Engine of Growth

15 April 2013

Guangdong province becomes auto giant

By Ou Nian-le

In 2000, Guangdong province produced 39,400 cars – less than two percent of the national total. Last year it produced 1.67 million – more than nine percent of national production.

In just ten years, the province has become one of China’s biggest auto manufacturing centres and is growing at breakneck speed, despite fears of a national glut.

A Sino-German joint venture, First Auto Works-Volkswagen, is investing 13.3 billion yuan in a new plant in Foshan. Chinese firm Chang An and PSA Peugeot Citroën of France are spending 8.4 billion yuan on a plant in Shenzhen that will turn out 200,000 vehicles a year.

Shenzhen is also the home of a private company, BYD Auto, which aims to become the world leader in electric cars. Warren Buffett owns ten percent of the firm, which he paid US$230 million for in 2008.

The provincial government wants to turn Guangdong into a global production centre for motor vehicles; the capital, Guangzhou, is competing with Shanghai and Tianjin in the race to become the Detroit of China.

For nine years, it has hosted an Auto Show, one of the three biggest such events in China, at the Canton Fair Complex.

The most recent one, in November 2011, attracted a record attendance of representatives from over 800 different manufacturers of cars and components, including the major foreign companies that produce in China. The show also unveiled a record number of new models, numbering over 30, including a new Porsche 911, a Ferrari 458 Convertible, a new BMW M Series and a Mercedes Benz made in China.

Volkswagen unveiled a concept car, the Seat IBL, with LEDs at the front and back and an electric-powered hybrid engine.

Over the last decade, the Chinese have embraced the car and the car culture with extraordinary speed and enthusiasm; in no other country in the world has production increased so rapidly and on such a large scale. This is especially so in Guangdong, the country’s richest province, where the affluent and the middle class alike have rushed to transform their lives with the purchase of a private car.

In 2009, China overtook Japan to become the world’s largest maker of automobiles, as well as the biggest buyer of them. National production in 2011 was 18.4 million, compared to less than two million in 2000.

Guangdong is determined to be a key part of this industry.

Humble beginnings

Historically, China’s auto industry was concentrated in northeast China, Shanghai, Beijing, Tianjin and Wuhan.

In the 1980s, Guangdong became the first province to implement the open-door and reform policy of Deng Xiaoping. It attracted thousands of investors from Hong Kong, Taiwan, the Chinese diaspora, Japan, the United States and Europe.

It began with textiles and garments, toys, electrical appliances, food processing, paper, pharmaceuticals and light industrial goods. Its first auto joint venture, in 1985, was with PSA Peugeot Citroen; it closed in 1997 after producing only 100,000 vehicles, after disputes over localisation and repatriation of profits. PSA’s decision to pull out ranks as one of the worst in the corporate history of the auto industry.

The Guangdong government immediately looked for a foreign partner to replace PSA, and decided on the Honda Motor Company of Japan.

China negotiated to join the World Trade Organisation, under which it was committed to lowering tariffs for imported cars. At the same time, foreign producers were looking at China as one of the world’s fastest-growing markets as well as an export production base.

In 1998, Honda and Guangzhou Auto Industry Group (GAIG) set up a joint venture, Guangzhou Honda Automobile Co, to make Accord passenger cars in the former PSA factory. Other Japanese makers followed suit – Isuzu, Toyota, Nissan and Hino, then Fiat, Volkswagen and PSA.

The Japanese giants brought with them their ‘keiretsu’ system – a dense network of suppliers of parts and components who set up plants near the main factory in order to provide the necessary components quickly and efficiently.

The foreign firms were delighted to have factories in China’s richest province where private car ownership was increasing rapidly.

Auto production in Guangdong rose at an astonishing rate – 39,400 in 2000; 188,900 in 2003; 413,500 in 2005 and 1.13 million in 2009, when it accounted for 8.2 percent of national output.

This rapid expansion reflected both the ambitions of the provincial government to have an important share of this strategic industry and also the will of Beijing. Large joint ventures like car factories need the approval of the central government; it was happy to see national production spread across different parts of China.

Trail-blazer

Leading the way was the Guangqi Honda Automobile Company, established on 1 July 1998 with a 50-50 stake between the two partners and a contract period of 30 years. It was the first Japanese company to manufacture cars in China. It invested US$1 billion in the engine plant in Guangzhou that had formerly been used by Peugeot, and started producing Accords there in March 1999.

The joint venture has two plants covering an area of nearly two million square metres. It employs 7,000 staff and produces six brands, of which the Accord, Odyssey and Fit are the best known.

On 1 March 2010, it announced that cumulative sales had exceeded two million units, making it only the fourth company in China to achieve this. In 2011, it sold 362,000 units, and it aims for 400,000 this year.

One of Honda’s plants produces the compact Fit for export, mainly to Europe, where it is sold as the Jazz model. In December 2011, it exported the model to Canada from its Guangzhou plant for the first time, replacing models that were previously made in Japan. The main reason for this move was the high value of the yen, which had eaten into the overseas profits of all Japanese auto-makers.

Guangqi Toyota was founded in September 2004, also as a 50-50 joint venture with 30-year terms, with a registered investment of US$363 million. It completed construction of its manufacturing plant in 2007, covering 1.87 million square metres in the Nansha district.

It has an annual capacity of 360,000 vehicles, including Camry, Yaris and Highlander. It employs 7,000 workers, with an average age of 24, and of whom 25 percent receive training at technical school or at a higher level.

Newcomers

Two other international companies have recently joined the rush into Guangdong. Volkswagen is building a 13.3 billion yuan plant in the Hongsha high-tech industrial park in the Nanhai district of Foshan. It is due to start production in 2013, and is aiming for an annual capacity of 300,000 cars.

The central government delayed approval of the project for one year, until VW and its partner, First Auto Works, agreed to develop local brands and an electric car at the new plant.

VW was the first foreign company to make vehicles in China, and last year sold 2.26 million, accounting for 12 percent of the national passenger car market. But its share in southern China is only ten percent, lagging behind Toyota, Honda and Nissan. The new plant aims to rectify that.

Also under construction is a plant in the Baoan district of Shenzhen. A collaboration between Chang An and PSA Peugeot Citroën, it involves an investment of 8.9 billion yuan and production of the Citroën DS series.

Electric car pioneer

Most automakers in China are large state companies. One outstanding exception is BYD, founded in Shenzhen in 1995 by Wang Chuanfu, an expert in material sciences. Within ten years, it had become the world’s largest producer of small batteries, found in mobile phones, digital cameras, iPods and many other products. It went public on the Hong Kong stock exchange in 2002, with Warren Buffet owning a ten percent stake.

Then Wang decided to make electric cars, and built an assembly plant covering 1.6 million square feet. In 2010, it sold 520,000 vehicles, making it the sixth largest Chinese automaker. But sales of electric cars are currently going slowly, because of the high prices, lack of infrastructure and consumer resistance.

In February this year, BYD announced that its 2011 net profit fell by 44 percent due to lower solar power product prices as well as intense auto market competition that forced the company to offer large discounts.

Ambitions unrealised

Guangdong has within the last decade achieved one of its ambitions – to become a major manufacturer of automobiles; last year the auto sector accounted for 20 percent of its industrial output.

But two ambitions remain unrealised – to be a major exporter and have its own brands. In 2011, China exported 849,000 vehicles, making up less than five percent of total output. They were mostly low-cost cars sold to developing markets such as Brazil, Iran and Russia. Domestic brands accounted for just 29.1 percent of the national market, as foreign brands continue to dominate at home.

Despite its enormous output, China is still far from challenging Japan, Germany, the United States and South Korea in creating auto brands that are recognisable all over the world.

The government is, however, working hard to achieve this, with financial and policy incentives to encourage firms to set up their own Research and Development programmes and reduce their reliance on foreign designs and technology.

On 1 March, GAIG unveiled the first up-market SUV that it has designed itself; the model will be officially launched at the Beijing Auto Show in April, with a selling price of 123,800–229,800 yuan.

For the foreign firms who have invested in Guangdong, these ambitions are a double-edged sword. The firms built factories there to serve the domestic market, which is growing faster than any other in the world. They want to supply export markets from their plants in other countries, especially those at home.

The growth of Chinese brands is regarded with anxiety; foreign firms do not want China to repeat in autos its success with colour televisions, personal computers and air-conditioners.

Beijing puts a 50 percent ceiling on foreign ownership in the auto sector and presses the foreign firms to transfer technology to their local partners. The joint ventures have a limited time span; in the end, the foreign companies will leave their factories, machinery and engineers behind, in the hands of their Chinese partners. By then, whose brands will be more famous?

Another shadow overhanging this extraordinary growth is over-capacity.  If all the investment money promised for the industry is actually spent, China will be able to produce 31 million vehicles a year by 2015. Will the market be able to absorb such an enormous volume, and will the country’s infrastructure be able to cope? Does China want to become even more dependent on imported oil?

Traffic congestion, lack of parking spaces and air-pollution are already major problems in Guangzhou, Shanghai, Beijing and other major cities. But China is also investing heavily in subway networks and high-speed inter-city railways, to give people an alternative to automobiles.

Auto production in Guangdong

Year National output GD output Increase on year Share of total
2000 2.07 mln 39,400 1.9 per cent
2001 2.34 mln 56,700 44 per cent 2.4 per cent
2002 3.25 mln 65,200 15 per cent 2.0 per cent
2003 4.44 mln 188,900 190 per cent 4.3 per cent
2004 5.1 mln 276,300 46 per cent 5.4 per cent
2005 5.7 mln 413,500 50 per cent 7.2 per cent
2006 7.28 mln 555,000 34 per cent 7.6 per cent
2007 8.89 mln 789,000 42 per cent 8.9 per cent
2008 9.3 mln 881,800 12 per cent 9.5 per cent
2009 13.8 mln 1.13 mln 28 per cent 8.2 per cent
2010 18.3 mln 1.36 mln 20 per cent 9.5 per cent
2011 18.4 mln 1.67 mln 7 per cent 9.0 per cent

From China’s National Bureau of Statistics

MACAUHUB FRENCH