A growing number of big foreign car makers are developing new low-end brands and models just for the China market, with Nissan (Tokyo: 7201) and Volkswagen (Frankfurt: VOWG) the latest to make moves in that direction. These new initiatives come as the foreign giants look to keep their growth alive in China’s slowing auto market, posing a major new challenge to domestic nameplates like Geely (HKEx: 175) and Chery, which have been rapidly losing share to their better funded, more experienced foreign rivals. These moves also follow on the phenomenal success of General Motors’ (NYSE: GM) 2010 launch of the Chevy Sail, its first low-end model developed just for China which has posted growth rates in the 50 percent range for much of the last year and is now one of the nation’s best-selling models. Let’s look at the latest news first, starting with Nissan, which last week formally began production of its Venucia line of cars developed just for the China market in its partnership with Dongfeng Motors (HKEx: 489). (English article) Nissan first announced Venucia just over a year ago, so the brand itself isn’t exactly news. But all eyes will be watching to see how quickly sales grow for the first model, the D50, which will be priced starting at around 70,000 yuan, or about $11,000, which is roughly comparable to the Sail’s starting price of about 60,000 yuan. Meantime, German media are quoting a Volkswagen executive saying the company is planning to launch its own new brand to make low-priced, high quality cars for developing markets, starting at an even lower 5,000 euros per car, or about $6,600. (English article) The reports indicate that China, already one of VW’s top global markets, would be one of the primary markets for this new initiative, and I would expect the German car maker could launch the initiative with its main Chinese partner, SAIC (Shanghai: 600104). These new initiatives follow similar ones by Honda (Tokyo: 7267), which last year launched a new brand called Everus with Chinese partner Guangzhou Auto; and GM’s launching of its own made-in-China brand, Baojun, with its China partners also last year. All of these big foreign names are hoping to capitalize on China’s auto market, now the world’s largest, to develop these new brands that will combine good quality with low prices, and then export those models and technology to other developing markets like Brazil and Russia. I would expect to see the handful of other major global automakers who haven’t joined the trend yet, including Ford (NYSE: F) and Toyoto (Tokyo: 7203), hop on this new bandwagon soon, turning up the pressure on what looks like an important new growth area for everyone. Of course that will mean a potentially difficult road ahead for Geely, Chery and other domestic names like BYD (HKEx: 1211), that have largely dominated the lower end of China’s car market to date while the foreign names focused on the higher end. Look for that competition to get hotter as these new brands start rolling out more new models, potentially sending many of the Chinese brands into the red.
Bottom line: Nissan and Volkswagen’s new forays into the low-end car space are part of a broader move by foreign automakers, putting growing pressure on domestic nameplates.
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◙ Jaguar-Chery: Veto Ahead 奇瑞联手捷豹路虎建合资厂料难获批
I hate to be overly pessimistic, but I have serious doubts about the future of a newly announced joint venture between fading domestic auto giant Chery and luxury car maker Jaguar Land Rover. More specifically, I am quite skeptical that this new tie-up will ever get the necessary approvals from Chinese regulators, which must approve all such major new investments. (
A new plan being floated by the central government could put the brakes on soaring sales growth for luxury brands like Audi (Frankfurt: VOWG) and BMW (Frankfurt: BMW), who have so far managed to defy a broader downturn for China’s auto sector. The shift would come as a huge blow for those names just as most are investing billions of dollars to increase their capacity to cater to China’s huge thirst for luxury brands, though I expect the final outcome will be a compromise that allows some government sales to continue. Let’s look at the facts first, which have the Ministry of Information and Industry Technology (MIIT) reportedly proposing a plan that would limit all government agencies to buying only domestic brands, in an attempt to support struggling homegrown players like Dongfeng (Shanghai: 600006) and Geely (HKEx: 175) that have steadily been losing market share to the more aggressive and resource-rich foreign names as growth sharply slows in China’s auto market. (
China has just published its first monthly auto sales for 2012 and they aren’t pretty, boding poorly for the sputtering market in the Year of the Dragon. Of course, the figures for the month of January come with several major footnotes, most importantly the fact that sales were weak in 2012 as the Lunar New Year holiday fell during the month this year, whereas it fell in February for 2011. Still, the 16.5 percent decline in sales for the month marked the biggest decline in more than a decade, a sharp reversal for a market that was used to gains in the healthy double-digit percentage range for most of 2009 and 2010, and was still seeing healthy growth for most of 2011. (
The upstart Chery, one of China’s only major car makers without a foreign partner, may be close to a tie up with Jaguar Land Rover, in a deal that looks both interesting but also questionable to me in terms of chances for success. Foreign media are reporting the 2 sides would join forces to manufacture cars in China, presumably Jaguars and Land Rovers, to cater to the market’s strong appetite for luxury cars. From a demand perspective, such a tie-up certainly makes sense. Luxury car makers like BMW, Audi and even the stodgy Rolls Royce all saw their unit sales rise in the healthy double digits last year, even as the broader market only managed to eke out a small gain, as newly affluent Chinese clamored for the latest status symbols to show off their wealth. I just returned from a trip to the provinces myself during the Chinese new year holiday, and was surprised to see an Alfa Romeo driving down a dusty partially paved road in a very small town, testifying to the popularity of luxury cars just about anywhere people have money. Chery also sorely needs a foreign partner to help it weather the coming downturn in China’s auto market, and has come close to tie-ups at least twice only to see them fall through. All that said, I’m not completely convinced that Jaguar Land Rover, which is owned by India’s Tata Motors, is the best partner for Chery. Jaguar Land Rover was struggling when Tata bought it from Ford in 2008. Perhaps performance has improved since then, but I suspect the brands are still struggling or perhaps just breaking even. What’s more, Chery is famous for its smaller, cute QQ cars, though more recently it has also gotten into bigger sedans. But it has no experience with luxury cars, and I’m not sure if Jaguar Land Rover is the right company to enter that area with. At the end of the day, I see a rough road ahead for this joint venture, though perhaps it will be like Chery’s other foreign tie-ups and stall out before it ever starts making cars.
2011 sales data for 2011 has been trickling out for the past week from the various car makers in China, showing US and German names made big gains last year at the expense of Japanese and domestic rivals, who could face a continued uphill battle in the coming year. General Motors‘ (NYSE: GM) China sales rose 8.3 percent last year to a record 2.55 million vehicles, while Ford (NYSE: F), a later arrival to the market, said its sales grew 7 percent to 519,390 units, according to company statements. (
What a difference a year makes, at least if your name is Geely, the company that was China’s pride last year when it purchased struggling Swedish automaker Volvo. The blogosphere has been buzzing the last 2 days after Chinese magazine Securities Weekly reported the company, whose Hong Kong-listed unit Geely Automobile (HKEx: 175) shares are down by half this year, is struggling under a mountain of debt now totaling 71 billion yuan, equal to about 73 percent of its assets. (
China’s automobile association has lowered its sales outlook for 2011, dealing a further blow to the industry and especially to China’s embattled domestic car makers that specialize in the kinds of cheaper, more fuel-efficient models that look set to take the biggest hit as the market cools. The auto association’s latest numbers show that passenger vehicle sales rose an unexpectedly strong 8.79 percent in September, as buyers rushed to take advantage of government incentives that expired at the end of the month for smaller, more fuel efficient cars. (
The rapid slowdown in China’s auto sales has spread to the higher-end of the market, boding poorly for foreign names like Volkswagen’s (Frankfurt: VOWG) Audi brand and BMW (Frankfurt: BMW), which have invested heavily in the market on a bet that pricier cars were less vulnerable to industry downturns than more mainstream models. After two turbo-charged years of growth that saw Chinese car sales jump on strong buying incentives from Beijing, growth in the market has suddenly disappeared as incentives ended and the central government takes other tightening steps to cool the overheated economy. Makers of high-end products, such as luxury bags, homes and cars, love to say how their products are more immune to economic downturns than mainstream goods, even though the reality is that the suffering is usually just slightly delayed for these higher-end products. But even luxury cars appear to already be suffering in the current car slowdown, with foreign media reporting that sellers of premium brands are now offering discounts of 16-20 percent to maintain sales. Those discounts look similar to ones being offered by more mainstream brands such as VW and SAIC (Shanghai: 600104), as companies lower prices to try and offset cooling demand. I previously said that Chinese car makers with major foreign partners are best positioned to survive the current downturn, which is bad news for names like Chery and BYD (HKEx: 1211; Shenzhen: 002594), which lack such partners that have the resources to weather such slowdowns. Chery has received a setback on that front, with Japanese media reporting the company’s plan to produce Subaru-branded vehicles in a new joint venture with Fuji Heavy Industries (Tokyo: 7270) has been rejected by China’s state planner because the company’s major shareholder, Toyota (Tokyo: 7203), already has 2 joint ventures in China, the maximum allowed under Chinese law. (
