Liu Yu said he was making a generous offer: a $1 million subsidy to entrepreneurs willing to build a dealership for BAIC Motor Corp. (BAIHZ)’s Beijing car brand. Though that covers about three-fourths of the cost of each outlet, the BAIC deputy sales chief has struggled to recruit the 150 candidates he wants by year-end, whereas BAIC’s parent company has no trouble finding dealers for its joint ventures with Daimler AG (DAI) and Hyundai Motor Co. (005380), even without subsidies.
“China’s indigenous cars are the lowest in the food chain,” said Liu. “Many consumers are biased against them.”
Three decades after China implemented rules requiring foreign automakers to form joint ventures with domestic manufacturers to build cars in the country, the strategy appears to be failing in one of its key goals. While the policy has attracted investment and created millions of jobs, it has done little to help the Chinese build strong brands.
“We have been trying to exchange market access for technology, but we have barely gotten hold of any key technologies in the past 30 years,” said Liao Xionghui, vice president of Lifan Industry Group Co., a car and motorcycle manufacturer based in the southwestern municipality of Chongqing. “China’s auto industry is still in its infancy. How can a two-year-old beat someone in his thirties?”
Chinese auto brands have lost a quarter of their market share in the past two years as consumers choose vehicles made by foreigners such as General Motors Co. (GM) and Volkswagen AG (VW). As many as half of China’s 171 domestic automakers may go out of business in the next three years, the state-backed auto association predicts, as foreign brands push into smaller cities.
Foreign and joint-venture brands had 63 percent of the passenger-vehicle market in July, according to the China Association of Automobile Manufacturers. Domestic brands saw their share decline to 37 percent from 49.2 percent in January 2010.
“There is a belief at this point in time that international brands have more technology, in some cases better craftsmanship,” Joe Hinrichs, president of Ford’s Asia Pacific and Africa region, said in an interview last month.
The joint-venture policy has failed to create competitive brands because the Chinese have grown dependent on profits from manufacturing for the foreigners, neglecting their own marques, said Jeff Chung at Daiwa Capital Markets Hong Kong Ltd.
“Foreign partners are not willing to transfer their key technology to local partners, and most state-owned companies don’t really care that much,” said Chung. “Their focus is more on sales volume and a high utilization rate.”
There’s little doubt that the joint-venture policy has helped build the industry in China. The country overtook the U.S. in 2009 as the world’s largest market for new vehicles, with sales of more than 18 million units last year. The industry today accounts for an estimated 30 million jobs, or 11 percent of the total workforce, government statistics show. Most major automakers today assemble vehicles in China, with about 410 models available, the most in any country, according to J.D. Power & Associates.
And Chinese cars have improved over the years. Vehicle owners reported a 30 percent drop in problems with domestic makes in 2011, due to improvements in the exterior, engine and transmission, according to J.D. Power’s annual dependability study. Still, problems with local nameplates exceed those of foreign brands by 75 percent.
“It is not just one product that changes perception but it is many products over two to three model cycles, five to seven years,” said Charles Mills, vice president of the global retail practice at J.D. Power Commercial Consulting (Shanghai) Co. “Even if they come up with a beautiful skin of a vehicle, the people still have to believe the vehicle is going to deliver as good an experience as something else.”
To burnish their appeal, some Chinese automakers have brought in star designers from abroad. BAIC’s state-owned parent in April hired Leonardo Fioravanti, who designed the Ferrari Daytona, as chief design officer. Bayerische Motoren Werke AG (BMW)’s China partner, Brilliance China Automotive Holdings Ltd. (1114), lured Dimitri Vicedomini from design house Pininfarina SpA. (PINF) Great Wall Motor Co., China’s biggest maker of sport-utility vehicles, appointed former Mercedes-Benz designer Andreas Deufel as design director last year.
China’s automakers are also looking overseas, with exports projected to jump by 50 percent this year, extending record shipments in 2011, according to the official trade chamber. Russia was the biggest export destination for China-made vehicles, while Brazil posted the fastest growth. Those ambitions, though, may have been dealt a blow after Australia this month ordered a recall of 23,000 vehicles made by Great Wall and Chery Automobile Co. that were found to have parts containing the carcinogen asbestos.
China’s government has partially met its 2011 targets to have two to three national automakers with annual sales exceeding 2 million units and four to five with more than 1 million deliveries each.
SAIC Motor Corp., Dongfeng Motor Group Co. (489), China FAW Group Corp. and China Changan Automobile Group Co. sold more than 2 million vehicles last year, according to auto association data. Among the rest, only BAIC topped the 1 million-unit mark.
To encourage consolidation, the industry ministry said last month that it will revoke production permits of automakers that make fewer than 1,000 passenger vehicles annually for two consecutive years.
Yet even the stars haven’t fared well with cars they developed themselves. SAIC, Dongfeng and China FAW Group generated less than 10 percent of their profits last year from selling their own passenger-vehicle brands, according to China FAW deputy engineer-general Zhou Yongjiang.
SAIC (600104) suspended production of its “Shanghai” brand in 1991 after it started making Santana cars with Volkswagen. In 2007 it introduced its Roewe nameplate, which sold 47,832 vehicles last year, or about 1.3 percent of the combined sales of its ventures with GM and VW. Dongfeng, which works with Nissan Motor Co., Honda Motor Co., PSA Peugeot Citroen and Kia Motors Corp. (000270), derived about 66 percent of its sales from foreign brands.
For BAIC’s Liu, who previously worked at Chinese ventures of VW and Hyundai, making the new “Beijing” brand stand out among the hundreds crowding the market remains an uphill task.
“Our margins are next to nothing,” Liu said. “The difficulties are way more than I previously imagined and we are struggling to find solutions.”
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