Great Wall Motor secures a foothold in Europe

BAHOVITSA, BULGARIA — Sometime next summer, a brand-new assembly plant here should begin turning out the first Chinese-branded cars in the European Union.

Why build a factory in this goat-trodden village in the foothills of the Balkans? Credit a local tycoon who wants to provide jobs for his neighbors — and a desire by Chinese companies to secure a relatively low-cost foothold in the European Union, the largest single market in the world.

Grisha Ganchev, a Bulgarian wrestler who made a fortune in the “Wild East” during the economic transition of the 1990s, was the driving force behind the project. Mr. Ganchev then enlisted Great Wall Motor, a private company that is one of the biggest makers of sport utility vehicles in China, as a minority investor.

Of the initial 97 million, or $130 million, in start-up costs, Great Wall Motor is putting up about 10 percent, with Mr. Ganchev’s wide-ranging holding company, Litex, providing the rest.

The Bahovitsa plant is expected to create 1,220 jobs and to produce 50,000 sedans, pickup trucks and sport utility vehicles a year, although the models and technical specifications have yet to be released.

Even as European and U.S. automakers have made major inroads in China, analysts say that it would be a while before they have to worry about serious Chinese competition at home. Chinese carmakers are not even close to challenging established brands in Western markets, said David Sedgwick, editor of Automotive News China.

A few companies have tried to export Chinese-made cars to the European Union, but without much success, Mr. Sedgwick said. “What you see is Chinese companies talking about Europe, but not making a move yet.”

He also noted that Bahovitsa is basically getting what is known as a screwdriver plant. “They bring in the kit and reassemble the car, and there’s not a lot of automation,” Mr. Sedgwick said of the factory.

“You really want to pay attention when it’s a full-scale assembly plant. They can cost $500 million to $1 billion. When you see a Chinese automaker taking on that kind of investment, then you know they are serious.”

Some bigger Chinese investments are being made, but for European nameplates. In March, Geely bought Volvo for $1.8 billion. The bankrupt British automaker MG Rover was bought in 2005 by Nanjing Automotive Group of China, which in turn merged with another Chinese company, Shanghai Automotive Industry Corp., in 2007. SAIC plans to restart MG production next year.

China has swelled its investments across Eastern Europe in recent years, buying up manufacturers, stepping up exports, offering governments low-interest loans and bidding for public procurement contracts, especially infrastructure and energy projects.

“I think they invest in countries where they don’t expect a backlash,” said Jonas Parell-Plesner, a senior policy fellow at the European Council on Foreign Relations in London.

Julian Nikolov, director of economic policy at the Bulgarian Ministry of Economy, Energy and Tourism, said Bulgaria was an attractive option because it is part of the European Union, while also offering low taxes and a relatively low cost of labor for the region. “We are actively attracting Chinese investment,” he said, calling it “one of our priorities.”

Current Chinese investments in Bulgaria include a glass factory, a solar energy farm and plants for making televisions and air conditioners. Mr. Nikolov said negotiations were currently under way with a Chinese company to invest in the construction of an industrial zone near Sofia, the capital, which would bring in more Chinese manufacturing.

Great Wall Motor did not come looking to invest, however, but was courted by Mr. Ganchev, who was looking to build Chinese cars in Bulgaria to serve the low-end Balkan and Eastern European market, said Ilia Terziev, the chief executive of Litex Motors.

Mr. Terziev called Mr. Ganchev a “patriot” who wanted to find new jobs for people in his home region.

During the Soviet era, an automobile assembly plant in Lovech, just down the road from Bahovitsa, produced Russian Moskvich cars, which were also built from kits. That came to an end with the fall of the Iron Curtain and the arrival of free markets, in which few consumers wanted to buy the Russian vehicles.

“The local people hope that this factory will mean work,” said Plamen Likyov, the production manager at Litex Motors, showing a visitor around former pasture land that is now a construction site. “The global economic crisis is felt here like everywhere, and many jobs were lost.”

At Great Wall, Andy Liu, deputy head of European marketing, called Bulgaria an appealing location and said the company’s goal is to enter the U.S. market as well as the European Union.

“Our equipment will be very good and our price will be very competitive,” Mr. Liu said by telephone from Baoding, in Hebei Province. “That’s a characteristic of Chinese manufacturers.”

The new Chinese sedan will sell for about  €5,000, compared with about  €6,000 for the Logan, a bare-bones model built at Renault’s Dacia plant in neighboring Romania.

But Great Wall cars will have to overcome a lot of skepticism, according to car dealers in Sofia.

Mitko Tzonev, general manager of a Renault Dacia dealership, expects no more than 1,000 to 1,500 Great Wall cars to be sold per year — in a country where 26,813 cars were sold in 2009 and 57,927 in 2008.

“The Bulgarian driver is very informed but not very open to such experiments,” he said with a laugh.

Danko Idakiev, the general manager of a Nissan dealership, said that Bulgarians are aware that Chinese quality is increasing, but noted that there is no distribution network for parts, service and sales. “It takes a lot of time and money to build one,” he said.

Roger Gao, a spokesman for Great Wall, said the company would be setting up a dealer network, probably in conjunction with importers.

But beyond practicalities, emotions come into play when buying a car.

People in the Balkans have a firm hierarchy of brands by national origin, Mr. Tzonev said. At the top are German brands, then Japanese, then French, Italian and Korean. Chinese brands will need to do a lot of work to climb up that unofficial hierarchy, he said.

“Bulgarians use cars to make an impression,” said Alexander Dimitrov, a sales manager at the Renault Dacia dealership.

“They would rather buy a 10-year-old Mercedes than a new Chinese car.”