– by Yu Linglin
YIZHENG, Jiangsu – After two years and nine months since it acquired Korean automaker Ssangyong, Shanghai Automotive Industry (Group) Corp. (SAIC) is now getting ready to start production of Ssangyong vehicles at its Yizheng base, about 300 kilometers from Shanghai.
The first Ssangyong vehicle to be produced at the Yizheng base will be a revised model of Kyron. When production equipments are ready for operation, the Yizheng base will officially enter mass production at the beginning of 2008. If everything goes smoothly, the revised Kyron will be introduced to the market next April.
Meanwhile, SAIC’s engineers in China, Korea and Europe are reportedly all engaged in the R&D work of Ssangyong’s upcoming model, which is based on Rover technologies purchased by SAIC years ago.
The Rover-based new model will enter mass production in Ssangyong’s manufacturing facility in Pyeongtaek, South Korea, starting from the latter half of 2008. By then, SAIC will have two private brands after it sealed deals with Ssangyong and Rover: Ssangyong and Roewe. Both models will share the same platform, which greatly reduces cost of R&D work on both brands.
The merger talks between SAIC and Nanjing Automobile Group Corp. (NAC) are still in progress. NAC’s product lineup already covers MG, Iveco, Yuejin and Fiat vehicles, but SAIC still has no SUVs in its lineup. Ssangyong is thus the best solution since it was positioned as a SUV and C-class vehicle manufacturer when it started production in South Korea because of government policies.
In the meantime, other Korean OEMs have started to launch SUVs, giving SAIC a push to develop more models for Ssangyong so as to sharpen the Korean automaker’s edge in the increasingly competitive market. So far, SAIC has put Ssangyong’s R&D center in Seoul among the list of its top three R&D institutions, the two being in Shanghai and Birmingham, UK.
SAIC will apply its advanced diesel hybrid technologies on the 2008 version of the Kyron in coming years. It also plans to launch six new models – three SUVs, one MPV and two luxury sedans – from Ssangyong by the end of 2010.
SAIC’s Shanghai R&D center has been remodeling and improving the original Kyron (the program is codenamed “S-100”) since October 2005.
According to SAIC’s original plan, it would establish a 50:50 joint venture with Ssangyong to produce Ssangyong brand vehicles in China, paying the Korean automaker technology transfer fees. However, the Korean Trade Union in Ssangyong was concerned that SAIC would move the production back to China, and so obstructed the JV plans. SAIC finally lost its best opportunity to establish a JV with Ssangyong.
In August 2006, Ssangyong’s workers went on strike, suspecting SAIC would transfer both the technology and the production to Shanghai. The strike lasted for 20 days, causing a heavy loss of 70 billion KRW ($399 million) for the Korean automaker.
SAIC renewed JV talks with Ssangyong at the end of 2006. It was planning to cooperate with the Korean automaker and register a brand new JV, side by side with Shanghai-Volkswagen, Shanghai-GM and SAIC-GM-Wuling. However, the Chinese government policy now in favor of independent brands is most unlikely to ratify SAIC’s new JV project with a foreign OEM.
Ssangyong is the fourth-largest auto manufacturer in Korea, which specializes in making SUVs. However, Korea’s consumption tax on automobiles has recently become more favorable towards small-displacement vehicles while on large-displacement vehicles, such as SUVs, the tax has increased gradually. Plus, the mounting diesel price in Korea has also aggravated the situation for Ssangyong. As a consequence, Ssangyong was on the verge of bankruptcy, straggling in red, having no access to loans due to a lack of financial trust. And it finally ended up getting taken over by its creditors.
In January 2005, SAIC purchased 48.92 percent of Ssangyong’s shares with close to $500 million, and acquired more shares in the secondary market later. It was finally able to hold 50.91 percent shares of the Korean automaker. SAIC announced the sales performance of Ssangyong on August 15 this year, about two and half years after the acquisition. As revealed in the announcement, Ssangyong sold 69,755 vehicles in the first six months of 2007, up 13.2 percent year-on-year, setting a significant milestone in the history of Ssangyong as it was the first time it recorded a surplus after years of deficits.
SAIC has been improving the management system of Ssangyong since 2005, having the decision-making process of the managing board more transparent, ensuring interests of minority shareholders, trying to ensure a smooth transfer. Meanwhile, SAIC also poured into Ssangyong huge sums of money. With strong backing from its largest shareholder SAIC, Ssangyong has obtained altogether 420 billion KRW of financial support through long term interest-free loans and issuing company bonds. It first paid off its bank loans and then borrowed another 97 billion KRW to develop new products.
By such tremendous efforts, Ssangyong has become an irreplaceable part of SAIC. In the 11th Five-Year Plan period, SAIC aims to “produce 600,000 independent-branded vehicles,” which will include 200,000 passenger vehicles from Rover and Ssangyong platforms.
Both Ssangyong and Roewe brands play significant roles in SAIC’s project to build its independent brands. The two brands exhibit some distinctive features: based on the platform of Rover, Roewe brand vehicles will mainly be cars, while Ssangyong makes SUVs, which perfectly complements the product lineup of SAIC.
“There is a good chance that we’ll develop our independent products based on Ssangyong vehicles,” said Chen Hong, president of Shanghai Automotive Co., Ltd. Previously, Chen expressed his hopes to realize resources sharing between Roewe and Ssangyong. He also revealed that the first Ssangyong car to be produced in China will bear the Roewe badge.
“What SAIC is really interested in is not the profitability of Ssangyong products, but the ‘Synergy Effects’ between the two companies,” said an industry analyst.
The output amount of Ssangyong’s six main models is relatively small, about 20,000-50,000 units each annually. As scale determines merits in today’s auto industry, an annual output of around 150,000 vehicles puts Ssangyong in a disadvantaged position when sourcing from upstream suppliers. Meanwhile, SAIC’s subsidiary automakers sold a total of 800,000 vehicles last year. If SAIC adopts centralized procurement, it can greatly slash the cost for Ssangyong by further cutting the procurement price.
SAIC has made enough preparations for production of Ssangyong vehicles in China. Except for chassis, engine and transmission, which will be from Benz as before, all parts and components will be supplied by local producers, which has greatly facilitated further cost reductions.
“Though massive remodeling work has been done in the S-100 program, we will still stick to the original chassis,” said a senior technician of SAIC. “In this way we will be able to share a lot of parts and components with those vehicles produced in South Korea.” According to preliminary estimates, over 50 percent of auto parts and components can be shared. This means Ssangyong will enjoy a parts supply system in China without spending a single dime.
“Ssangyong can save at least 25 percent in tariffs after realizing production localization of its vehicles in China,” said an industry expert. “With local suppliers in place, costs for Ssangyong vehicles can be reduced by a total of 30-40 percent.”
Rewritten by Louise Liu based on the author’s story published in the 21st Century Business Herald