Thanks to a remarkable price/performance ratio, China`s indigenous passenger car brands have established a firm foothold in the domestic market there, breaking the dominance of the market by leading international brands.

The output of local brands in China hit 660,000 units in the first half of 2007, accounting for 28.9% of the domestic market and outpacing German, American, and Japanese brands.



Of the eight indigenous brands, Chery Automobile turned out 305,200 units in 2006, soaring 60% over the year before, making it China`s fourth-largest car manufacturer, trailing Shanghai General Motor, Shanghai Volkswagen, and FAW-Volkswagen. Founded in 1997, the company rolled its 1 millionth sedan off the production line in November 2007.

In addition to solid self-developed technology, Chery also has a strong capability for the production of parts and components; it now turns out 40,000 of its own ALTECO-brand engines per year, for its own use as well as for supply to other domestic automakers. Moreover, it has signed an agreement with Italy`s Fiat for the supply of 100,000 ALTECO engines annually.

Geely International, the second-largest indigenous auto brand, turned out 200,400 units in 2006, up 40%. Geely also boasts solid self-developed technology; it is backed by its own R&D center and several academic institutions, including Beijing Geely University and Zhejiang Geely Technician Academy.

Meanwhile, major indigenous brands are making vigorous forays into overseas markets in order to achieve economies of scale and attain higher profits than are available with domestic sales, where they have been cut paper-thin by acute competition.

Doubling Exports

Chery, for instance, shipped 53,000 sedans abroad in 2006, 16% of its total output. Exports reached 53,000 units in the first half of 2007 and are expected to reach 100,000 units for the entire year. Geely exported 15,000 units in 2006, a growth of 110%.



China`s overall exports in the first seven months of 2007 totaled 294,000 autos and the number is expected to hit 500,000 units for the year as a whole, with major markets including Russia, Kazakhstan, Iran, and Egypt, according to the China Association of Automobile Manufacturers. Export of autos and auto parts combined jumped 45% in 2006, to US$15.8 billion.

Major indigenous brands expect vigorous export growth in the coming years. In addition to its existing seven overseas assembly plants, Chery is cooperating with Yontrakit of Thailand to set up an auto plant in that country with an investment of 1 billion baht (US$30 million at B33:US$1). The new facility will produce Chery-branded sedans for sale in Thailand and other ASEAN (Association of Southeast Asian Nations) markets.

Chery has also signed a memorandum of cooperation with Fiat to establish a joint auto-production venture in China. Furthermore, it has inked a contract with Chrysler for the production of economy sedans that will be tweaked versions of several existing Chery models affixed with Dodge and other Chrysler brands for sale in the U.S. and Europe. In addition, it has signed an agreement with Khodro, Iran`s leading auto firm, and Solitac, a Canadian investment firm, for the construction of an auto plant in Iran.

At home, the big local brands are engaged in ambitious capacity expansion projects aimed at meeting expected growth in demand. Chery, for instance, obtained 5.8 billion yuan worth of loans from state banks in 2006 to fund its expansion projects. Geely is expected to boost its annual capacity to 800,000 units with the inauguration of four new plants, three in China and one in Malaysia, in the next few years. Great Wall Motor, a leading pickup maker, inaugurated a new sedan plant in October 2007 that boosts its annual capacity to 200,000 vehicles.



The extraordinary success being enjoyed by China`s local auto brands is due mainly to their ability to turn out products with low price stickers and acceptable quality, catering to the needs of the huge number of Chinese people with greatly improved incomes but still limited budgets. Geely`s first economy model, which was rolled out in 1998, carried a sticker price of 60,000 yuan while similar models carrying international brands cost 100,000 yuan.

The Advantage of Self-developed Technology

The local brands also benefit from solid self-developed technology, which enables them to stimulate the interest of auto buyers by launching a steady stream of new models.

As a result, they have managed to snatch a growing share of China`s fast-expanding auto market, which posted sales of 7.2 million units in 2006. This was up 27% over 2005 and it made China the second-largest auto market in the world, trailing only the U.S., according to the China Association of Automobile Makers. Auto sales advanced a further 20% to 6.4 million in the first nine months of 2007; the number is expected to reach 8.5 million for the entire year, including 4.5 million sedans.

Japanese brands came into the Chinese market relatively late but have been catching up quickly in recent years, threatening the leading status of their European and U.S. counterparts. Sales of Toyota, for instance, soared 68% to 308,000 units in 2006, compared with growth rates of 32% for GM, to 876,700 units, and 22.3% for Volkswagen, to 628,800 units.

A key to the success of Japanese brands is their strategy establishing complete supply system for key parts in China. Toyota alone had its supporting manufacturers set up 24 factories in China; these include Denso, a maker of engine management systems such as fuel injection and ignition systems, which is supplying not only Toyota but also foreign brands such as Beijing Hyundai and Shanghai Volkswagen.

Korean brands are also stepping up their penetration of the Chinese market. Hyundai, for instance, is building a new Chinese plant with an annual capacity of 100,000 units; this will boost the company`s total annual capacity by 50%, to 300,000 units, once the new facility begins operating in 2009.

In the face of this growing competition, the established European and American brands are accelerating investment in an effort to protect their share of the Chinese market-a market which has become increasingly critical to them, especially at a time when their home markets have become saturated.

Volkswagen, the first foreign auto manufacturer to enter China, reported a sales increase of 30% in the first half of 2007. This growth was second only to Volkswagen`s 31% increase in Brazil; in the U.S. and Europe, by contrast, the company managed to boost sales by only a meager 0.2% and 2.8%, respectively. Volkswagen estimates that its China sales there will hit 900,000 units in 2007.

Looking to Be No. 2-and No. 1

Vigorous investment may push China ahead of Japan to become the world`s second-largest automaker in a few years. If its annual capacity continues to grow at an annual clip of 10%, as predicted, China`s auto production will reach 15 million units in 2015, outstripping the U.S. to become the world`s largest auto supplier.

Aggressive expansion among competing brands, however, is likely to lead to a condition of excess capacity in the market and drive the industry`s meager profit margins even lower. Capacity hit 8 million units in 2005 but sales that year amounted to only 5.7 million, resulting in a capacity utilization rate of only 72%.

Some joint automaking ventures have responded to the intense competition by starting to develop own brands in order to free themselves of the shackles of their foreign partners so that they can move into overseas markets. The Shanghai Automotive Group, the leading Chinese automaker, for instance, is developing own-brand models independent of its partnership with GM and Volkswagen. Huang Hua-qiong, the firm`s PR supervisor, remarks, "Development of own-brand autos and expansion into overseas markets is our main road to future development."

Expansion overseas will not be easy, however, especially if the Chinese automakers want to tap the big developed markets. The difficulty is illustrated by recent design piracy cases involving Shuanghuan and Great Wall Motor, as well as the substandard performance of a Brilliance Auto model in collision tests in Europe.
(by Philip Liu)