Shanghai Auto prepares to challenge industry giants

PUBLISHED : Monday, 05 June, 2006, 12:00am
UPDATED : Monday, 05 June, 2006, 12:00am

This year Shanghai Automotive Industry Corp (SAIC) stepped out of the shadows of the foreign partners in which it has lived for the past two decades.

In April, the company revealed ambitious plans to spend more than US$1 billion over four years to build its own cars, with output of 200,000 a year by 2010, of which it will export 45,000. To raise as much as US$2 billion, it wants a listing in Hong Kong, this year if possible.

The announcement was a milestone in the history of the motor vehicle industry, the first time that a leading state-owned manufacturer has declared its intention to become a significant producer of its own brands and challenge foreign makers in the world market.

'We want to become a force competitive with the world's giants,' said Wang Xiaogiu, general manager of SAIC Motor Manufacturing, set up to build the new models. 'Our goal is to develop a high-end, international brand.'

It plans to start making luxury cars this year, based on designs for the Rover 75 that it acquired from Britain's bankrupt MG Rover Group. Family and smaller cars come next.

This is a double challenge to Volkswagen and General Motors, SAIC's mainland partners. Both have announced sweeping job cuts and cost reductions at home and are counting on sales in China to compensate for those losses. They do not welcome SAIC competition.

After it signed its first joint venture contract with Volkswagen in 1985, SAIC was initially a passive partner with it and GM, simply providing the land, workforce and distribution while the foreign companies provided the technology, the models and the engines.

As it learned, so its ambitions grew. It insisted on a joint research and development operation with GM, the Pan Asia Technical Automotive Centre, in which local and foreign engineers work together to redesign GM cars for the mainland.

In 2004, it bought a controlling stake in Ssangyong Motor, the fourth biggest car maker in South Korea and a specialist in sports utility vehicles. In November that year it also spent #67 million ($970 million) for the intellectual property rights to the Rover 25 and 75 models from bankrupt MG Rover.

Last December 30, the company started an engineering research centre in Shanghai, with an investment of 1.8 billion yuan to ensure technological independence and develop energy-efficient cars.

SAIC chairman Hu Maoyuan said at the ground-breaking that Chinese consumers wanted Chinese brands that were internationally competitive and that this was what SAIC would achieve, using the human talent, raw materials and technology it had acquired over many years and adding to it new resources from abroad.

It will produce its own brand at a factory in Yizheng, 250km from its joint-venture plants, a symbol of its desire for independence.

The top executives and engineers in the new company come from the joint ventures, including Wang Xiaoqiu, a veteran of Shanghai Volkswagen.

SAIC's production last year was 911,748 vehicles, ranking it just behind First Auto Works as the second biggest producer in China. It employs 50,000 people.

Its domestically listed unit, Shanghai Automotive, turned a net profit of 222.9 million yuan in the first quarter of this year, up 47 per cent from the period last year. Its turnover in the period rose 39 per cent to 2.08 billion yuan.

In recent years, SAIC has trailed First Auto Works as the biggest car maker in China. In April this year, SAIC had the highest sales, 116,600 units, an increase of 53 per cent on the same month last year, while FAW rose 15 per cent to 113,500, according to the China Association of Automobile Manufacturers.

In 2005, FAW ranked first with 983,100, ahead of SAIC with 917,500. The country sold 3.97 million cars last year, giving SAIC a market share of 23 per cent.

SAIC said it planned to start selling cars in Britain by late next year and expand in Europe from 2009. Other target markets include North and South America, Russia and the Middle East.

So far, SAIC's partners have reacted diplomatically.

'Volkswagen and SAIC keep a close and long-lasting partnership,' said VW. 'We understand SAIC's wish to build up its own Chinese car brand. We offered our support in the past and still do.'

GM said it understood SAIC's desire for further growth and that it was confident that SAIC recognised success was closely linked to the success of joint ventures.

Analysts do not expect SAIC to threaten VW and GM in the short term, but 2006 will mark the year SAIC fired the first shots in a battle that will only intensify.