Foreign automakers are showing faith in the China market with aggressive investment plans, despite mounting concern over manufacturing capacity and slowing car sales.

However, they appear fickle in finding Chinese partners and vice versa.

South Korea's Hyundai Motor, together with its affiliate Kia Motors, has the biggest number of Chinese partners.

Hyundai has formed two joint ventures with Beijing Automotive Holdings Corp and Jianghuai Automobile Co in east China's Anhui Province, and also joined with Huatai Automobile Co in eastern Shandong Province to produce vehicles under technical licensing deals.

Kia has a joint venture with Dongfeng Motor Corp and Yueda, a local industrial group in eastern Jiangsu Province.

Dongfeng, one of China's biggest automakers, has the biggest number of foreign partners.

Besides collaboration with Kia, it has three joint ventures with French PSA Peugeot Citroen and Japan's Nissan and Honda respectively.

Dongfeng will also set up a car joint venture with France's Renault, which owns a 44 percent stake in Nissan.

"Only one local partner is not enough for many foreign automakers who want to swiftly expand businesses in China because of government policies. Who is willing to put all its eggs in one basket?" said Jia Xinguang, chief analyst with China Automotive Industry Consulting and Development Corp.

Foreign automakers don't have a controlling say in their joint ventures in China because they are only permitted to control a maximum stake of 50 percent according to the nation's auto policy, although they are much stronger than Chinese partners in capital and technology.

The equity structure requirement is seen as China's most important resort to protect domestic automakers in joint operations with foreign partners. And there is no indication that it will be changed soon.

"Car makers, either foreign or local, may want to leverage the balance tool to influence their joint ventures and gain bargaining power," said Yale Zhang, the Shanghai-based analyst with CSM Corp the US automotive consulting firm.

"Some of the foreign car makers may have strategic planning to build different models in different regions, while having only one partner perhaps cannot meet this demand," Zhang said.

Foreign automakers have benefited a lot from their multi-partner strategy in China.

Almost 90 percent of China's passenger car sales are controlled by foreign brands.

Volkswagen, which runs two car ventures with SAIC and FAW, has been the biggest foreign passenger car producers in China for two decades.

The German automaker sold 697,000 cars in China last year, accounting for one-third of China's total car market.

Foreign automakers also enjoy bumper profits in China as domestic car prices remain higher than in the international market, despite manufacturers frequent price cuts during the last three years.

But they are very cautious in voicing multi-partner strategies as it is a sensitive issue among Chinese partners.

"China's auto policy permits us to have two joint ventures partners, and both partners have their own advantages," said Kousuke Shiramizu, vice-president of Toyota.

In 2002, Toyota formed a strategic alliance with First Automotive Works Corp (FAW) China's top vehicle producer to make 400,000 automobiles a year by 2010.

FAW also acquired Toyota's two small joint venture partners in China.

But Toyota last month launched a joint venture with Guangzhou Automobile Group in South China's Guangdong Province to produce Camry, one of the best-selling imported sedans in China, starting from 2006, despite strong opposition from FAW.

"Chinese car makers want to have as many as partners as possible, simply because more car models generate sales volume and revenue," said CSM's Zhang.

Guangzhou Automobile, which also runs a car joint venture with Japan's Honda and a bus venture with Isuzu, aims to lift its annual output to 300,000 vehicles next year and to 1 million units by 2010 from 120,000 units last year.

It also expects its sales revenue to reach 200 billion yuan (US$24.2 billion) in 2010, up from 31 billion yuan (US$3.7 billion) last year.

"The important thing for Chinese automakers to find more foreign partners is to be stronger in an effort to gain a favourable position in the expected shake-up of China's auto industry," Jia said.

An official from Guangzhou Automobile told China Daily that the company now "has no risks of being swallowed up by Dongfeng" by teaming up with Toyota.

Industry sources said that Dongfeng, under direct control of the central government, had hoped to merge with Guangzhou Automobile, but now that appeared very difficult to achieve because of the tie-up between Guangzhou Automobile and Toyota.

Besides FAW, Dongfeng and Shanghai Automotive Industry Corp (SAIC) the government-named "top three", a phalanx of other Chinese automakers are striving to be top players in the nation's auto industry by joining forces with foreign partners, such as Guangzhou Automobile, Chang'an Motor Corp and Beijing Automotive Holdings Corp.

SAIC has three vehicle joint ventures with General Motors (GM) and one venture with Volkswagen.

Chang'an runs two car ventures with Ford and Suzuki.

Beijing Automotive Holdings also has two vehicle joint ventures with Hyundai and DaimlerChrysler.

Worries about local firms

Although Chinese automakers' sales grew fast by teaming up with more than one foreign partners over the past two decades, they remain much weaker than foreign giants, especially in development capabilities.

Almost all of domestic automakers have become "assembling plants" of foreign giants in China.

"We have no time to do own development now as we are very busy... producing Jetta and Bora (two Volkswagen models)... We should wait some 20 years to have strong development capabilities," Zhu Yanfen, FAW's general manager, said in a television interview earlier this year.

Besides co-operation with Volkswagen and Toyota, FAW also has a car joint venture and a car technical licensing production base with Mazda, the Japanese affiliate of Ford.

Analysts said that if Chinese automakers continued to introduce only foreign models, instead of proceeding with their own development, they would lose more ground to foreign partners.

"They are likely to be abandoned by foreign partners ultimately if China's requirement on the equity structure of Sino-foreign auto joint ventures is relaxed and the domestic market becomes less attractive than it is now," said Xia Jun, an auto analyst with CCID Consulting Co Ltd, the Beijing-based and Shanghai-listed industry consultancy.

Foreign automakers in the past heavily invested in Brazil and Mexico to build vehicle and component plants, but now they are shifting to China as it is the world's fastest-growing big auto market.

The other difficulty for Chinese automakers is how to handle relations with different foreign partners properly, analysts said.

Sources said Honda would "lean to" Dongfeng, instead of Guangzhou Automobile, in its China strategy, because of Guangzhou Automobile's new marriage with Toyota and its earlier collaboration with Dongfeng.

It is reported that Honda will introduce its Civic and Legend sedans into its joint venture with Dongfeng in Wuhan, capital of Central China's Hubei Province, rather than its joint venture with Guangzhou Automobile.

The Honda-Dongfeng venture started to produce the CRV sports utility vehicle (SUV) in April this year.

Honda and Dongfeng formed two joint ventures to produce engines and spare parts in the early 1990s in Guangdong Province.

The Honda-Guangzhou Automobile venture, which was set up in 1997, is producing Fit compact cars, Accord mid-sized sedans and Odyssey wagons.

Hyundai is unhappy about Beijing Automotive Holdings' strategic alliance with DaimlerChrysler formed in September last year, as it clinched exclusive partnership with the Beijing firm when the two sides set up a joint venture in 2002.

"Many foreign and local players want to play about, but none of them hopes to see their partners find new sweethearts. It will be sophisticated work to deal with different spouses," said CCID's Xia.

Reshuffle ahead

Evidence is looming of a big reshuffle in foreign automakers' joint ventures with different Chinese partners.

The latest move has been taken by Nissan which integrated its two joint ventures in China into one entity through an equity merger deal earlier this month.

Dongfeng Automobile Co Ltd, the Shanghai-listed affiliate of Nissan's joint venture with Dongfeng Motor Corp, acquired a 51 percent stake of the Japanese firm's other joint venture in Zhengzhou, capital of Central China's Henan Province.

Dongfeng Automobile, 70 percent owned by the Dongfeng-Nissan joint venture, paid 242 million yuan (US$29 million) to buy a 35 percent stake of Zhengzhou Nissan from Chinese financial conglomerate Citic Group.

Dongfeng Automobile also paid 111 million yuan (US$13 million) to acquire a 16 percent share of Zhengzhou Nissan from Zhengzhou Light Vehicle Co.

Sales networks of the two joint ventures will also be merged.

The Dongfeng-Nissan venture, launched in July last year with a registered capital of US$2.1 billion, is the biggest Sino-foreign vehicle joint venture in terms of investment, producing Nissan-brand passenger vehicles and Dongfeng-brand commercial vehicles.

Zhengzhou Nissan, formed in 1993, is producing Nissan-brand sport utility vehicles and pick-ups.

Chang'an, Ford's partner in Southwestern Chongqing Municipality, is in final talks for an equity merger with the US giant's other joint venture partner Jiangling Motor in eastern Jiangxi Province.

The venture between Chang'an and Ford is producing Fiesta and Mondeo sedans. The Ford-Jiangling venture is making Transit wagons.

GM, the second largest foreign auto producer in China, in August merged its joint venture with Jinbei Automobile Co in Northeast China's Liaoning Province into its flagship venture in Shanghai with SAIC.

The GM-Jinbei venture was formed in 1998 and produced Chevrolet SUVs and pickups but it halted production at the beginning of this year due to sluggish sales.

Shanghai GM, set up in 1997, is producing compact Buick Sails, and Buick Excelles and mid-sized Buick Regals and Buick GL8 wagons.

The venture will also start to make luxury Cadillacs at the end of this year.

GM also has two joint ventures in Shandong Province and South China's Guangxi Zhuang Autonomous Region through merger and acquisitions of smaller partners with SAIC.

"GM is wise to bring all its operations under centralized management of it and SAIC," said Jia from China Automotive Industry Consulting and Development Corp.

"With market competition further growing, more mergers and acquisitions between foreign automakers' different joint ventures will take place within the next two to three years, although most of them are having good lives helped by booming sales," he said.

Reshuffles could also start from sourcing and sales channels as the first step towards equity mergers and acquisitions, Jia says.

Volkswagen hopes to integrate purchasing and sales channels of its two joint ventures with FAW and SAIC, but no substantial steps have been taken because of resistance from the two Chinese partners who are wrestling for the No 1 position in China's auto industry.

Dongfeng also planned to form a three-party sales joint venture with Honda and Guangzhou Automobile for the Japanese automaker's vehicles produced in China. But the plan failed because of rejection from Guangzhou Automobile.

The Dongfeng-Honda venture in Wuhan now borrows networks from Honda's venture with Guangzhou Automobile to sell CRV SUVs, and will build its own sales channels for CRVs and future products.

Sales of China-made vehicles grew by 18.36 percent year-on-year to 3.73 million units during the first three-quarters of this year. Growth was down from 34 percent last year.

Vehicle demand in China is forecast to reach 10 million units by 2010, up from 4.5 million units last year.

(China Daily October 28, 2004)