China to fund development of new-energy car models

Nov. 10 (Bloomberg) -- China will boost research into alternative-energy automobiles after investments totaling more than 200 billion yuan ($29 billion) failed to create a brand capable of rivaling Toyota Motor Corp. and Volkswagen AG.

"We should speed up the development of alternative-energy technologies," Wan Gang, China's science and technology minister, said at a conference in Tianjin on Nov. 8. The government will provide financial support, said Chen Jianguo, deputy head of the industrial coordination department of the National Development and Reform Commission.

The plans may aid Chinese automakers, such as SAIC Motor Corp. and China FAW Group Corp., the country's two largest, which are struggling to enter developed markets overseas and are losing market share at home as foreign carmakers slash prices. Investing in systems such as fuel cells and hybrids is also in line with a 4 trillion yuan economic stimulus budget China announced yesterday.

Like other carmakers, "SAIC has invested heavily in developing self-owned models, but there is still no profit," said Gu Jiahao, a CSC Securities Co. analyst in Shanghai. "There won't be a fundamental improvement in profitability unless they come up with something that really sells.''

Carmakers in other countries are also trying to get government help. In the U.S., General Motors Corp. Ford Motor Co. and Chrysler LLC are seeking $50 billion in loans to help them weather the worst auto market in 25 years, according to a person familiar with the matter. The Australian government plans to give the automotive industry A$6.2 billion ($4.3 billion) in assistance through to 2020 to develop less polluting vehicles.

Falling Share

Chinese carmakers' combined own-brand market share fell by 2 percentage points in the first nine months, the worst performance among automakers grouped by country, as Toyota and Volkswagen AG lured customers away from FAW's Red Flag sedans and SAIC's Roewe models. Domestic automakers have also lost their traditional price advantage. Chery Automobile Co.'s 1.6 liter A3 compact, for instance, starts at 78,800 yuan. A similar-sized Toyota Yaris costs from 76,000 yuan.

Overseas carmakers "are squeezing Chinese brands by giving up some of their profit margins and slashing prices," said Xu Jianyi, general manager of FAW Group. The company makes own- brand cars and has ventures with automakers including Toyota. Overseas carmakers have to work with a local partner in China.

Competitive Market

China's car market is the most competitive worldwide with 52 brands seeking to lure customers, including almost every major global automaker. Competition has increased this year as carmakers are opening new plants, while demand is slowing. Industrywide sales fell in August and September, the first declines in three years.

"Consumers are only becoming more picky about quality and that's leading to the decline in market share for China's own- brand cars," said Hu Xindong, head of investor relations at Dongfeng Motor Group Co. "Consumers don't care about the origin of a brand, only quality matters."

Chinese automakers' share of the domestic market slipped to 25 percent in the first nine months. By comparison, carmakers in South Korea and Japan have market shares of more than 90 percent in their home countries, which has provided a platform for developing overseas sales.

SAIC, China's biggest automaker and a partner of GM and Volkswagen, has fallen 80 percent this year, outpacing a 67 percent plunge for the benchmark CSI 300 Index. Dongfeng Motor has lost 64 percent this year in Hong Kong trading.

China's rising wages are also hurting the nation's domestic car brands, as richer workers are favoring more expensive models. Sales of Toyota cars, including Camrys and Corollas, surged fourfold in the first nine months. Chinese automakers have struggled to convince drivers that their models are of the same standard.

"We have gained market share in the low-end car segment, but it is much more difficult in the medium and high-end car categories," said Hu Maoyuan, chairman of SAIC Motor. "Still, we need to be persistent in developing our own brands."