Chinese car makers add luxury

Despite the global economic downturn, China's auto makers are working to build higher-end brands and fancier cars to woo China's affluent entrepreneurs, and, eventually, they hope, overseas buyers.

In April at the Shanghai auto show, Geely Automobile Holdings Ltd., which got its start making bare-bones subcompacts, unveiled its concept of an extreme luxury car. The outside looks like a Rolls-Royce Phantom. The rear has a single, well-cushioned seat, making it a modern-day sedan chair for capitalist mandarins.

Geely says the car, the Geely Excellence, will only be made to order, and will have a likely price tag of more than $100,000. But the company sees it as an important symbol of its hopes for the future: catering to China's growing, urban middle and upper classes with fancier autos.

View Full Image

"We are using it to show Geely's great ambition to make upscale vehicles," says Frank Zhao, Geely's chief technology officer. He says that larger and better cars are essential to Geely's "sustainable development."

People familiar with the situation said last week that Geely has submitted a bid to acquire General Motors Corp.'s Saab unit, a move that comes just weeks after people familiar with the situation said it submitted a separate bid for Ford Motor Co.'s Volvo unit, also based in Sweden. Geely has denied any plans to acquire Saab or Volvo. Buying the companies or some of their cars and technology, however, would jump-start Geely's upscale strategy.

Economy cars are likely to remain the central focus of domestic auto manufacturers at least in the near term, as more and more Chinese buy their first cars. As part of its efforts to stimulate the economy, the government is offering incentives to people to buy small-engine cars, helping boost sales of domestic makers.

But the market for compact and smaller cars is extremely competitive in China, and falling prices have pinched car makers' profits. Manufacturing higher-end cars -- on which companies generally earn more money -- will expand the product lines of domestic makers and force needed improvements in their craftsmanship and quality. A tonier image could also help add branding luster to the companies' lower-end models.

"It's something they have to do," says Yale Zhang, an analyst with auto consultancy CSM Worldwide in Shanghai.

Earlier this year, state-owned Chery Automobile Co., maker of the tiny subcompact QQ, which has been one of China's best-selling cars, said it would roll out a new brand, Riich, with sedans aimed at wealthier buyers. The first is expected to go on sale later in 2009 for about $30,000 to $44,000. The QQ, on the other hand, sells for as little as $4,500.

"We used to focus only on the mass market," says Jin Yibo, Chery's spokesman. "The next step in our strategy is to develop middle to upscale brands." Mr. Jin said that "medium to high-end brands will turn out higher value added for the company" and help improve designs and competitiveness.

"They are determined to break out of the price-is-why-you-buy-us box," says Michael Dunne, managing director in Shanghai for market research firm J.D. Power & Associates. Mr. Dunne estimates that auto makers earn five-to-10 times more on a midsize or larger car than on small cars.

Chinese companies have had modest success so far with larger cars. Since 2007, Shanghai Automotive Industries Corp., GM's main joint-venture partner in China, has been selling up-market sedans branded Roewe based on designs acquired from now-defunct MG Rover Group Ltd., but volumes remain small.

Sales of the two Roewe models combined in 2008 totaled 26,007 vehicles, according to J.D. Power & Associates' Automotive Resources Asia unit. In contrast, the similarly sized Honda Motor Co.'s Accord sold more than 170,000 units and GM's Buick LaCrosse sold more than 52,000 units in China last year.

One problem is that the Chinese name plates lack the cachet of foreign cars, especially among the country's most affluent consumers, who have made China an important market for Mercedes-Benz, BMW and Audi autos. Local makers appear to be aiming primarily at the rungs below these luxury brands, and are pricing their products below comparable models of foreign brands.

Chinese manufacturers' marketing approach is tailored to the local market, with the at-times blunt messages about wealth and success that play well here, such as Chery's choice of name, Riich.

Chery, which now exports smaller cars, says it intends to sell the Riich G6 overseas eventually, but is still unsure when it will start. Chinese auto exports had been climbing until the economic crisis started crimping consumer spending last year. Chinese companies sell compacts, sedans and SUVs to Russia, Ukraine, Vietnam and elsewhere, largely in the developing world.

At the auto show in Shanghai last month, Geely introduced its new high-end Englon. The name combines the first syllables of "England" and "London," which Geely says evokes "nobility."

The Geely Excellence concept car, meanwhile, strongly resembles a Rolls-Royce, with its imposing grill and winged-goddess hood ornament -- which Geely says is the Chinese moon goddess Chang'e.