Is anybody having a nice time in China right now – financially speaking? The question arises from two pieces of recent news. The first, that VW – the market leader – is rushing into a restructuring. The second, the news from Bricklin that the exotic and ambitious plans for Chery exports to the US have hit a substantial snag. Rob Golding reports.
But in addition to that we have substantial excess of capacity over demand which is hurting all the players, and an industry formation that appears to make the Chinese authorities far from happy.
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The early arrangement still hampers VW’s progress. This week – VW put in place a new plan aimed at cutting cost by three billion yuan ($360m) this year according to China Economic Net who say that VW has been handicapped by the bitter rivalry between FAW and SAIC which has prevented both the purchase of parts and components from common suppliers, and the selling of cars through a common distributor. VW’s once highly-profitable China subsidiary is losing market share (volume halved year over year) and money. The problem has been exacerbated by the change in the value of the Euro against the yuan.
In the case of Chery Automobile in Wuhu, the heavily-detailed plan to send Mercedes CLK-beaters to the US within two years seems to have drawn some incredulity from the man hired in the US to execute those plans. What has gone wrong precisely is unclear but clearly all is not well.
The heaviest investor is nervous. GM has been pouring money in – no doubt ecstatic about the ability to build cars without having to pay private health insurance to everyone involved – and for the last three years did very nicely thank you. But the quarter billion dollar a year profit rate shrunk to a quarter of that in the first three months of this year. Despite the pressure on cash flow back home, it insists it will commit another $3bn over two years to double capacity to 1.3m units.
The indigenous manufacturers are not happy. There are far too many of them – nearly 30. While the market was booming (sales doubling every two years on average) there was business for all of them. As soon as there was a shortage and the implants started discounting there was no call for unsophisticated local brands.
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By GlobalDataThe local component industry is not terribly thrilled about its problems in accessing technology. ASIMCO, for example, has just had to go to the lengths of buying a Federal Mogul reject company in the US to access manufacturing methods. Yet it has been operating in China for 15 years.
Nor are the locals able to compete on price. Bosch has said that only 10% of its made-in-China component price is labour. So the attraction for anyone to chose a local start-up supplier in their place is not huge. All the Tier One component boys are now on-shore, following -as usual – the instruction from customers to go wherever they go regardless of the high cost of early market development.
For the Chinese authorities, things are not going as well as they had hoped. Despite allowing all Western and Japanese players into the market, little of advantage has been learned by the local start-ups. The desperate attempts by Shanghai Automotive to buy design and manufacturing technology, and purchasing expertise from the failed MG Rover are more understandable in the context of firm pressure from the authorities to do something, anything, to drive China further up the value chain. The sudden downgrade of expectations for Chery exports will not have helped the mood in the corridors of power.
Maybe one of our many China-watching readers will know a business wreathed in smiles. It would be nice to know who it is.
Rob Golding
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Volkswagen restructuring Volkswagen plans to cut 10% from its materials costs by 2008 and will sharply step up buying from suppliers in China. Lopping a tenth from materials costs would save around 1 billion euros ($1US.22 billion), according to Volkswagen’s Francisco Javier Garcia Sanz. “In the next three years we want to have purchasing volume of $1 billion from China,” Sanz recenty told a supplier comference, specifying that this represented annual purchasing volumes, up from around $250 million a year now. VW officials had already signalled that they were eager to get steel from China, and Sanz said the company had already received and was processing its first Chinese steel shipment. However, he dismissed speculation that VW was playing the China card to improve its leverage in negotiations with steelmakers such as Arcelor and ThyssenKrupp. Chief executive Bernd Pischetsrieder has also said that Volkswagen planned another multi-billion-euro efficiency programme in 2006 to 2008 to help offset sagging car markets and rampant price wars. “By 2008, more than €4 billion in measures aimed at improving earnings could be necessary again,” Pischetsrieder had told the Frankfurter Allgemeine Zeitung last week. Bricklin Chery doubts The future of Visionary Vehicles, the company that announced in January it would bring the first Chinese-made cars to the United States by 2007, appears to be in some doubt after two top executives have left the company. After just three months on the job, Pierre Gagnon, the president and chief operating officer and the No. 2 executive at Visionary [and former head of Mitsubishi in the US] has resigned after a ‘falling out’ with the head of Visionary, Malcolm Bricklin. “Malcolm reneged on several agreements that affect my trust and willingness to be part of his organization,” Gagnon told the New York Times, adding: “I still have high hopes for what it might be possible for Visionary Vehicles to achieve and wish him the best.” Gagnon reportedly said that “many of the commitments he reneged on revolved around financial issues,” but he declined to elaborate. The second executive to leave was Andrew Stewart, who worked with Gagnon at Saturn and Mitsubishi and was the vice president of franchise development at Visionary – he said he left at the end of April and returned to Mitsubishi. “I left one month after I started,” Stewart reportedly said, adding: “It became very, very clear, as much as I believe in what he’s trying to do, it became clear he’s not able to fulfil the promises necessary to create a viable company. “The man doesn’t have any money that I could see,” he added, according to the NYT. “He doesn’t pay his employees on a regular basis, he doesn’t reimburse expenses very well.” Bricklin disputed the men’s contentions. He reportedly said that his company “was well funded” and that he had “terminated” Gagnon two months ago and had not paid him since. “We realised he was not start-up material,” Bricklin told the NYT, adding: “He didn’t fit and we didn’t announce it, and he was not supposed to announce it, until we worked out something in an advisory role.” Bricklin has received a wave of press coverage in recent months after his promise to bring 250,000 vehicles made by the fledgling Chinese automaker Chery Automotive to the United States by 2007, and even to deliver Lexus-level quality. Gagnon and Stewart, speaking to the NYT in separate interviews, said they were concerned about the ability of Visionary to deliver on Bricklin’s promises. “One of the risks is definitely quality in any start-up, and it’s difficult to commit to Lexus-type quality with a five-year-old company, and by 2007 they’ll be five years old,” Gagnon reportedly said of Chery. According to the New York Times, both Gagnon and Stewart said they still expected that cars from Chery would eventually make their way to the United States, though they could not say when. “I think it’s 90-plus percent that Chery automobiles will make it to the United States, and 99% that it won’t happen with Malcolm Bricklin,” Stewart reportedly said, adding: “I wish them the best.”
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