China goes to Motown

BenBen: the cheapest car in China

Motown and New Motor City may be almost 7,500 miles apart, and perhaps even more distant in terms of their respective futures, but Chang’an Auto now has a foot in both locations. Which of the two will prove the wiser investment?

As we have written previously in WiC, China wants to consolidate its expanding auto industry around eight state-owned carmakers. Chang’an is part of a ‘big four’ tier (along with SAIC, FAW, and Dongfeng) and has been given the green light to expand and acquire across the country. Below these ‘national champions’ there’s a ‘smaller four’ group of BAIC, Guangzhou Automobile, Chery and China HDT, which will likely grow via regional acquisitions.

Other state-owned carmakers (often with their own local government shareholders) will find the going tough against the preferred elite, although manufacturers like Geely and BYD – generally considered to be privately owned – are expected to be nimble enough to compete.

However, among all the state-owned car firms it is Chang’an that has been grabbing most of the headlines recently. That’s because it’s announced its intention to invest this year in both Detroit (in an R&D centre) and Yuzui in Chongqing (to build a massive new manufacturing facility).

Chang’an got into the ‘big four’, following the last round of consolidation in 2009 when it was given the automotive assets operated by aerospace giant AVIC (see WiC42).

But it stands out from its peers for two main reasons. Although it aims to produce 2.5 million vehicles in 2011, according to Chinese media reports, as many as 1.9 million of these will be self-branded (rather than foreign brands produced in joint venture partnerships). That makes Chang’an the largest manufacturer of ‘Chinese’ vehicles, primarily compact cars like the BenBen Mini (lauded at launch as ‘the cheapest car in China’ at only Rmb30,000, or $4,566). The company is also known for its ‘bread vans’ (mian bao che in Chinese) – 7 to 8 seater minivans, said to look like local ‘bun’-bread.

Consumption-tax rebates on smaller vehicles announced in March 2009, as well as subsidies for rural car buyers and incentives of up to Rmb18,000 to trade in older models all helped to lift sales in both segments significantly. But most of those incentives have now been withdrawn, and analysts will be watching the monthly sales figures closely in early 2010. January’s numbers are now out, with total vehicle sales up 13.8% to 1.89 million, says the China Association of Automobile Manufacturers. That was the largest monthly total ever, although the growth rate (in year-on-year terms) was down on December last year.

Glass half-full or half-empty? Chang’an CEO Xu Liuping says there are plenty of reasons to be cheerful, including the continuing contribution of the Rmb3,000 government subsidy for fuel-efficient vehicles, as well as the wider economic growth now making car ownership a new reality for millions of potential drivers.

Chang’an is also well positioned in a number of second and third tier cities for the next wave of demand, say commentators, and by focusing on sales of Chinese brands is doing something that pleases policymakers.

Xu now says his focus is more on the longer term, with a target to raise annual sales to 6 million units a year by 2020 (well over double last year’s production). The goal is to move up the rankings of the top four grouping.

In preparation Chang’an has announced it will be investing heavily, primarily in a ‘New Motor City’ in the company’s home municipality of Chongqing. Total spend on the new site will exceed Rmb35 billion (yes, that’s $5.32 billion), with a production goal of 800,000 vehicles and 1.5 million engines annually set for 2015. A further seven cooperation agreements have been signed with local governments for more production elsewhere; Harbin in Heilongjiang is slated for 1 million vehicles in annual throughput, for instance, and Jingdezhen in Jiangxi will be expected to deliver a similar number.

The critics see three main clouds on the horizon, says China Business News. One is that Chang’an is trying to grow too fast, and may not be able to digest so many new projects. The concern is that the carmaker is getting bigger but not stronger.

A second concern is that the company has an uphill struggle to compete in the higher-end segments of the market. That feeds through into lower profitability: in 2010 Chang’an reported net profits much lower in percentage terms than its peer group. Part of the response will involve a review of its joint venture arrangements with foreign partners, (currently there are tie ups with Suzuki, Ford and Mazda, with a new deal with Peugeot-Citroen still being discussed). Xu is also looking at further investment in Chang’an’s own brands, which he hopes will allow him to close some of the pricing gap. Hence the $30 million spend on an R&D centre in Detroit announced last month, the first from a Chinese automaker in the American city. The focus is on chassis technology for mid- and high-end cars to be independently developed by Chang’an, according to the Global Times.

The third challenge: the expansion plans will all require huge funding and it isn’t clear where the financing will be found. No doubt the state-owned banks will be approached, local governments in Harbin and Jingdezhen will no doubt help too. The listed company also raised Rmb3.5 billion in a share placement on the Shenzhen stock exchange in January. Then again, the placement raised less than anticipated. Chang’an spokesmen blamed adverse market conditions. But perhaps investors needed a little more convincing about the strategy…

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