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  • Jul 26, 2014
  • Updated: 1:53pm

Nanjing Auto on rough road with Rover

PUBLISHED : Tuesday, 21 March, 2006, 12:00am
UPDATED : Tuesday, 21 March, 2006, 12:00am

The Jiangsu provincial government is making a US$1 billion bet on an upmarket passenger car, but many see such a project as driven by politics and not economics and doomed to fail for lack of capital, technology and legal protection.


On March 13, Nanjing Automobile (Group) announced it had obtained approval from the State Development and Reform Commission for what it calls the 566 Project, named for June 6 last year, when it successfully bought the bankrupt British car company MG Rover.


'This year is a turning point in the history of the company,' said chairman Wang Haoliang. 'We must succeed with the 566 project. The river is behind us and the enemy in front. There is no retreat, no other way out.'


If these are less the words of a car company executive than a Communist Party bureaucrat, that is because Mr Wang had no experience in the industry until April last year, when he was moved from his post as deputy Communist Party chief of Jiangsu province to Nanjing Auto with a mission to arrest its decline in the fiercely competitive vehicle market.


China's oldest carmaker was founded in 1947 and has been principally a truck manufacturer. It used to be among the top 10 producers until the mid-1990s, when it made a wrong bet - a joint venture with Fiat, the weakest of the foreign carmakers in China.


As a result, it was virtually left out of the passenger car boom of the past 10 years, producing fewer than 30,000 in this segment last year, when it made a loss overall.


The Jiangsu government was not amused. As China's third-richest province, it considers it essential to have a leading manufacturer in what will be one of the most important products of the next 20 years.


With this mandate and the promise of billions of yuan in state funding, Mr Wang joined Nanjing Auto and, within two months, succeeded in buying MG Rover for GBP53 million ($722.3 million, minus its debt and obligations to former employees), snatching it from the grasp of rival Shanghai Auto Industry Corp (SAIC) - the country's biggest carmaker - which Beijing had favoured to make the acquisition.


Since then, Nanjing Auto has shipped 4,000 containers of machinery, equipment and parts from the Rover plant in Longbridge, Birmingham, and is installing them at a new plant in Nanjing. It is promising production of the MG7Z, an upmarket passenger car, in the first half of next year.


The approval it obtained last week allows annual production of 200,000 vehicles, with an initial investment of 2.8 billion yuan.


However, many in the industry are sceptical. For one thing, who is going to provide the capital? Mr Wang has put the cost of the project at 10 billion to 12 billion yuan.


The company has repeatedly called for strategic investors, Chinese and foreign, to join the project, but none has come forward, so it looks as if the provincial government will have to put up most of the money in grants or loans through state banks.


Potential investors have stayed away because they doubt the project's viability and see Nanjing Auto as an ageing state company with weak technology, poor management, an excessively large workforce and unable to compete against the likes of Toyota Motor, Honda Motor, General Motors and Hyundai Motor.


Mr Wang is counting on state money. 'Never have the provincial and city governments paid so much attention to Nanjing Panda. The leaders of many departments are helping us to solve all problems and want its renaissance for the city's car industry to become an engine for the economy.'


Zhao Ying, an economist at the China Academy of Social Sciences, was doubtful about the prospects for the firm's new car. 'The market for domestically made cars at the top end of the market is limited. It would be very hard for Nanjing Panda to break into this market.'


Qian Xiaoyu, an analyst at United Securities, said there was a big gap between selling high-end cars and those for the middle and lower end of the market.


'It is hard for domestic firms to sell high-end cars. Nanjing Auto lacks experience in this sector for quality, marketing and branding. Its joint venture with Fiat makes economy cars, which are quite different,' he said. 'SAIC is more equipped in this sector because its joint ventures with General Motors and Volkswagen have developed managers with experience. Fifty to 60 per cent of buyers of high-end cars consider imported models.'


Paul French, chief representative of database manager AccessAsia, said Rover was not well-known in China and the new car would compete with models in the same segment as those from Honda, Toyota and the other big foreign manufacturers. 'Getting the pricing right will be the big challenge.'


Analysts said consumers were more likely to buy a Rover made by SAIC, which enjoys a better reputation and a nationwide distribution and after-sales network that Nanjing Auto cannot match.


The next problem is a legal one. SAIC, which paid GBP67 million for the intellectual property rights to the Rover 25 and Rover 75 in 2004, has threatened legal action against Nanjing Auto if it begins making the MG7Z, which is based on Rover 75 technology.


SAIC plans to introduce its version of the Rover 75 early next year. Nanjing Auto says it has the rights to the 98 per cent of Rover and MG models that share common designs, a position backed by PricewaterhouseCoopers, administrators of the failed company.


SAIC says that Nanjing Auto bought only 2 per cent of the designs exclusive to MG cars. A legal battle would be damaging as SAIC's purchase was covered by Hong Kong law, where the courts are more open to media scrutiny than on the mainland.


The reform commission's plan was always that the two firms co-operate in producing Rovers in China. However, talks collapsed because each wants majority control, and no deal has been made.


At the same time, the lobbying power of the Shanghai and Jiangsu governments was so strong the commission had to approve their two applications for new production despite its own directive to reduce excess capacity.


Now that each of them has won Beijing's approval, nothing seems likely to stop them going ahead - and the Chinese taxpayer is going to pay a heavy price for this corporate delusion.


REVVING UP


A snapshot of Nanjing Auto (Group) Corp Set up in 1947, the company has total assets of 12b yuan, some 14,600 workers, 25 subsidiaries, including seven with foreign companies. It produced 100,000 vehicles in 2004 in four main product categories. It also produces parts and components for sale at home and for export


1995: Sets up 50-50 US$425m joint venture with with Italy?s Iveco to make Iveco light-duty commercial vehicles and Sofim diesel engines


April 1999: Forms a 50-50 US$282m joint venture with Fiat to make Fiat Palio, Palio Weekend and Siena cars. It made 37,418 units in 2003 and 26,598 in 2004


July 2005: Announces US$200m investment to build 40,000 light-duty trucks in Russia in partnership with a local firm by 2010


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