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Chang’an-PSA partnership reflects new JV orientatio

PARIS – China Chang’an Auto Group Corp. (Chang’an) and French leading carmaker PSA Peugeot Citroën (PSA) signed an agreement on July 9 to form an equally owned joint venture in China.

The new joint venture will be capitalized at ¥4 billion ($590 million), which will be equally shared by the two companies, and backed by an initial investment of ¥8.4 billion. Their initial cooperation will introduce the Citroën DS commercial vehicle line in China, the two companies said in a joint statement.

The contract also allows for the new joint venture to market, at a later date, vehicles under the partners’ own brands, Peugeot and Chang’an. A new brand is to be created by the joint venture in the future.

Based in Shenzhen, southeast of China, the joint venture will have an initial annual production capacity of 200,000 vehicles and engines, which will meet the highest environmental standards. The joint venture will boast two production lines, one totally new and the other be based on the existing line built by Hafei Auto, Chang’a’s subsidiary based in Harbin, Heilongjiang Province. An R&D center will also be built at the JV to develop new energy vehicles, according to the statement.

The joint venture’s first model is scheduled to be launched in the second half of 2012, if the new company gets approved in time, the statement concluded.

The JV contract was signed by Xu Bin, president of China South Industries Group Corp., Chang’a’s parent company, and Philippe Varin, PSA CEO, at a ceremony attended by Wu Bangguo, chairman of the Standing Committee of the National People’s Congress, Bernard Accoyer, president of the National Assembly of France.

 

PSA efforts for a second partner in China

The two partners began meeting with each other late last year after Chang’an acquired Hafei Auto and Changhe Auto, two automakers under the country’s aviation industry. In no time the two sides agreed on a letter of intent last May.

The French automaker began negotiation with Hafei Auto for an LCV joint venture in 2005 and signed a MOU in 2007. But due to the consolidation efforts by the Chinese government, Hafei was first consolidated into AVIC Auto, which later was acquired by Chang’an in 2009.

Partnership with Chang’an, China’s fourth largest automaker in 2009, would certainly be a happy ending of PSA’s unremitting chase of a second partner in China for more market opportunities. For Chang’an, the tie-up will help with its product portfolio and its ambition to surpass Dongfeng and FAW in becoming the second largest auto group in China.

“PSA Peugeot Citroën has a wide range of products, and teaming up with a second partner means a new opportunity for the French automaker,” said Jia Xinguang, a Beijing-based auto analyst. “Developing two distinctly different brands under one joint venture also does’t fit its best interests.”

PSA has a passenger vehicle joint venture with Dongfeng Motor Corp., China’s No. 3 auto group. Dongfeng-Peugeot-Citroën Automobile (DPCA) now produces the Citroën C2, C4, C5 and the Peugeot 206, 207, 307 and 408.

Last year, PSA sold around 272,000 vehicles in China, a rise of 52 percent. Despite the strong growth in China, PSA’s development in the China market has been slow compared with General Motors and Volkswagen. GM’s sales jumped 67 percent to top 1.83 million units last year. During the past years, both Dongfeng and PSA have publicly expressed discontent for each other because of the JV’s poor performance.

“We are not satisfied with our market share of 3.5 percent in China. As the No. 1 European auto manufacturer in the field of light commercial vehicles, PSA has not introduced any such models in China yet, including MPV, SUV and crossover,” said Claude Vajsman, CEO of PSA China.

With the new JV, PSA will introduce more passenger and light commercial vehicles in China, but the models will likely be different from the current PSA models made by DPCA.

 

New form of JV

The PSA-Chang’an tie-up represents a new form of JV partnerships in a 50:50 percent alliance compared to traditional ones, according to analysts.

One is the agreement on the outset to create an independent JV brand, which not only conforms to China’s national strategy of independent innovation and branding, but also helps with the successful marketing and sales of JV vehicle products in China and globally.

The other is the possibility of a deepened effort in joint R&D and mutually promoting each other’s brands through their respective sales and distribution networks in China and globally.

“It is an innovation for a new JV to decide to build an independent brand,” said Cao He, a senior analyst for the securities market. “The move is probably requested by Chang’an, which means that the Chinese partner today in a new JV has more say than before. In addition, creation of a new brand would avoid possible product conflicts between PSA’s two joint ventures in China.”

“I am cautiously optimistic about the JV,” said Jones Zhong, senior analyst and editor of Qiche Yaowen, CBU’s Chinese-language weekly newsletter. “The new JV would not affect DPCA in any major way as long as product lineups of the two will not overlap. The high-end LCV market has large potential in China, and PSA actually has some cutting edge technologies in this field.”

However, for both partners, the prospects of success of a new JV in China are nowhere as promising as 10 years ago, when market competition was much less fierce with fewer numbers of players, analysts said.

The French automaker eyes a market share of 10 percent in China by 2020 with 2 million in sales. Although partner Chang’an is one of China’s Big Four auto groups, it prides itself of the significant market share of its own brands. In addition, Chang’an also has both Ford and Suzuki as its JV partners in China.

“It will therefore be an uphill battle for PSA and Chang’an to realize the goals entertained by the new JV,” said Dr. Wayne Xing, publisher of CBU-Auto and China Automotive Review.

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