Auto Industry

On the starting line

Is Renault coming to China too late?

Renault w

Facing sluggish sales in Europe, Renault lures Chinese consumers

Business conditions for carmakers in Europe sounds dire. As Stephen Odell, head of Ford in Europe, put it to the Financial Times recently: “We have a catastrophic decline in the industry.” Six out of 10 car companies in the European Union are making a loss, leading to a “race to the bottom” as firms reduce prices to shift inventory, the FT reports.

French carmaker Renault is in the middle of the melee, despite striking a deal with the unions this year to reduce its number of employees in France by 17%, reports Bloomberg.

So it should be good news that Renault’s first production joint venture in China is getting underway, finally providing an opportunity to scale up its sales in the country’s car market.

Renault’s first partner in China was Sanjiang Aerospace Group. The joint venture – Sanjiang-Renault – was set up as early as 1994 to produce Trafik vans. But the partnership went sour and Sanjiang pulled out. The biggest stumbling block to cementing a new deal was a regulatory requirement that this earlier company was liquidated.

The good news came at the end of May, when state asset holding company Sasac approved Dongfeng’s acquisition of 55% of Sanjiang Renault, reports CBN, in a deal blessed by Wuhan’s local government. But the new joint venture – Dongfeng Renault – is yet to obtain the consent of the central government, the 21CN Business Herald reported last week.

The project is a huge investment – now tabled at Rmb11 billion ($1.79 billion) from the previously announced Rmb7.2 billion – so Renault will be anxious that its struggle to set up in China shows signs of paying off.

But Renault’s delay in producing in China may have already damaged its chances, as it looks as though it is about to enter a market that is facing tougher commercial conditions. Car sales might have risen 9.3% in June (versus the same period in 2012), but dealers have been offering customers bigger discounts in order to meet half-year targets, reports Bloomberg.

Furthermore, concerns over air pollution are prompting some local governments to limit car purchases. The restrictions are equally aimed at easing some of the traffic congestion that now plagues large Chinese cities.

Beijing and Shanghai already have limitations in place, but eight more cities are expected to impose similar rules, reports the Economic Observer. Paradoxically Wuhan – site of the proposed Renault JV plant – is one of those proposing controls, reckons the newspaper. The estimate is that a restriction on licence plate allocations could see annual car sales fall by 400,000 units.

Unsurprisingly, talk of restrictions on sales doesn’t please the China Association of Automobile Manufacturers (CAAM). It has been robustly lobbying government officials, pointing out that licence plate reductions will not only hurt car companies but government finances too. CAAM estimates that restrictions will result in a 25% reduction in local car sales, which in turn will reduce tax revenues in the eight cities considering the move, reports the Economic Observer. The newspaper also warns that sales curbs would come at a time when supply is growing in the industry.

According to the sales targets of the major automobile groups, the Economic Observer estimates annual production capacity of 40.4 million vehicles by 2015. So anything that holds back sales is likely to see a lot more cars sitting in dealers’ lots. For example, in the first half of 2013, a little over 10 million cars were sold, suggesting that sales are going to have to double if they are to fill the looming capacity gap.

Production volumes are increasing thanks to all the new car factories now under construction: for example, General Motors said earlier this year that it will boost its output to five million cars a year by building four new plants in China over the next three years, reports the South China Morning Post.

And it’s not just carmakers that are ramping up: the number of dealerships increased almost 17% last year to more than 21,000, reports the Economic Daily.

Ten years ago, Renault would have launched production in China in a less competitive environment. But faced with a domestic market in Europe that offers little commercial comfort, Renault’s bosses will now have to make the best of a Chinese market that is facing its own challenges.

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