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INTERVIEW-Denway pursues Chinese taste for family automobiles

By Alison Leung

GUANGZHOU, China, Feb 19 (Reuters) - A joint venture here between state-backed Denway Motors and Japan's Honda Motors is cranking out gleaming Honda Accords and Odyssey minivans as fast as Chinese drivers can buy them.

But Denway Vice Chairman Lu Zhifeng recalls being driven nearly to tears five years ago by the state of the firm's last joint venture, which used an antiquated assembly line to make unpopular and dated Peugeots.

"Grass had grown in the production line, there were holes in the roof and 1,800 workers were sitting there without work or pay," Lu said in a recent interview, puffing on a cigarette at the recollection of the firm's ill-fated tie-up with France PSA Peugeot Citroen .

"I almost cried," he said.

With support from state lenders including Industrial and Commercial Bank of China and a new joint venture partner in Honda, Denway has become a success story in car crazy China, winning attention from foreign investors and planning to nearly double output this year as China's auto market mushrooms.

Denway's rust-to-riches story demonstrates that China's increasingly discerning and wealthy consumers want innovation and quality, and won't settle for last year's or last decade's model.

"We introduce timely technologies, not a single product, so every one of our models is launched in tandem with the international market," said the 51-year-old Lu, who is also general manager of Denway's state-owned parent Guangzhou Automobile Industry Group.

Shares of Denway have raced up in the past year on optimism that China's sizzling auto market will continue to grow at a rapid pace as incomes rise.

The stock climbed 62 percent in the year to Tuesday close and 24 percent in the last month. It was down 0.81 percent at HK$3.05 by mid-afternoon on Wednesday.

Denway's turnaround has been helped by having a joint venture partner whose car models were conceived in Asia.

"The size, the colour, and the design of Japanese cars are more suitable for Chinese," he added.

The Guangzhou Honda joint venture held 47.5 percent by Denway targets families, not fleet owners, as buyers, Lu said.

The venture sold 59,000 cars last year, or about five percent of the cars sold in China.

It plans to sell 110,000 vehicles in 2003, and hopes to win 10-12 percent of the China market, which is now dominated by the local joint ventures of Germany's Volkswagen and U.S.-based General Motors Corp .

Fueled by a surging consumer class, China's passenger car market grew by 56 percent last year to more than a million.

Lu said sedans such as the Accord are the fastest-growing segment of the Chinese auto sector.

Guangzhou Honda is rolling out a new Accord series this year with a 2.4-litre model launched in January at 259,800 yuan (US$31,380). Versions with 2.0- and 3.0-litre engines will be available soon.

The venture also said it plans to begin selling an economy car in July to be priced at around 100,000 yuan, with initial production capacity of 50,000 that will be doubled.

"China has a population of 1.2-1.3 billion and about one-quarter of them live in the prosperous coastal areas," he said. "If just one percent of these families want a new car, it's already big demand."