Innovation the key to survival

PUBLISHED : Monday, 12 March, 2012, 12:00am
UPDATED : Monday, 12 March, 2012, 12:00am
 

China's vehicle manufacturing industry must innovate to improve the quality of self-developed products and cut costs if it is to avoid losing more market share to foreign goods, warns a top mainland carmaker.

'Since we lack core technology, we have relied on foreign partners for innovation and new product development. We have only grown by replicating the numbers of Sino-foreign joint ventures,' said Zeng Qinghong, vice-chairman of the nation's sixth-largest vehicle maker, Guangzhou Automotive Industry.

'We have adult-level manufacturing and production management, but in terms of research and development, we are still in our infancy.'

The domestic vehicle manufacturing industry has relied for the past decade on technology provided by foreign partners, but now faces the prospect of gradual relaxation of restrictions on foreign investment and the danger of losing market share to foreign carmakers.

Multinational firms controlled more than half of the mainland's vehicle market and 70 per cent of the profit, but accounted for less than 40 per cent of the investment, Zeng said.

On the subject of innovation, he noted that a Japanese carmaker he would not name achieved a 50 per cent reduction in facilities investment; a 35 per cent cut in materials consumption; and a 35 per cent improvement in the fuel consumption of one its latest products compared with consumption levels five years ago.

Building better quality own-brand products was therefore becoming increasingly important to the long-term viability of the domestic manufacturing industry, as the mainland car market had entered a slower-growth stage, and Beijing might reduce shareholding percentage ceilings imposed on foreign firms, he warned.

When China joined the World Trade Organisation in 2001, Beijing pledged to gradually open the sector to foreign investment, which was capped at 50 per cent.

Zeng said there had been a worrying trend of shrinking market shares for domestic brands in the past two years. Citing China Association of Automobile Manufacturers figures, he said last year domestic brand passenger car sales fell 2.6 per cent from 2010 to 6.11 million units, with market share declining 3.4 percentage points to 42.23 per cent.

'China's vehicle industry is too fragmented. There is a lack of concentration on human and other resources,' Zeng said, adding the industry would probably see its present 140-plus vehicle manufacturers eventually consolidated into five or six groups.

In 2009, Beijing released targets for consolidation, which would result in two to three firms with an annual output of more than two million units and four to five other makers with outputs of over one million units.

Zeng said the former objective had been reached, but the latter had not, as progress had been hampered by local governments reluctant to lose control over their carmakers, which are key job providers and tax revenue generators.

Hong Kong-listed Guangzhou Automotive aims to sell three million units and generate revenues of 400 billion yuan (HK$489 billion) in 2015, up from 0.72 million units and 60 billion yuan in 2010. It now makes sedans in joint ventures with Japan's Toyota Motor and Honda Motor.

A new sedan joint venture with Italy's Fiat is scheduled to start production in July, and a sports utility vehicle joint venture plant with Japan's Mitsubishi Motors should come on stream in the second half of this year.

Meanwhile Guangzhou Automotive aims to double sales of its own Trumpchi brand of sedans this year with the launch of a second product, after its first vehicle recorded sales of 17,000 units last year, 43 per cent short of its target.

It posted a net profit of 2.6 billion yuan in the first nine months of last year, based on mainland accounting standards. It alerted investors it may achieve only 80 to 90 per cent of the total 5 billion yuan net profit it forecast in the middle of last year.

Zeng forecast Guangzhou Automotive's joint venture with Honda would achieve a 10 per cent sales growth to 440,000 units this year.

Guangzhou Automotive cited the economic slowdown on the mainland, parts supply disruption due to last year's earthquake in Japan and floods in Thailand as reasons for last year's shortfall.

The profit forecast was made when it announced an offer to buy the 71 per cent stake in Shanghai-listed, Hunan province-based sports utility vehicle maker GAC Changfeng Motor that it did not already own. It received approval from the mainland securities regulator to issue shares to GAC Changfeng's shareholders for the takeover.

When completed, Guangzhou Automotive will become the first mainland firm to have issued shares in both the Hong Kong and mainland stock markets.

Zeng forecast that the mainland's entire vehicle market would grow by between 8 million and 20 million units this year, after a scant 2.5 per cent rise last year to 18.5 million units as a scheme to subsidise rural residents' car purchases expired.

In the first two months of this year mainland passenger car sales slipped 4.4 per cent year on year to 2.37 million units.

Leading carmaker says mainland must develop home-grown products, consolidate and cut costs or lose share to foreign manufacturers

24.5%

The rise in car sales in February when compared with last year. Carmakers on the mainland delivered 1,567,100 vehicles that month

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