Chinese auto companies struggling at home

SHANGHAI, China—These should be good times for Chinese automakers as they prepare to show off their latest models at the Shanghai auto show.

Their home market is the world’s biggest and growing. But local automakers such as Chery and Geely are being squeezed by bigger, richer global rivals including General Motors and Nissan that have moved into segment the Chinese makers considered their own: low-priced models for local tastes.

Domestic brands account for less than half of their own market.

“At a time when the Chinese were getting ready to move upscale, they have come under siege in their area of traditional strength,” said Michael Dunne, president of Dunne & Co., a research firm. “They didn’t see that coming and it hurt.”

Fighting back, Chery, Geely and local rivals Great Wall and BYD are scaling down ambitious expansion plans and focusing on improving quality. Some hired managers or designers with experience at Mercedes Benz and other foreign producers. Others aim at specialties such as SUVs, minivans for export to other developing countries and electric buses.

This week, Chery Inc. announced a corporate overhaul after sales plummeted 10 per cent last year. The company said it will shrink its range of 20 models to 11 or 12.

BYD Co., in which American investor Warren Buffett’s Berkshire Hathaway Corp. owns a 10 per cent stake, plans to display a new SUV and its Si Rui sedan at Auto Shanghai 2013, which opens Sunday.

The company, China’s leading maker of electric cars, blamed intense competition for a 94 per cent plunge in profit last year and says the midsize Si Rui should help to drive a rebound.

Great Wall Motors Co. plans to debut two SUVs, a pickup and a sedan among 23 models on display. Last year, the company was China’s top-selling independent automaker on the strength of its popular SUVs, which are exported to 80 countries.

China’s failure to follow its neighbours Japan and South Korea in creating at least one global auto brand—even after this country passed the United States in 2009 as the biggest auto market—has frustrated communist leaders.

They see automotive manufacturing as a national priority—the “industry of industries” that supports higher-paid jobs in fields from manufacturing to electronics to chemicals. They have spent two decades giving producers subsidies and other help.

Beijing issued development plans in the early 1990s that called for creating three globally competitive auto groups. Since then, planners have changed course repeatedly after efforts to create success by decree failed to pan out.

In March, domestic Chinese auto brands accounted for only 43.4 per cent of sales, according to the China Association of Automobile Manufacturers.

By contrast, Japanese automakers control a commanding 95 per cent of their home market, according to LMC Automotive, a consulting firm. South Korea’s producers have 82 per cent of theirs.

Global automakers that want to produce in China are required to work with local partners in hopes the Chinese manufacturers will learn enough to launch their own brands—a policy that has had little success.

Shanghai Automotive Industries Corp., which assembles cars for both GM and Volkswagen AG, created the Roewe brand based on models bought from defunct British producer Rover. Nanjing Automotive Group relaunched MG sports cars in China. But state-owned producers still make up to 80 per cent of their revenue as service providers to foreign brands.

“They are under huge political pressure to build up their own brands,” said LMC analyst John Zeng. “But really they are struggling.”

More recently, Beijing has stepped up support to independents that emerged over the past decade such as Chery and Geely Holding Group, which acquired Volvo Cars from Ford Motor Co.

Some producers have bucked the hard times. While BYD earned just 81.4 million yuan ($13 million) last year, Great Wall’s booming SUV sales boosted profits 65.7 per cent to 5.7 billion yuan ($934 million).

Chery, founded in 1997, was once China’s top-selling independent brand but saw sales tumble last year to 563,000 vehicles. Its turnaround plan calls for eliminating two of its three brands and selling all its vehicles under the Chery name.

Chinese domestic brands suffered a blow last year when GM hit their low-price market segment with a new version of its Sail sedan that sells for just 56,800 yuan ($9,100). Developed at GM’s Shanghai design centre in partnership with SAIC, the Sail also is due to be exported to India.

Chinese brands also face a slowdown in overall sales, though to still-robust levels that outpace Western markets.

Sales in March rose 13.3 per cent from a year earlier to 1.6 million vehicles, well below 2009’s explosive 45 per cent growth, according to an industry group, the China Association of Automobile Manufacturers.