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Going for broke

There is no mistaking the ambition of the Shanghai Automotive Industry Corp (SAIC) – it wants to be one of the world’s top six carmakers by 2020. This means that it is targeting sales of around four million vehicles to achieve it. Last year, it sold 848, 542 units, a 7.8 per cent increase on 2003. Its rise has been fuelled by a boom in car sales in its home market China where it has expanded from tractor making to become a diversified automotive group.

Completely owned by the City of Shanghai, SAIC nevertheless has a large international network that includes joint ventures with General Motors and Volkswagen while earlier this year it bought Korea’s SsangYong Motors. It has also been closely linked with MG Rover, at first as a potential partner but following the British car company’s demise, as the owner of various licences and technologies that include the design rights to the Rover 25 and 75 as well as the K series engine.

However, even this has been thrown into doubt as PricewaterhouseCoopers, the Administrators for MG Rover, are investigating the legality of its €100 mn ($128 mn) sale of Rover car designs to China. SAIC, though, is still planning to make cars based on the designs in China and has already approached Rover component suppliers with a view to buying parts to build the Rover 75 in China, the Birmingham Chamber of Commerce and Industry said. However, it added that it was unclear who owned the rights to the tooling of the 75.

SAIC, though, has now just entered a new phase in its life with the creation of Shanghai Automotive Co Ltd, a new unit set up at the end of 2004 to pave the way for parent Shanghai Automotive Industry (Group) Corp to list overseas or at home in a public offering that could raise as much as $2 billion in 2005 or beyond. According to a Reuters report, in mid-May its parent had completed the shift of its 70 per cent stake in the listed firm to another unit. The new company will serve as the public face of Shanghai Automotive and own its stakes in car-making ventures with GM and Volkswagen.

However, the company is facing a dilemma. While the Chinese car market's potential is undeniably massive in the long run and SAIC is very profitable, its position is not as stable as it might seem, according to a BBC website report. New government regulations on car financing together with measures to cool down an overheating economy have had their effect with passenger car sales dropping by more than 35 per cent in January compared to December, according to Chinese state media. Overall, sales rose 12 per cent in 2004, with 14 per cent growth expected in 2005, according to Wang Qing of the Economic Research Institute while longer-term estimates suggest that the market will grow at 10-15 per cent over the next decade. It will also take a long time before Chinese car sales rival those in Europe or the US despite this double-digit growth rate.

However, production figures are rising far more quickly faster than sales. In January, 423,000 motor vehicles were made in China, up 37.6 per cent year-on-year leading to a backlog of some 500,000 unsold vehicles according to media estimates.
Compare that with total sales of motor vehicles, expected to reach 5.8 million this year according to the State Information Centre, and it becomes clear that the disease of overcapacity that has long marred the US and European automotive industry has arrived in China. Far more worringly by 2007, it is estimated that around 7 million motor vehicles will be sold in China, representing less than half the 15 million that will be made, predicts the State Development and Reform Commission. Nor will plans to lower car import tariffs for cars to 30 per cent and abolish the quota system on car imports this year help local firms.

Another worrying factor for local carmakers and SAIC in particular is that the profitability of the sector dropped from 8.6 per cent in 2003 to 6.6 per cent in 2004, according to the news service Xinhua. Around 1,200 of China's 6,000 automotive enterprises suffered losses last year, according to the Ministry of Commerce. Brilliance BMW, Dongfeng Peugeot Citroën Automobile, Jiangsu and Yueda Kia Automobile all suffered losses last year, and a further 19 mainstream car makers saw their performances slide in 2004, according to China Association of Auto Manufacturers. Many have been the victims of an intense price war.

SAIC’s solution, as it is with some of the other smaller carmakers, is to find overseas markets but this is where its lacks the necessary expertise. While its most senior executives, chairman Chen Xianglin and president Hu Maoyuan, are both rated highly in the automotive world, its middle managers are far less experienced in international affairs. It was trying to make up for this deficiency that SAIC considered going into partnership or even taking over with MG Rover until they realised the downside of being laden with the problem of a depleted pension fund amongst other issues. It is now said to be on the outlook for other candidates, which is why Fiat Auto, which has firmly refuted the rumours, has been linked to the Chinese carmaker.