China may now be the world’s largest car market but it is also dominated by foreign brands. Hence the grand ambition for an industry of national champions that can (one) take the lead in new technologies and (two) outcompete its Western rivals globally.
Two different Chinese carmakers have come to embody the blueprint for success: BYD, for the plan for battery-powered electric vehicles; and Geely, which has the first chance to show that a Chinese carmaker can cut it overseas, courtesy of its acquisition of Sweden’s Volvo.
First, Geely. The landmark $1.8 billion deal for Volvo proved that Chinese firms can acquire major overseas brands. But Geely is yet to show that it can make a success of running one internationally.
“Volvo is well known for safety, technology, electronics development and quality,” auto industry expert Zhao Hang told Xinhua, “[the deal] is a shortcut for Chinese businesses by purchasing an international car manufacturer.”
In fact, the first challenge is to nurse the loss-making Volvo back to health – principally by boosting its sales in China.
Geely recently announced plans to build three new Volvo plants in the country, capable of assembling 300,000 new cars a year (it’s expecting to sell 380,000 Volvos worldwide this year).
And the early signs are that sales are up (China was Volvo’s third biggest market for the first ten months of the year), although that seems to have been helped by some aggressive price discounting.
That could have an adverse impact on Volvo’s brand positioning, and there are already signs of differences of opinion on the way forward. “I suggested [to Volvo’s board] that we make Volvos bigger in China,” Geely boss Li Shufu told China Business News. “They disagreed, since bigger cars consume more energy, material and… go against the current trend of the world’s auto industry.”
Li (also Volvo’s Chairman) seems to have had the last word on the matter, with Volvo CEO Stefan Jacoby since announcing plans to introduce a bigger vehicle in the China market. But Li also has to decide if Volvo will try to bridge the brand gap with Audi, Mercedes and BMW in China, as well as how best to maintain its reputation overseas. The acquisition won’t be judged on profits or sales volumes alone – but also on whether it can enhance the Volvo and Geely brands.
So far, Geely’s stewardship looks solid enough – its stock is up around 40% since the deal was signed last August.
But the same can’t be said for our other bellwether: BYD. Its shares are down nearly 15% over the same period.
A year ago, Wang Chuanfu’s firm (10%-owned by Warren Buffett) was still the industry’s pin-up. But BYD has repeatedly delayed its plans to release the all-electric E6, prompting speculation that its battery technology could be further delayed. Even if the technology is mature enough, hybrid vehicles look too expensive to attract millions of customers, even after the announcement of more subsidies for buyers in the summer.
That leaves BYD making almost all of its money from selling petrol-powered vehicles – not what the “green premium” in its stock price had been indicating. The premium has narrowed in recent months, despite a visit from Buffett to rally BYD’s spirits.
What’s next? BYD says it will launch the E6 commercially later next year – putting it well behind rivals GM and Nissan, which are releasing electric cars in the US this month.
That news may embolden the planners behind the ‘electric vehicle union’ of 16 top state firms, including carmakers Dongfeng and FAW. They have announced they will invest a collective $14.7 billion by 2012 with a goal of producing 6 million electric vehicles annually by 2020. Further subsidies for consumers (of around $9,000 per car) are in the mix for spurring demand.
Commentators say that the ‘union’ still lags privately-owned BYD in the race, especially in battery R&D, the area said to have persuaded Buffett to invest in the first place. The thing to watch will be whether it’s the private sector player or the state-backed behemoth that makes more zero-emission headlines next year.
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