billion yuan (US$82 billion) last year.

Weak in development and brand However, behind the boom, there is a bitter frailty in China's auto industry - lack of strong self development capabilities and brands, which is frequently criticized by experts.

The domestic passenger car market is dominated by foreign brands as almost all of the world's auto giants have built car joint ventures in China.

Ninety per cent of passenger cars made and sold in China are brands of foreign automakers, such as Volkswagen, General Motors (GM), Honda, PSA Peugeot Citroen, Toyota, Ford, BMW and DaimlerChrysler.

Volkswagen is the biggest car producer in China, selling 697,000 cars in the nation last year. All big State-owned automakers including FAW, Dongfeng Motor Corp and Shanghai Automotive Industry Corp (SAIC) - are assembling foreign brand cars to cash in on the fast-growing car market.

Only a few small Chinese players are struggling in the international car league in China with home-grown brands, such as Geely, Chery and China Brilliance Auto taking a tiny slice of the domestic car market.

These small players are newcomers to the auto industry without the government's blessing. "The phenomenon is a big embarrassment for China's auto industry," said Jia Xinguang, chief analyst with China National Automotive Industry Consulting and Development Corp. "This is the aftermath of the government's market-for-technology policy on foreign automakers over the past two decades," Jia said.

The first Sino-foreign vehicle joint venture was formed in 1984 by Chrysler and Beijing Automotive Industry Corp.

The government expected foreign automakers to transfer much advanced technology to their Chinese partners by allowing them to produce vehicles in China. However, what has happened has been contrary to the government's wishes. Foreign automakers have grabbed the lion's share of the lucrative domestic car market through local production, while Chinese firms have failed to assimilate enough technology to greatly enhance their development capabilities.

"Chinese automakers should possess their own strong development capabilities and brands for fear of any future uncertainties," Jia said. "You can imagine what would happen if foreign automakers were permitted to control majority stakes in joint ventures with Chinese partners or even to set up wholly-owned plants in China one day."

Although the government now requires foreign automakers to have stakes of at most 50 per cent in join ventures to protect Chinese players, product portfolios and key technology are still tightly controlled by foreigners. "We would not be able to withstand fluctuations in the world's auto industry and the economy as a whole if we just assemble foreign products without strong self development capabilities and our own brands," said Yin Jiaxu, president of Chang'an Motor Corp, China's biggest mini vehicle maker.

However, it is a very arduous task for Chinese automakers. "We should be patient and it will take us 20 years to possess strong development capabilities and brands," said Zhu Yanfeng, general manager of FAW. Echoing Zhu, Dongfeng President Miao Wei said: "Only through efforts of several generations can we establish strong development capabilities and brands because it demands an annual output of 2 million cars of a single company and US$1 billion of fixed asset investment."

FAW, the nation's No 1 automaker, produced 900,000 vehicles last year. Big State-owned companies, such as FAW, Donfeng and SAIC, now seem unworried about innovation as they can get many products from foreign partners, Jia said.

All of the top three run profitable joint ventures with two or more foreign partners. Sales of FAW's own car brand - Red Flag - which was created more than 40 years ago, stood at only 20,000 units last year, compared with more than 140,000 Jetta sedans produced by its joint venture with Volkswagen. FAW is building a new manufacturing base for Red Flag and upgrading the model with a total investment of 1.8 billion yuan (US$210 million).

SAIC, which has joint ventures with Volkswagen and GM, said that it plans to produce 50,000 self-developed vehicles by 2007 when its total output will exceed 1 million units. "China's car industry can not be at the mercy of foreign giants any more, and we should cast away the illusion that they will really help boost our development capabilities," said Li Shufu, chairman of Geely, the sole privately-owned passenger car producer in China.

Geely, which is producing the Haoqing, Merrie, Ulion, Maple and Meirenbao, sold more than 80,000 cars last year.

Some Sino-foreign car joint ventures, such as Shanghai GM and Shanghai Volkswagen, have vowed to increase their own development capabilities. "But these joint ventures are just improving foreign brand models according to local market needs. They will not invest heavily to develop Chinese brands," said Yale Zhang, a Shanghai-based analyst with CSM Worldwide, a US auto consulting firm.

Shanghai GM's Buick Excelle redesigned based on a Daewoo model and Shanghai Volkswagen's Santana 3000, an upgraded sedan from the German company's Santana 2000, are two hot sellers on the Chinese market. "One of the most important reasons for our weak development capabilities and brands is that Chinese automakers, especially those State owned, rely increasingly heavily on foreign partners," said Guo Konghui, an academician of Chinese Academy of Engineering.

To encourage their own development, Guo suggested the government treat the small and privately-owned automakers, State-run big names and Sino-foreign joint ventures on an equal footing. The government should grant locally-developed cars preferential taxation, he said.

"The State should also join with domestic automakers to develop key automotive technology and form their own rules and standards," he said.

China's auto industry aims to make breakthroughs in safety, energy-saving and new product development technology within the next 10 to 15 years to lay a sound foundation to be internationally competitive, according to Zhang Xiaoyu, chairman of the China Association of Automobile Manufacturers.

Experts also suggested regulators should take substantial measures to encourage consumers to buy home-grown brand cars to boost Chinese automakers' own development capabilities.

Going abroad

Domestic automakers are going abroad, although in a much smaller way than foreign giants' massive forays into China. Experts say 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. Many of them will be driven out by growing competition.

Chinese automakers have three main paths in going abroad - mergers and acquisitions (M&As), building plants and direct exports. M&A represents the boldest move for Chinese automakers in going abroad.

Some companies, such as SAIC, newly-crowned among 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 this month, according to the latest report. If the deal comes off, SAIC will be the first Chinese automaker to have a controlling stake in a foreign vehicle producer. Experts say 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 in foreign companies.

But Chinese automakers should be very prudent because they are novices in international M&As and they will fall into the mire if they cannot handle M&As smoothly.

Meanwhile, a slew of domestic automakers are 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 in East China's Anhui Province, will start to produce its own brand cars next month in a plant built by its local partner in Iran with an annual capacity of 50,000 units.

Zhongxing Automobile, the Chinese mainland-Taiwan joint venture based in North China's Hebei Province, expects to build four to five plants in North Africa and South America.

An affiliate of Chang'an has struck a deal with a Viet Namese partner to jointly build a plant, which is expected to start 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.

But experts say the time is not ripe now for Chinese automakers to invest heavily and independently build plants abroad because they are not as strong as foreign auto giants and are unfamiliar with overseas markets. At present, to boost direct vehicle and component exports is the most practical way for domestic automakers to expand in and become familiar with international markets.

China's vehicle and component exports are growing significantly, although their 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. To boost vehicle and spare parts exports will help attract further 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.

The Chinese Government encourages domestic companies to speed up vehicle and spare part exports. The government expects that five to 10 specialized automobile and component exporting bases will be built in China in several years. The government is considering giving domestic manufacturers financial aid to increase vehicle and component exports. 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," said Xia Jun, an auto analyst with CCID Consulting Co Ltd, a Beijing-based industry consultancy.

Aided by massive bank loans, Daewoo, the former South Korea's second biggest automaker, expanded aggressively worldwide through M&As, building plants and exporting with much lower prices than US, European and Japanese rivals in 1980s and 1990s. But, ultimately, the company went bankrupt because of formidable debts in 2000.

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 thing for them is to improve their own competitiveness as fast 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.

Source: China Daily

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