China's Auto Industry: Roaring Ahead

Since the mainland overtook Japan as the world's second largest car market, local automakers are increasingly competitive and cutthroat

The word Longbridge was once synonymous with all that was great about British motoring. This southern suburb of Birmingham in the English midlands gave a home and a name to what was, at its peak, the world's largest car plant, producing Austin, Morris and MG Rover cars.

As the UK auto industry slipped into 20th century oblivion, the plant saw nationalization, privatization, mergers, takeovers and, ultimately, financial meltdown. In April 2005, with owner MG Rover in receivership, Longbridge closed its doors after 100 years of continuous operation, putting 6,500 people out of work.

If all goes according to plan, the lights will officially be switched back on at the end of May. This won't just bring new life - and 250 jobs - to a corner of the English midlands steeped in auto making history; it also represents a big step for the new Chinese masters of Longbridge.

Nanjing Auto plans to launch the MG-TF roadster convertible this month and the cars will go on sale later in 2007, initially in Europe. But as well as serving as a staging post for exports, it is hoped that Longbridge, and the intellectual property that came with it, will help this domestic carmaker go toe-to-toe with foreign brands in the Chinese market.

"April 8, 2005 was one of the worst days of my life," said Adrian Ross, formerly convener for the Transport & General Workers Union at the plant. "At the end of the day, as long as Nanjing Auto honors what it has said about Longbridge then I am 110% behind them. Everything is there, geared up and ready to go."

TAKEOVER BATTLENanjing Auto's involvement came after a fierce battle with rival Shanghai Automotive Industry Corp (SAIC) over the assets of the insolvent MG Rover. Nanjing Auto was the small-scale upstart, SAIC the established player running joint ventures with GM and Volkswagen that build around 700,000 vehicles per year.

In the end, SAIC paid US$130 million for the rights to two Rover models and one engine series. Nanjing Auto got the rights to the MG portfolio, as well as MG Rover's production lines and other assets, for US$97 million.

SAIC released the 2.5-liter Roewe 750, based on the Rover 75. In March, Nanjing Auto announced plans to start production of the 1.8-liter MG-TF roadster and the MG 7295 and MG 7275 sedans at its new plant in Nanjing, which is partly modeled on Longbridge.

The vigour with which Nanjing Auto and SAIC competed for MG Rover speaks volumes for both the ambitions and limitations of China's auto industry.

Last year, China overtook Japan to become the world's second-largest auto market as total vehicle sales came to 7.2 million units, up 25.1% year-on-year. Passenger vehicle sales rocketed 30% to reach 5.14 million units. Having put total light vehicle sales - the bulk of which is cars - at 5.7 million units in 2006, auto consultancy CSM Worldwide expects it to nearly double over the next seven years to more than 10.3 million units.

Needless to say, the top global automakers have all positioned themselves in joint ventures with domestic firms so as to take advantage of this boom.

"If you want to have any growth in the auto industry, you have to be focused on China," said Joseph Liu, executive director of vehicle sales, service and marketing for General Motors (GM) China, which works in partnership with SAIC.

"We expect to see double digit growth every year until 2010-11."

FOREIGN DOMINANCEGM is the market leader, selling 876,747 vehicles in China last year, up from 665,390 in 2005. Volkswagen, which runs a joint venture with Changchun-based First Auto Works (FAW) as well as SAIC, occupies second spot with 711,000 sales in 2006, a year-on-year increase of 24%. Meanwhile, Ford, partnered by Changan Auto, saw sales jump 87% to 166,722.

The Japanese carmakers are the ones that are set to see the largest near-term growth, though. CSM expects Toyota, Honda and Nissan - all relative latecomers to the market - to more or less double their China sales within five years.

It is in this cutthroat environment that local Chinese automakers are looking to step up a level in product development.

Most domestic firms entered the market by producing vehicles that were basically low cost, low quality versions of existing models. For example, the Chery QQ, one of the best selling economy cars in China, prompted legal action from GM over the vehicle's similarity to the Daewoo Matiz, produced by the US carmaker's Korean joint venture.

"It all comes down to re-engineering," said Charles Cheung, head of regional autos at Citigroup. "Most carmakers start out by replicating existing models and that is fine. To really move up the value chain, they need to reinvent themselves."

STANDING OUTDomestic firms account for 27% of the Chinese market but it is split amongst 20 or so manufacturers. With consolidation inevitable, the race is on to develop better designs and technology and wider product ranges under respected brands.

It is a strategy that will see them gradually move up the value chain, first challenging the lower-end Korean producers, Hyundai and Kia, before taking on GM and Toyota in the higher segments.

"There is no room for a firm that only focuses on small cars - you can't get the volume and profitability," said Lawrence Ang, executive director of Hong Kong-listed Geely Automobile Holdings. "You have to be a full range car manufacturer."

Geely, based in Zhejiang province, is moving fast to expand its product range. It is expanding from one to 1.8-liter models this year, will enter the two-liter bracket in 2008 and hopes to be offering 3.5-liter cars by 2010. Geely is also sinking 6-8% of annual revenues into research and development efforts.

"When you invest in developing engines and gear boxes, it gets expensive but our long-term competitiveness depends on technology. We are catching up with international car companies," Ang said.

The advantage that SAIC and Nanjing Auto have is that they have their hands on a Western-standard design ready made. The Roewe 750 has gone straight in at mid-market level and hopes to challenge some of the established foreign players. Backed by a proven track record in producing cars through its GM and Volkswagen joint ventures, SAIC will move from own-brand sales of 23,400 this year to an annual output of nearly 180,000 by 2013, according CSM.

The projections for the smaller Nanjing Auto aren't as high but, from an export angle at least, it can call upon the strength of the MG brand. (The Rover name is owned by Ford.) "Rover didn't sell in the North American market but, in the MG, Nanjing Auto has a brand that is recognized," said Ross.

The company also has the chance to develop the car designs it acquired at a research facility set up in the UK with the assistance of MG Rover.

"In the US, it takes decades for car companies to come into their own," said Michael Dunne, vice president for Asia-Pacific at auto consultancy JD Power & Associates. "Nanjing Auto and SAIC can say: here is a car with our brand on it and it's not the result of a partnership with a foreign car company."

SITTING PRETTYIf the likes of GM and Volkswagen are concerned about being challenged in the domestic market by the parent companies of their own joint venture partners, then they aren't showing it.

"There is a degree of natural substitution but, based on our product resources, we don't really see them as a director competitor," Liu said of SAIC's Roewe 750.

In his view, GM remains innovative enough to be more than a match for its competition. He cited the launch of the Buick GL-8 - which found success as a high-end minivan when everyone else said budget vehicles were the only option - as evidence that GM has what it takes to set the standards in China.

And getting your first car on the road is the easy part. Any manufacturer that really wants to make an impression has to back this up with effective after sales services and a string of successful follow-up models that make the line sustainable.

"Brand, future technology and distribution networks are very important," said Liu. "A car is not like a commodity - you have to build up trust."

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE