Chinese Automakers, Suppliers Encouraged to Go Global

WUHAN, China – International expansion is a consistent theme here at the Global Automotive Forum, where Chinese automakers and suppliers are being encouraged to venture into new markets but cautioned to do it the right way.

“Going global is very important for Chinese automakers,” Wang Xia, chairman of the China Council for the Promotion of International Trade’s Automotive Committee, says Thursday in kicking off the fifth annual GAF conference, hosted by a government-industry coalition.

The Chinese auto industry has lagged other sectors, most notably consumer electronics, when it comes to tapping into global markets. Now central-government officials and many industry insiders here say it is time for indigenous car manufacturers to put the building blocks in place for international expansion and for local suppliers to move into new markets more aggressively, either on their own or via strategic tie-ups and outright acquisitions.

However, many speaking at the conference, held in the heart of this automotive-manufacturing hub city, believe the local industry will have to step up its game, mainly by focusing on improving technology and quality through better R&D and further development of the local supply chain, if China is to gain an international foothold.

And they caution against setting overaggressive growth objectives that might build short-term sales but lack long-term strategic value.

“There should be no blind investment (solely) to push (economic expansion),” Wang Ruixiang, chairman of the China Machinery Industry Federation, warns. “We need to focus on healthy growth.”

Motivating the push beyond China’s borders is the slowing automotive market, which after years of double-digit gains is expected to rise a relatively modest 7% this year.

There also appears to be widespread consensus that unless local automakers begin to compete globally, they will continue to lose ground in their home market to the multinational brands that currently hold the technological edge, have better quality reputations and are building their production capacity here at a rapid pace. Wuhan is a case in point, where Chinese officials say there now is capacity for 3 million vehicles annually, much of it dedicated to foreign brands.

“There needs to be an international mindset,” says Zhu Fushou, general manager of Dongfeng Motor, a Wuhan-based state-owned automaker that acquired a 14% stake in France’s PSA Peugeot Citroen last year.

Domestic automakers “need a strategy to go abroad and go up (market)” to create more valuable brands, he adds.

Chen Demai, of SAIC, notes that “all powerful industrial countries are auto powerhouses. China should focus on (developing) its own brands and (promoting) self-innovation. It’s a tough road, but I believe we can make it.”

Chen Lin, commercial counselor-Department of Outward Investment and Economic Cooperation for the Ministry of Commerce, says China’s central government has eased regulations restricting foreign investment, making it less onerous for local suppliers to acquire or link up strategically with overseas firms. It also has changed some tax requirements and is hosting forums, workshops and seminars to help Chinese companies formulate a solid mergers-and-acquisitions strategy.

“The new policies are making it easier (for Chinese companies) to make big investments,” Chen says. But he warns local firms to “be practical and have a clear vision. You need a strategy that is not too bold a step.

“It’s important to start with smaller projects and then grow. It’s a pity not every company is doing this, and there are a lot of failures (as a result).”

Silvio Angori, CEO of Italian design house Pininfarina, says domestic auto brands should create a clear vision of what they stand for and then carry that theme throughout their entire product lineup. He points to BMW and Audi as brands that have succeeded worldwide by incorporating such a product-development strategy.

“You have to have a clear brand identity…then develop a coherent (product) portfolio,” he says. “That is the recipe to becoming a global brand. If you do this, you won’t have a problem gaining share outside your country.”

People buy particular cars because they have a passion for them or because they meet specific needs, Angori says, and the domestic brands need to figure out a design and technology strategy that will make their vehicles stand out in the crowded marketplace.

China’s local automakers should focus on emerging markets, rather than more mature arenas such as the U.S. and Western Europe, advises Eric Sentuck, executive vice president-sales and marketing for Germany’s Incadea Group.

He points to the India/ASEAN region, where combined new-vehicle sales are projected to grow to nearly the size of the Western European market by the end of the decade, as an optimal strategic target for the Chinese.

“I would go for this (rather than the U.S. or Europe), unless you’re very ambitious and you have a lot of money to spend,” Sentuck says.

The Chinese already have come a long way internationally, Ellis B. Chu, head of China M&A for Bank of America Merrill Lynch, notes, pointing to the 80-plus companies that are on the Global Fortune 500. But the industry is poised for much more, he contends.

“This is the most excited I’ve seen Chinese companies wanting to go outbound,” Chu says. “The government is very supportive of the changes (that will help) companies going out. And companies want more of their profits coming from overseas.”

Shanghai-based Steyr Motors, which makes diesel engines in China, is one of the firms on the lookout for acquisitions, Sally Liu, general manager of the supplier’s Strategic Management Dept., tells WardsAuto.

In attendance at the forum here, Liu is on the prowl for acquisition targets that would be a strategic fit for the company, including electric-motor makers that would give the company a foothold in the emerging new-energy-vehicle market in China.

“If you know of any (U.S.) companies that are looking for a buyer, can you let me know?” she says.

M&A activity among Chinese suppliers totaled $1.2 billion in 2012, 33% involving overseas moves, BoA Merrill Lynch’s Chu says. This year, the sector is expected to total $3.3 billion, of which 58% will occur overseas.

“As an M&A practitioner, this is the most excited I’ve been,” Chu says.

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