China's Auto Industry: Roaring Ahead

(page 2 of 2)

Most domestic firms entered the market by producing vehicles that were basically low cost, low quality versions of existing models. For example, the Chery QQ, one of the best selling economy cars in China, prompted legal action from GM over the vehicle's similarity to the Daewoo Matiz, produced by the US carmaker's Korean joint venture.

"It all comes down to re-engineering," said Charles Cheung, head of regional autos at Citigroup. "Most carmakers start out by replicating existing models and that is fine. To really move up the value chain, they need to reinvent themselves."

STANDING OUT
Domestic firms account for 27% of the Chinese market but it is split amongst 20 or so manufacturers. With consolidation inevitable, the race is on to develop better designs and technology and wider product ranges under respected brands.

It is a strategy that will see them gradually move up the value chain, first challenging the lower-end Korean producers, Hyundai and Kia, before taking on GM and Toyota in the higher segments.

"There is no room for a firm that only focuses on small cars - you can't get the volume and profitability," said Lawrence Ang, executive director of Hong Kong-listed Geely Automobile Holdings. "You have to be a full range car manufacturer."

Geely, based in Zhejiang province, is moving fast to expand its product range. It is expanding from one to 1.8-liter models this year, will enter the two-liter bracket in 2008 and hopes to be offering 3.5-liter cars by 2010. Geely is also sinking 6-8% of annual revenues into research and development efforts.

"When you invest in developing engines and gear boxes, it gets expensive but our long-term competitiveness depends on technology. We are catching up with international car companies," Ang said.

The advantage that SAIC and Nanjing Auto have is that they have their hands on a Western-standard design ready made. The Roewe 750 has gone straight in at mid-market level and hopes to challenge some of the established foreign players. Backed by a proven track record in producing cars through its GM and Volkswagen joint ventures, SAIC will move from own-brand sales of 23,400 this year to an annual output of nearly 180,000 by 2013, according CSM.

The projections for the smaller Nanjing Auto aren't as high but, from an export angle at least, it can call upon the strength of the MG brand. (The Rover name is owned by Ford.) "Rover didn't sell in the North American market but, in the MG, Nanjing Auto has a brand that is recognized," said Ross.

The company also has the chance to develop the car designs it acquired at a research facility set up in the UK with the assistance of MG Rover.

"In the US, it takes decades for car companies to come into their own," said Michael Dunne, vice president for Asia-Pacific at auto consultancy JD Power & Associates. "Nanjing Auto and SAIC can say: here is a car with our brand on it and it's not the result of a partnership with a foreign car company."

SITTING PRETTY
If the likes of GM and Volkswagen are concerned about being challenged in the domestic market by the parent companies of their own joint venture partners, then they aren't showing it.

"There is a degree of natural substitution but, based on our product resources, we don't really see them as a director competitor," Liu said of SAIC's Roewe 750.

In his view, GM remains innovative enough to be more than a match for its competition. He cited the launch of the Buick GL-8 - which found success as a high-end minivan when everyone else said budget vehicles were the only option - as evidence that GM has what it takes to set the standards in China.

And getting your first car on the road is the easy part. Any manufacturer that really wants to make an impression has to back this up with effective after sales services and a string of successful follow-up models that make the line sustainable.

"Brand, future technology and distribution networks are very important," said Liu. "A car is not like a commodity - you have to build up trust."