Foreign groups told to make Chinese cars

Financial Times - Foreign carmakers wishing to build new plants or add capacity in China’s burgeoning car market are being told by the government that if they wish to expand, they must develop a low-cost local car brand.

While Beijing has spoken of promoting local car brands, no central government ruling or written policy is known to exist on the subject.

However, automakers confirm that the issue is cropping up in their negotiations to expand existing plants or build new ones.

French producer PSA Peugeot Citroën, which is pushing its cars upmarket globally and, until recently, rejected the notion of producing low-cost cars, confirms that it is now studying the possibilities.

Philippe Varin, the group’s chief executive, recently told the Financial Times that developing a local brand was “part of the deal” in its new joint venture with Chongqing-based producer Chang’an, which is installing capacity to produce up to 200,000 cars a year from 2012 in Shenzhen.

He said that Peugeot was considering offering some of the low-cost cars for export to other markets, but added that the French group had yet to make a final decision.

Volkswagen, which is seeking to build a new 300,000-vehicle plant in Foshan, southern China, confirms that it is in talks with its Chinese partners FAW and SAIC to develop local brands.

Industry analysts say that the local brand issue has been specifically linked in the expansion talks, but VW – said to be reluctant to roll out a new brand – declined to confirm this.

“I believe there are changes to the policy coming,” said the head of China operations of one foreign carmaker, who asked not to be named.

“All the multinational companies are working with their joint venture partners on what the ramifications are.”

Some reports suggest that as much as 30 per cent of additional capacity would have to be devoted to the indigenous brand.

In most countries, governments bend over backwards for automakers, dangling tax breaks or other sweeteners to carmakers to induce them to build plants.

But amid blistering competition by producers to cash in on China’s booming car market – due to grow 10 to 15 per cent in the current “slow” year – the deck is stacked in the government’s favour.

Mike Dunne, president of Dunne & Co, an industry consultancy, said: “Nothing is written down, but when automakers go to apply for capacity expansion, in their application it’s clear that they should have a plan for an indigenous brand with jointly owned product rights and some provision for new energy vehicles.

“Foreigners want more capacity; China is saying: ‘We want more own brands’.”

From China’s perspective, co-operation with foreign carmakers has yielded little in terms of development of local brands or transfer of intellectual property.

Lang Xuehong, automotive analyst with Sinotrust , said: “During 10 years of trying, China has become a big factory for foreign companies, and their Chinese partners didn’t get advanced technology.

“Through this industrial policy they would like Chinese carmakers to get IP in order to own this market”.

Some foreign carmakers believe a drive into local brands makes questionable business sense at a time when most are trying to reduce complexity.

“None of the manufacturers freely opted for having local brands added to a complex brand portfolio that they all already had,” said Engelbert Wimmer of PA Consulting, which advises the industry.

“It’s clearly something driven out of the political class in China with long-term interests in mind.”

But General Motors, which recently launched its Baojun local brand, insists it is the right move commercially for the company.

“We made this decision a number of years ago that it made sense to play in this area of the market,” said Kevin Wale, head of GM in China.

He predicts that GM can sell 4m-6m Baojun-branded cars in the next five years. “By itself, it is a bigger market than Germany,” he said.

VW, meanwhile, said that it sees a local brand as “an opportunity to get into new market segments, especially those we have not been able to get into so far”.

However, the carmaker said that the discussion is at an “early stage”.