Ssangyong looks to localize

Employees check a Ssangyong Motor Korando C SUV during final inspection on the production line at the company's factory in Pyeongtaek, South Korea, in August 2014.  [Photo/Bloomberg]

Automaker aims to overcome roadblocks to build first overseas plant in China

China has long been "a field of hope", as Mercedes-Benz claims, for automakers worldwide, and most of the industry's biggest names have localized their production in the world's largest car market, with some smaller players poised to follow suit.

The latest to make the attempt is Ssangyong Motor, but the road ahead seems bumpy for this South Korean brand.

Ssangyong, part of India's Mahindra Group, signed a letter of intent with China's Shaanxi Automobile Group on Oct 11 to examine the feasibility of the proposed venture, as well as the capability of manufacturing plants to produce both engines and entire vehicles in Xi'an, capital of Northwest China's Shaanxi province.

Shaanxi Auto, established in 1968, produces heavy and special-purpose trucks as well as new energy ones.

According to a Mahindra company document, the proposed plant will have the capability to build 150,000 cars a year by the end of 2019, and the plans allow for the production of 300,000 cars a year if necessary.

If built, the plant will be Ssangyong's first production base outside of South Korea. Its CEO Choi Johng-sik expressed his hope that the plan would be realized.

"It is essential to have a local plant with comprehensive capacity in China, both to increase our competitiveness in the rapidly growing Chinese car market and to increase our sales volume," he said.

The automaker said it will also look to establish an automotive cluster with its major suppliers, both to ensure product competitiveness and work on production of Ssangyong's current models, as well as models that are now under development.

The plan, while ambitious, faces a number of challenges, the first of which is gaining the approval of the government.

On Oct 8, just three days before Ssangyong signed the letter of intent, the State Council, China's cabinet, decided that "in principle it will not approve new joint ventures that produce gasoline cars".

Pang Qinghua, head of Pangda Automobile Trade Co, Ssangyong's sales agent in China, is pessimistic about the carmaker's plan.

"It (the plan) is very unlikely to be realized. In addition, they merely signed a memo, which is not a legally-binding document," he told the National Business Daily newspaper.

The company's declining sales, along with its weak brand awareness in China, are also stumbling blocks on its road of localization.

Statistics show it sold 2,460 units in China last year, a dramatic fall on the 12,000 units sold in 2014.

Due to its weak sales in China, Ssangyong is little known in the country, despite the fact that China's SAIC Motor was one of its largest shareholders for more than five years.

One reason behind Ssangyong's enthusiasm for the plan could be that the proposed joint venture may be dedicated to new energy vehicles, said Alfred Tian, an expert on mergers and acquisitions in the automotive industry.

Tian wrote on Sina Weibo that Ssangyong is planning to build electric versions of its hit SUV Tivoli, which will be capable of traveling 300 km on a single charge.

Ssangyong's total global vehicle sales reached 144,764 last year, with its compact SUV Tivoli accounting for more than 40 percent of the total.

"That means the electric Tivoli will be crucial to the future of both Ssangyong and Mahindra. It is not that they are unaware of China's policies - quite the contrary: They have a good understanding of them," said Tian.

Policy-wise, China advocates the production and use of new energy vehicles, including electric, plug-in hybrid and fuel cell models.

Tian said that the letter of intent is no different in nature to the agreement struck last month between Volkswagen and Anhui Jianghuai Automobile.

On Sept 7, Volkswagen AG signed a memorandum of understanding with JAC about establishing a 50:50 new energy vehicle joint venture.

The companies will evaluate the feasibility of the new venture that will focus on the research, manufacturing and sales of new energy vehicles and spare parts.

They aim to sign a formal partnership agreement within five months, according to the memo.