Auto Industry

The slow lane

Homegrown cars lose out to foreign rivals

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When foreign carmakers like GM and Volkswagen were first allowed to set up shop in China, they were forced to partner with local manufacturers. The longer-term goal was to encourage the production of locally-designed cars. But the plan has backfired. As we noted in WiC165, business has been so good that the largest Chinese car firms haven’t needed to plough their own furrow, concentrating instead on harvesting the fruits of their joint ventures. Each has become dependent on sales of overseas brands. Almost nine out of 10 cars sold by Shanghai Auto last year came from tie-ups with General Motors and Volkswagen, for instance.

“It’s like opium. Once you’ve had it, you’ll get addicted forever,” He Guanyuan, a former minister, lamented two years ago. “So many years have passed and we don’t have a single brand that can be competitive in the auto world. I feel red-faced.”

After peaking at 31% of the market in 2010, domestic brands have been on a downward trend ever since. The latest data shows that they are still stuck in the slow lane. While the total market grew again in May, rising 8.5% to 1.9 million vehicles, sales of Chinese cars struggled to keep up, growing at 5.4%.

It is China’s independent producers – firms like Geely, Great Wall, Chery and BYD Auto (which don’t have state ownership and lack an international partner) – that are getting the worst of it, says Carson Ng, HSBC’s analyst for the sector.

The assault they face is three-pronged. Firstly, the stronger joint ventures are starting to produce lower-end models at competitive prices like the VW Santana, the Buick Excelle and the Skoda Rapid. Additionally, some of the larger local automakers like Beijing Auto and Changan have managed to launch some more attractive models of their own, funded by the cashflow from their joint-venture businesses. And finally, Chinese consumers are starting to shift towards higher price ranges, which is damaging for the purely domestic operators, which tend to compete at the lower end of the market.

Contrastingly, China is gushing cash for the international carmakers. GM’s joint ventures produced net income of $595 million in the first quarter, for instance, compared with $100 million from the rest of its international operations. Volkswagen’s contribution from China has been similarly weighty. Last year’s operating profits from its partnerships were reported at €9.6 billion ($13.06 billion) out of €11.7 billion worldwide, the Financial Times says.

Aside from profits shared on China sales, the foreign carmakers charge royalties on their brands and shared technology, and sell key components to their Chinese partners.

Volkswagen continues to do best among the foreign firms. Further back, Ford has been making ground, almost doubling its share in sports utility vehicles and larger passenger cars over the last two years, partly at the expense of its American rival GM.

The Japanese are having a harder time. Despite regaining some of the business lost to consumer boycotts two years ago (see WiC270), Japan’s premium brands don’t appeal to wealthy Chinese as strongly as marques like Range Rover or BMW, suggests The Economist. Even Toyota’s boss Toyada Akio has admitted that Japanese cars lack “story, narrative or history”, the magazine noted last week.

Meanwhile Japan’s carmakers already struggle to win over Chinese consumers. A little over half of 40,000 respondents to a Sanford Bernstein survey said they would never buy a Japanese car on patriotic grounds, the Wall Street Journal has reported.

But how does Beijing get back on track in encouraging a genuinely competitive roster of domestic cars? One option is to call a halt to the joint ventures, allowing the foreign companies to buy out their Chinese partners. Without their share of profits on the foreign models, the state-owned manufacturers would struggle financially. But at least this would encourage greater consolidation among the homegrown groups, forcing them to focus on producing better models of their own.

Of course, the move might also help privately-owned automakers like Great Wall and BYD, since they don’t depend on the joint ventures for income. If they can survive long enough, China’s independent producers might prosper yet.

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