UPDATE 1-Toyota, Volvo ink $257 mln in China engine deals


(Adds details, analyst comments)

By Ben Blanchard and Yuka Obayashi

SHANGHAI/TOKYO, March 29 (Reuters) - China's top auto maker inked two deals worth $257 million on Monday to make engines with Toyota and truck maker Volvo , helping them make vehicles more cheaply in China by avoiding costly import tariffs on parts.

In the larger of the deals, Toyota will set up a 50-50 joint venture worth 16 billion yen ($152 million) with First Automotive Works (FAW), to make about 40,000 engines a year initially for luxury cars in the city of Changchun in northeastern China.

That deal between Toyota and FAW follows an agreement in August 2002 to collaborate on a broad range of auto operations in China, the world's fastest-growing major car market.

It will help Toyota circumvent hefty import tariffs of up to 50 percent and bring costs down by moving parts production closer to car assembly, analysts said.

"This trend is bound to continue as everyone wants to lower their costs, in what remains a high-cost environment," said auto analyst Xu Xiang at China Southern Securities.

The engine is one of the most expensive and complicated parts of a vehicle. Most foreign auto makers now bring in the required components from overseas.

Toyota and FAW already make engines for small cars as well as the Vios, Corolla and other brands, made together at a plant in the northern city of Tianjin.

It can cost up to 20 percent more to make a car in China than in more developed markets in the West, due to poor logistics, lack of economies of scale and problems sourcing parts locally.

FAW will also team up with China National Heavy Truck Corp and Volvo, the world's number two truck maker, in a $105 million plant that will produce 50,000 engines a year by 2010.

Volvo will own 52 percent of that plant, and the two Chinese firms, 24 percent each.

"The engines will be for sale in China to start with," Jan van Stetten, head of Volvo's truck division in China, told Reuters. Exports would be deliberated upon later, he added.


Last summer Volvo signed a deal to form a 1.6 billion yuan truck joint venture with China National, with an initial capacity of 2,000 trucks per year.

Car sales in China almost doubled to around two million units in 2003, though that rate of increase is expected by analysts to slow this year. Vehicle sales -- including everything from buses to cars and tractors -- grew 34 percent in 2003 to 4.4 million.

Underscoring strong demand, Hong Kong-listed sport utility vehicle and truck maker Great Wall Automobile Holdings Co Ltd on Monday unveiled a net profit rise of 77.8 percent for 2003 to 523.4 million yuan.

Toyota is FAW's second major foreign partner after Germany's Volkswagen AG .

The Japanese company is a relative late entrant to the Chinese market, where established rivals Volkswagen and General Motors Corp have been making cars for years.

"They are playing catch-up and teaming up with a giant like FAW is good for both Toyota and its Chinese partner," said analyst Liu Fei at Automotive Resources Asia. "One gets technology and the other improves its foothold in the market."

The new plant will start manufacturing 3.0-litre V6 gasoline engines in early 2005 with the aim of producing about 40,000 units in the first year, a Toyota spokeswoman said.

It will manufacture engines for the Crown luxury sedan, which is to be made at their Tianjin FAW Toyota Motor Co Ltd venture from next year. (Additional reporting by Niklas Pollard in Beijing)



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