Challenges ahead

Although Chinese partners want to use this new collaboration as opportunities to learn from their foreign partners, experts say it is not an easy task.

Sergio Marchionne, CEO of Fiat SpA, estimates that it would cost $1 billion to develop a new model platform, and "it will be too expensive to lose such as bet".

To achieve sufficient revenue, the annual output should be at least 6 million units for every company, and 1 million units for each platform, he said during the recent CEIBS China auto forum.

Thomas McGuckin, partner of PwC Asia Pacific Automotive Segment, says establishing an automotive brand is an extremely complex and challenging endeavor.

Thomas McGuckin, partner of PwC Asia Pacific Automotive Segment, says establishing an automotive brand is an extremely complex and challenging endeavor. Provided to China Daily

"Companies need to coordinate the talent, resources, technology and systems to develop and produce a quality vehicle that meets market demand."

He still holds an optimistic view on the future of these new joint-venture brands. "The half-Chinese-half-foreign brands reflect the spirit of those joint-venture partners and their go-to-market plans. If the commitment by the joint-venture partners is true, there is no reason that these brands can't find their place and some success in the market."

Zhu Fushou, general manager of Dongfeng, says if the Venucia had carried the Nissan tag, it would have been possible to charge the customers a little bit more in the short term. "But over the next 50 years, there will be hardly any Chinese involvement in the R&D process, while the foreign brand will go from strength to strength in China."

According to officials from Guangqi Honda, the biggest challenge for Chinese companies is the lack of R&D expertise and the ability to build a strong brand.

Yet there is a possibility that these new brands may also cause friction within the existing joint ventures, feel experts.

Take Chang'an Automobile for example: besides its joint venture with Ford, the company also produces its own independent brands. The similar positioning and pricing strategies will definitely put them in competition against each other.

"We have to decide which segment we are going to compete and which product will be right for this segment," Hinrichs says. "We know Ford can go to a lower price point, so we believe we can afford products in the lower price point and the higher price point."

But the partners also have to sort out the intellectual property rights on the new brands, yet another sensitive issue. The recent case of Volkswagen accusing its joint-venture partner FAW of using its engine and gear box technologies during the latter's new brand development is a case in point.

Hodac from the European Automobile Manufacturers Association says there is no way to avoid this issue, as Chinese companies gradually become global players.

"The key point during the new round of cooperation is mutual trust," he says. "The intellectual property issue is among the biggest concerns of European auto companies. Once Chinese companies grow stronger and export to more countries, they will face more such cases."

Song from Tsinghua University says yet another problem confronting companies is the constant recycling of outdated platforms, with changes often being restricted to a new logo.

"I don't think that can truly improve the R&D capabilities of Chinese companies," he says.

Hinrichs from Ford doesn't think joint ventures alone should be blamed for such a situation.

"The real issue is when will the Chinese government come out with standards that are truly international and whether these (new) platforms meet the desired standards." He says that one of the reasons why recycling of old platforms does not occur in Europe or in the US is because the requirements (on new platforms) are much more stringent that it doesn't make sense (to continue using the old ones)."

McGuckin from PwC says consumers beyond the traditional first-tier markets will account for over two-thirds of the market growth in the next five years, so the new self-owned joint-venture brands have great potential.

"There is enormous potential due to the rising disposable incomes and, most importantly, the strong desire for more individual mobility in these markets," he says. "Vehicle purchases in these markets represent the practical aspirations of many buyers. And the automotive industry is critical to the ultimate economic growth, talent, technology and expansion of China."

But even in a big auto market that is still growing, consolidation is unavoidable if new brands keep coming out so regularly, analysts say.

Currently, the global auto capacity is about 95 million, about 25 million more than the market needs, says Marchionne from Fiat. Hodac estimates that there is about 30 percent to 50 percent of overcapacity in Europe.

"The crisis (in the European auto industry) exposed the structural flaw of the auto industry over the past few decades, such as low efficiency and overcapacity," Marchionne says.

"We foresee a global consolidation until eventually only five or six companies are left," he says. "During the consolidation, the Chinese government should make sure at least one major Chinese company survives."

Chen says the government should create an equal market environment for companies to meet this new round of consolidation, but not by protecting major Chinese automakers.

"The government should improve the merger and acquisition environment," he says.

Hinrichs predicts that China will account for 70 percent of Ford's growth for the next 10 years, and he expects more than 30 percent of sales volume to come from the Asia-Pacific region.

Dong Yang, vice-chairman of the China Association of Automobile Manufacturers, insists that Chinese brands should have the say in the domestic market during future consolidation.

"Multinationals should deepen their cooperation with Chinese partners, rather than complaining to the government for more share of the joint-venture."

Based on Chinese regulations, foreign automakers have to form joint ventures with Chinese companies, and the stake cannot exceed 50 percent. For decades, foreign brands have been complaining about this aspect.

"Chinese brands are still weak compared with auto giants from Europe, the US, and Japan. If the government allows the multinationals to increase their stake in the JV, Chinese brands will become even more vulnerable," Dong says.

Ma from Chang'an says the biggest opportunity, and challenge as well, is whether Chinese companies can learn some "real technologies" from foreign partners to accelerate their own development, rather than "getting an outdated platform to deceive the customers".

China Grand Auto, the biggest auto dealership in China in terms of revenue, says it is willing to cooperate with the new joint-venture brands, as long as the models have market demand.

"If the cost is reasonable and the returns decent, we will consider cooperating with these brands," a manager from the company says.

Song says the Chinese partner should figure out which specific technology or skill they want to learn from foreign partners.

wangchao@chinadaily.com.cn

(China Daily 11/30/2012 page1)