Auto Industry, Talking Point

Car country

The vehicular King of Bling capitulates to a manufacturer of dump trucks

Car country

Sichuan Tengzhong's proposed acquisition of Hummer has put it on the map

Revered by rap stars and beloved of basketball players, the Hummer sports utility vehicle is on the block as GM fights for survival. And now it could be on its way to a new home: an industrial estate in suburban Chengdu.

As a symbol of American macho, the Hummer is difficult to trump, from its Humvee military origins, careering through the dust of Desert Storm, through to its commercial reincarnation for Hollywood Boulevard, courtesy of its first private owner Arnold Schwarzenegger (who has owned as many as eight Hummers, according to reports).

So the proposed sale is replete with heavy duty imagery ­– as heavy as the industrial equipment sold by the vehicle’s prospective buyer, Sichuan Tengzhong. If the sale goes through, Arnie’s favourite automobile will be garaged at a firm with a reception hall dominated by sculptures of Chinese gods, reports

Together with the repeated rumours of a Chinese pursuit of Volvo, Opel and Saab, Hummer’s case is being taken as further evidence of a major shift in the automotive landscape.

So Chinese manufacturers are poised to overtake?

While light vehicle production shrank globally in 2008 by 5% (and is expected to decline further in 2009), Chinese unit sales are growing robustly. Bloomberg reported this week that Chinese car sales have jumped “beyond imagination” and buyers face two month waiting lists to pick up their vehicles.

Monthly vehicle sales in China have also exceeded those in the US since the beginning of the year. There were 1.12 million units sold in May, versus 925,824 in the US.

Then there is the news flow. In the US, the sense is of a dead-end street as Chrysler and GM struggle with bondholders and government-mandated restructurings.

In China, the spin is more of a future of possibilities, with ambitious talk of takeovers and new technologies.

But although sales at home may be on the up, most Chinese consumers (two thirds of them, in fact) are buying foreign models, and not Chinese ones.

True, many of the foreign models are made in China but they are not local brands. And overseas sales of Chinese cars are pitiful – only 66,000 in 2008, a decline on the previous year.

So a growing market but not necessarily for Chinese cars?

China is a huge producer of auto parts, many of which are supplied to manufacturers internationally. Chinese firms have also proved that they can assemble vehicles efficiently, including foreign brands.

But domestic producers are less successful in the complex skills of synthesis and engineering says Bill Russo, principal at China auto-consultancy Synergistics.

This means that the Chinese finished product trails international competitors, and domestic consumers know it.

In China there are at least 150 registered automakers, and the fragmented nature of the industry makes it a challenge to reach the highest standards.

Russo says the top 20 manufacturers count for 95% of sales but, even so, it is difficult for firms to achieve full economies of scale. This means less capital is available for investment in research and development.

Beijing is trying to encourage consolidation. The goal is a 10 firm industry, based around two tiers of manufacturers.

In the first tier are the nation-wide players like SAIC and First Auto Works Group, with annual production volumes of 2 million units. In tier two are the regional firms like Chery and Guangzhou Automotive Industrial Group, with production capacity of 1 million units.

The problem says GE Anderson, another industry specialist and author of the ChinaBizGov blog, is that there is stubborn resistance to Beijing’s attempts to streamline the industry. Local and provincial governments do not want to give up their manufacturing plants, nor the jobs that they create.

But eventually we will see strong Chinese brands emerging?

Perhaps, although analysts wonder how long it will take. There are some, for example, who think that China has “leapfrog” advantages in certain areas, especially electric-powered vehicles (see WiC11). But critics are less convinced, pointing to the desultory sales of BYD’s plug-in vehicle since its launch last year.

Other sceptics wonder how many of the proposed deals for foreign brands will actually go through. The Shanghai Securities News doubts that the Hummer transaction will get government approvals – a likely deal-breaker if Tengzhong needs financing from state banks. Certainly, the bid seems to run counter to policy commitments to promote fuel-efficient vehicles. It also adds a new carmaker to the bloated list of manufacturers.

Nor is it simply a case of buying up iconic brands and assuming world domination will follow. Indeed, for those deals that do go through there is the risk of failure; SAIC’s recent write-off on the failed purchase of Korean manufacturer Ssangyong is a case in point.

But now is the opportunity, so Chinese firms should take it?

Detroit’s distress may have opened a window of opportunity. If they can acquire and integrate the right assets from overseas, a small group of Chinese manufacturers could emerge onto the wider stage.

But analysts agree that they will need to start out by winning a bigger share at home. Ambitions need to be tempered too; why, for instance, does Tengzhong believe it is in a better position to make a go of Hummer than GM itself?

After all, the Chinese firms are veritable infants in carmaking terms. And for those interested in the industry’s history: Toyota started out in 1937 but did not enjoy large overseas sales until the mid-1970s, says Russo.

Toyota was helped by the first oil shock, which persuaded Americans to buy fuel-efficient cars. Crises can often offer opportunities, of course, and the Chinese carmakers will be hoping that they too will be able to capitalise on difficult times.

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