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Business / Auto China

New frontiers but no easy money in the car market

By Wang Chao (China Daily) Updated: 2013-07-15 07:25

Xu Heyi, president of BAIC, is optimistic about the new company's future. "Last year the export volume of Chinese cars reached 1 million and I project the volume will pass 2 to 3 million in the next two to three years. And of those, 30 percent will come from overseas manufacturing bases."

Internationalization is the trend for the Chinese auto market, Dong says, and this is illustrated by the blueprints followed by major Chinese auto groups.

"Sooner or later more than 10 million Chinese cars will go overseas and, during the 13th Five-Year Plan, at least several million sales will come from overseas."

However, giant auto groups such as SAIC and BAIC can boast about their big revenue and profits, but they must admit they have been slow to expand overseas compared with private companies such as Chery and Great Wall Motors Group Co Ltd.

The 2012 auto export ranking provided by China Association of Automobile Manufacturers shows that the top five exporters were Chery, Geely, Great Wall, SAIC and Lifan Group. Only one State-owned auto group, SAIC, made its way onto the list.

BAIC ranked 10th, with overseas deliveries of 50,900, only half of Chery's output.

Dong labels the key overseas markets as BRIMS: Brazil, Russia, Iran, Mexico and South Africa. These places already accommodate some strong rivals to BAIC, such as Chery, Great Wall and Lifan, which means BAIC has a big battle ahead if it wants to survive.

Because most of these export destinations have undeveloped auto industries, the local governments are open to Chinese automakers who can teach them advanced technologies and how to create jobs. But they do not want their nations to be flooded with Chinese cars.

Brazilian ambassador, Valdemar Carneiro Leao, says his country used to favor foreign investment in the energy field, but now prefers it in manufacturing areas such as railways, ports and automobiles. "BAIC's move into Brazil is part of this process," he says.

Brazil is now the world's sixth-largest auto market, with annual output of 3.2 million. It is an emerging market for Chinese automakers, but not an easy one. About 80 percent of the Brazilian market is taken up by budget cars with engine sizes smaller than 1.6 liters. Most of these are powered by a fuel made from ethanol and sugarcane, requiring different engine configurations.

Also, the import tariff on cars is high - 70 to 80 percent - so the sticker price of cars is much higher in Brazil.

"The only solution for international automakers is to localize to bypass the tariff," Dong says. "But, again, government requirements are high: A foreign company has to localize 65 percent of its full production line in five years."

BAIC will work together with local partners to achieve production capacity of 60,000 "in the mid-term", Dong says.

Although it is late, they are not entirely starting from the ground up, Dong says. "We already have a Russian trading company with 143 service sites and 15,000 deliveries and a branch company in South Africa manufacturing and selling cars locally."

BAIC's overseas schedule is ambitious. It plans to build seven regional centers in 30 countries in the long term, with expected annual output of 400,000 cars and revenue of 50 billion yuan.

Overseas markets vary. While drivers sit on the left side in Brazil, they are on the right in South Africa. In the Middle East, most cars do not have a roof window due to the harsh sun, yet in Russia people love the sunshine.

To address these issues, vehicles will first be designed by the research institute in China and then modified by local distributors. Meanwhile, the Chinese headquarters will support overseas bases by establishing packaging plants for knock-down parts as well as a logistics center in Tianjin port.

Despite these efforts, BAIC has a long way to go to beat even its Chinese rivals, such as Great Wall, let alone marquee names such as Toyota and Hyundai.

Great Wall boasts a bigger profit margin per car in overseas markets than in the domestic market, with sticker prices slightly lower than Japanese models.

"Great Wall has already established a good reputation and visibility in overseas markets, so it can charge high prices and still find buyers, but BAIC is still nobody, so we cannot follow their strategy," Dong says.

The pick-up trucks made by Great Wall and ZXauto Co Ltd in Hebei province became so popular in the Middle East and North Africa that they were used like chariots in the Libyan civil war.

There is a joke in the overseas auto market that says "made in China, 20 percent off". Dong does not want this embarrassment to apply to BAIC. He says the company will not entirely outsource after-sales services to local distributors, but will be involved in specific projects, helping to recruit workers, building plants and handling logistics issues.

During this process, the joint-venture partners cannot really help. BAIC has strong partners in China - Daimler and Hyundai - and the models are all money-spinners for the joint venture. But Dong says the company cannot count on foreign partners to help explore overseas markets, because there they are competitors.

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