Taiwan's Yulon Group recently paid N$300 million (US$8.93 million at N$33.6:US$1) for an addition 18.9% of shares in the China Engine Corp., the island's largest maker of auto engines. The new shares boosted Yulon's total stake in the engine maker to more than 70%.

This move is expected to help Yulon to speed up the development of its auto production in mainland China, and to boost its technological independence.

Yulon owns two auto production companies in Taiwan. One is the Yulon Motor Co., which redesigns, produces, and markets Nissan models on the island as well as in the Philippines (via its subsidiary, Nissan Motor Philippines Inc.) and China (at the joint-venture Aeolus Motor Corp.). The other is the China Motor Corp., which performs the same operations with Mitsubishi models in Taiwan and mainland China (at the South East Motor Corp.). The Yulon Group also has a number of subsidiaries that produce auto parts.

China Engine was established in 1995, with Yulon Motor and China Motor each holding a 20% stake originally. Recently, Yulon reports, it procured the 18.9% stake originally owned by Sanyang Industry (another local carmaker), and earlier this year it bought the 15% originally owned by the Chiao Tung Bank.

The engine manufacturer was set up under prodding from the government, which wanted to give Taiwan its own auto engine development and manufacturing capability so as to boost the growth of its auto industry. The company's first product was a 1,200cc eight-valve gasoline engine, which currently is used only in the Veryca mini commercial van produced by China Motor at an annual rate of 12,000 to 15,000 units.

China Engine has been working hard to expand production to an economic scale in recent years, looking especially hard for opportunities in the booming Chinese market. It recently managed rent an old factory in Fujian Province and mapped out a plan to invest NT$1 billion (US$29.76 million) in a new engine production facility there. The factory is located near to the South East auto plant, a joint venture between China Motor and the Fujian Motor Group.

Who Needs Economies of Scale?

A senior industry analyst says that China Motor has been able to break even in the past few years, or even make a profit, without achieving economies of scale. The analyst also notes that the company has built up its own engine development capability, which can be used to support the development of new cars by local auto makers.

China Engine, therefore, is expected to play a major role in Yulon's deployment in the mainland by supplying engines to Yulon affiliates and other manufacturers there.

The company recently initiated production in China of a new 1,300cc modularized engine (upgraded from the previous smaller model), which is being supplied to independent (that is, not state-run) auto plants there. The 1,200cc engine will also be made there beginning in the third quarter, for use in Veryca commercial vans produced by South East.

In Taiwan, China Engine is nearing completion of the development of a 2,000cc to 2,200cc, 16V modularized engine (which, under the modularized concept, can be made available in at least 2,000cc, 1,800cc, and 1,600cc sizes). The development project is costing the company NT$800 million (US$23.8 million) and is being carried out in cooperation with the Mechanical Industry Research Laboratories (MIRL) of the government-backed Industrial Technology Research Institute. Mass production of the engine could begin as early as the end of this year.

Potential applications of this new engine are in the Savrin sedan, which South East will begin turning out early next year, and the new Sunny sedan produced by Aeolus, a joint venture between Yulon Motor and the mainland's Dong Fong Automobile Group. China Engine officials believe there are good prospects for selling the engine in Taiwan as well as to Yulon's partners abroad.

All of this engine development is an outgrowth of the government's investment of NT$1.4 billion (US$40 million) in the development of a "common engine" and transmission system back in 1992. ITRI was commissioned to handle the project, which was accomplished with technological help from the Lotus Group International of the United Kingdom.