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China should stop approving new vehicle JVs

The 3rd China Self-innovated Auto Expo was held in Beijing from July 26-29. At the exhibition, major Chinese independent automakers such as BAIC, SAIC Motor, Chang’an Auto, GAC, Brilliance, BYD and JAC showcased models listed in the draft of 2012 Catalogue of Automobiles for Selection as Official Cars for Party and Government Organs released by MIIT on February 24. The following are highlights of comments made by industry analysts and senior automotive executives at a concurrent forum on “Governmental Policy and China’s Independent Automobile Industry.” Editor 

China should stop approving new vehicle joint ventures, according to Rao Da, secretary-general of China Passenger Car Association (CPCA).

“With every new JV built, market share of Chinese independent brands is being taken away,” said Rao, “China’s favorable system for the establishment of foreign-invested JVs will strangle independent Chinese automakers and threaten national security.”

According to Rao, passenger vehicle (passenger car, SUV and MPV, not including microvan) sales of Chinese independent brands dropped by 58,000 units in the first five months of this year, while those of JV brands increased by nearly 400,000 units during the same period year-on-year.

He also said that sales of cars of 1.5L and below in engine displacement from independent automakers accounted for more than 90 percent share of this segment five years ago. But as more JV brands set foot in this segment in recent years, the market share of independent brands has shrunk. Rao accused certain government policies, such as subsidies offered to smaller engine vehicles to have included 1.6L in the past two years, as “technology corruption,” because the policy purposefully included many cars of 1.6L displacement made by foreign-invested JVs.

On July 24, the Notice on Establishing Exit Mechanisms in the Auto Industry (the Notice) released by the Ministry of Industry and Information Technology (MIIT) stipulated that the tenure of vehicle production for automakers in China would be terminated.

However, Rao told CBU/CAR that more important is that the government reduces and stops offering vehicle production licenses rather than focusing on an exit mechanism.

“An automaker should be allowed only one production license and forbidden to obtain additional licenses through the so-called “shell resource” of idle manufacturing facilities,” said Rao. “There will be more than 200 vehicle makers in China if all ‘shell resources’ were used.”

Rao also suggested MIIT’s Passenger Vehicle Corporate Average Fuel Consumption Calculation (or CAFC) should be abolished.

“Domestic-made passenger vehicles need to meet second-phase fuel consumption standards before they can be produced and sold. But imported vehicles don’t have to meet this requirement,” said Rao. “Also, large-displacement passenger vehicles from JVs can easily meet fuel consumption standards by a hybrid technology upgrade at a low cost, maybe around ¥100,000 ($15,750), compared to a small-displacement car needing ¥50,000 for the upgrade, which is high relative to the vehicle’s cost,” he continued.

Rao predicted that market share of Chinese independent passenger vehicle makers will drop to less than 28 percent in 2012.

Chi Yifeng, general manager of Beijing Asian Games Village Auto Mart, also said that a stricter system of approving new JVs in China should be carried out. He believes that Chinese automakers must stand firmer on “exchanging the market for technology” in their joint venturing.

“China’s policy on allowing foreign investors to set up wholly-owned key parts and components companies in China needs to be changed,” indicated Hu Xinmin, honorary chairman of China Association of Automobile Manufacturers (CAAM).

Hu also expressed the belief that independent automakers should put product quality first at all times and find the correct market positioning.

“Independent brands need to develop their vehicle products step-by-step, instead of expanding into high-end segment in a rush,” he said, “otherwise, they may suffer bigger losses.”

“When Chinese customers are offered similar vehicle products with the same technology levels, they unhesitatingly choose a foreign brand,” said Chi based on a survey his Auto Mart conducted recently.

That means the improvement of brand recognition would be more significant for Chinese independent automakers in their sales and marketing efforts, Chi believed.

BAIC vice president Dong Haiyang believes that the inability of Chinese independent brands to offer products at a premium price is another important reason for their market share drop. Many of them are still trying to reach volume sales with cheap products.

A good piece of news is that despite the weak demand in the domestic market, Chinese independent brands exported 487,900 vehicles in the first half of 2012, up 28 percent year-on-year, according to CAAM.

However, Zhou Shijie, director of the Industry Department under the Ministry of Commerce, said that China’s vehicle export still has major weakness. Most of the exported vehicles are of low- to mid-end segments, low quality and profit margins. They also lack adequate sales and aftersales service.

“Only half of the 90 or so Chinese independent brands in Peru offer aftersales service,” Zhou said. “The average maintenance cycle of Chinese vehicles in South Africa is only a few months.”

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