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Global Economics

China's Auto Industry Takes On the World

Mainland-built Rovers and BMWs, plus new model blitzes at home and expansion plans abroad, showcase the planetary aspirations of Chinese carmakers

A little piece of England came to China this week. On Mar. 27, the classic British brand MG Rover began production in Nanjing, in Jiangsu Province, with 1.8-liter and 2.5-liter MG7 sedans and a 1.8-liter MG TF roadster rolling off a Chinese factory line. Next up will be other MG nameplates with engine sizes ranging from 1.1 to 1.6 liters, says Nanjing Automobile Group, the new owner of the once-iconic British brand.

This milestone for the Chinese auto industry follows Nanjing Auto's $97 million purchase in 2005 of the failed MG Rover brand, its Powertrain engine unit, and its factory in Longbridge, England. Nanjing Auto moved the entire production line to this city northwest of Shanghai—and the rollout of these stylish cars is part of a larger transformation for a company best known for its commercial bus and truck production. It already produces the Fiat Palio and Siena, thanks to a hook-up with the Italian automaker. The company pumped $450 million into the factory producing the Rover and aims to produce 200,000 cars, 250,000 engines, and 100,000 gearboxes a year.

Unlike other Chinese auto companies that have either partnered with foreign auto companies or developed their own brands, Nanjing Auto is taking "a third path" aimed at creating an internationally competitive auto player, said Chairman Wang Haoliang on Mar. 27, according to the China Daily. The company has ambitious plans to spend $2 billion, which include the opening of a factory in Ardmore, Okla., next year in a bid to crack the world's biggest auto market.

Sedans for the Mainland

Plans are also under way to produce Rovers at the original factory in England to sell in the European market in late 2007. Nanjing Automobile Group acquired the entire assets of MG Rover back in 2005, with the exception of some Rover technology that went to Chinese car company SAIC Motor.

The Rover deal is just one more example of Chinese automakers maneuvering to exploit a white-hot Chinese sedan market, which grew 30% to 5.18 million units last year and is expected to soon surpass Japan as the world's second largest market. Take rival player SAIC Motor, whose parent company partners with General Motors (GM) and Volkswagen (VLKPY), and owns the technology to the Rover 75 and Rover 25 models.

It launched its own-brand 2.5-liter Roewe based on the Rover technology last year. Already in the first five months it sold 4,000 Roewes and has plans to produce 200,000 passenger cars and 400,000 buses and trucks under its own brand by 2010, the company says.

Eye on the U.S.

And the Chinese car companies are not content to stay at home. Wuhu (Anhui Province)-based Chery, which produces the popular minicar the QQ on the mainland, recently signed a deal with DaimlerChrysler (DCX) that will see it produce Dodge-brand vehicles for the U.S. and Western Europe markets. Shenyang-based Brilliance Automotive, which has a joint venture producing BMWs with the German company in northeastern China, showed three new models at the Geneva Auto Show this month. Those included a sporty sedan called the BS6, a BS4 compact, and a two-door BS3 coupe, all of which it aims to sell in Europe.

And Zhejiang-based Geely Group, which plans to buy a stake in taxi maker Manganese Bronze Holdings (MBZHF) and start producing London black cabs in Shanghai, also aims to sell its affordable small vehicles in the U.S. within several years. "Our target is to put our car in the U.S. market by 2010," says Geely Holdings executive director Lawrence Ang. "Our obvious strength is price."

In an effort to get closer to overseas markets, the Chinese players are starting to open overseas factories, too. Chery, which exported 50,000 vehicles mainly to emerging markets last year, now has assembly operations in countries including Russia, Indonesia, Iran, and Egypt. The company now is planning to extend its reach in South America by opening an assembly plant to produce its Tigo-brand sport-utility vehicle in Uruguay. Brilliance produces vehicles in three overseas factories in North Korea, Egypt, and Vietnam, and Geely has a factory in Russia.

Trusted Brands?

Despite those inroads abroad, cracking developed Western markets certainly won't be easy. One huge challenge will be breaking into distribution channels and convincing overseas customers to trust Chinese autos. Chinese car companies have an often-deserved reputation for being more concerned with cost cutting than building high-quality, innovative vehicles. "The weak foundation of the Chinese car industry still makes it difficult for China to produce a car of decent quality and safety level," cautions Beijing-based auto analyst Jia Xinguang.

Indeed, even succeeding at home is a challenge in the highly competitive, cutthroat Chinese auto market. So Nanjing Auto has asked Beijing for loans and subsidies totaling close to $400 million to fund its big plans to sell the Rover in China and overseas. Whether or not Beijing provides that major handout, though, MG Rovers will soon be tooling the roads of China.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.

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