Yulon Motor Co Ltd (YMC), the parent company of Taiwan’s largest automotive group – Yulon Motor Group, is coming under increased pressure from rising raw material prices, higher energy costs and an increasingly tough pricing environment in its fastest growing market – mainland China. Furthermore, its domestic sales declined by 10.9% in the first half of the year, in a market that had expanded by 8.2%. Net earnings dropped by 20% in the first quarter and conditions are expected to have deteriorated further in the second quarter, writes Tony Pugliese.
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Focus on expansion
YMC has expanded rapidly in the last few years, with the acquisition of Nissan Motor Philippines in 1999, followed by the launch of a vehicle manufacturing joint venture in mainland China, in which it remains heavily involved and in which it controls a sizeable share of the equity.
YMC controls the Nissan manufacturing operations in Taiwan and has significant equity in many of the related component manufacturers, including three major joint ventures with Calsonic-Kansei, and a large stake in the vehicle distribution operations. The Yulon group itself, with its complex cross-shareholdings, comprises around 60 companies mostly involved in the automotive sector. There are also several textile companies – reflecting the origins of the group before it broke into the automotive sector, and a rising number of non-automotive companies. YMC also has a sizeable stake – understood to be more than 20%, in China Motor Corporation (CMC), the manufacturer of Mitsubishi vehicles in the country.
Both CMC and YMC have R&D operations that re-engineer and restyle vehicles to the requirements of the local market. These activities have until recently been encouraged by the Taiwanese government in the form of tax rebates. Now, vehicles such as the Taiwanese Sentra and the Mitsubishi Delica and Freeca have been adopted by other markets in the region, including markets in South-East Asia, China and more recently India. R&D is becoming a source of earnings in its own right.
Domestic performance suffers, however
The domestic performance of both YMC and CMC has been far from satisfactory, however. Both companies have seen their respective market shares decline sharply in the last few years. In the first half of 2005, both companies reported substantially lower domestic sales volumes in a market that expanded by 8.2%.
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By GlobalDataArguably, some of this underperformance can be blamed on the increased focus on overseas expansion and diversification. But mostly it is due to the growing strength of Toyota Motor, through its Kuozui Motors vehicle manufacturing joint venture, and the recent revival of Ford Lio Ho.
Last month, YMC added two Infiniti models to the luxury brand’s line-up, the G35 sports coupe and the M35 saloon, but a significant turnaround in its domestic market performance is unlikely until its best-selling Sentra model is replaced, which is expected in the coming months. CMC appears to have very little in the pipeline to reverse its decline and the ongoing flow of negative news from Mitsubishi Motors in Japan inevitably is not helping.
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The rate of growth of the domestic market this year has been slowing and manufacturers are becoming increasingly cautious with their full-year projections. The government itself is struggling to keep the economy on course and this month it announced an increase in public spending to support its 4.5% GDP growth target for the year. The export sector, particularly IT equipment companies, has come under pressure from lower overseas demand.
First-quarter earnings drop sharply
YMC reported a 20% drop in first-quarter 2005 net profits to NT$1.49bn (US$47m), compared with NT$1.86bn a year earlier, even though revenues rose by 8.4% to NT$14.3bn. The company blamed rising costs of raw materials such as steel plates, high energy costs and price erosion at its now substantial mainland Chinese operations.
The contribution of China Motor Corporation has also dropped sharply. The company reported a 40% decline in first-quarter earnings to NT$1.12bn, from NT$1.85bn a year earlier, on sales of NT$17.2bn. This comes on the heels of a 28% decline in earnings in full-year 2004 – to NT$5.4bn.
For the current year, Yulon Motor has targeted a rise in revenues of more than 10% to NT$45.5bn, with domestic sales, including imports, expected to rise to 72,700 units. The earnings outlook is not so good, given the market environment.
Joint venture with GM underway
YMC officially launched its latest major expansion project last week – a joint venture with General Motors in Taiwan. But it is unlikely to contribute positively to YMC until late 2006 at the earliest. Nevertheless, the company is upbeat about the joint venture’s long-term prospects. Kenneth Yen, the group’s CEO, told local reporters last week that he wants Yulon-GM Motor Company to become one of Taiwan’s top five automakers by 2009 – leapfrogging the likes of Taiwan Honda, Sang Yang (Hyundai) and Prince Motors (Suzuki) in the process.
In the next four years, Yulon-GM expects to have launched five Buick models in Taiwan. These are likely to be models derived from GM’s operations in South Korea and in mainland China. Local assembly is expected to be accommodated within Yulon Motor’s existing operations in Taiwan and will no doubt increase Yulon’s share of the Taiwanese domestic market considerably.
Yulon Motor made a little over 67,000 Nissan vehicles in Taiwan last year, but it has the capacity to produce 120,000 units per year at these facilities. The two partners will initially invest a total of NT$2bn (US$64m) in the joint venture, mainly in marketing, sales and aftersales networks. GM will own 49% of the joint venture and Yulon Motor 51%.
Yulon focus on Chinese mainland market
YMC established a joint venture on the Chinese mainland with Nissan Motor of Japan and China’s Dongfeng Motor in 2000. YMC took a 40% stake in Aeolus Motor, but this equity has been transferred to its joint venture Yulon-Nissan Motor following a reorganization of the Yulon Group in 2003. With a sales target of 14,000 units this year – up from around 60,000 units in 2004, Yulon’s mainland joint venture is fast becoming a major part of its business. Sales in the first quarter of 2005 amounted to 29,191 units – 63% more than a year earlier.
Growth in the Chinese mainland market has slowed markedly this year, from the astronomical levels of the previous few years. But supply has also been increasing at a similar pace and while price erosion has slowed in this market, it remains a reality that has to be dealt with in the foreseeable future. Nevertheless, Yulon-Nissan expects the operation to Aeolus Motor to contribute NT$600m in earnings this year – a slight increase on last year’s levels. It is a matter of time before China’s automotive market surpasses that of the US in volume terms and Yulon-Nissan is positioned to benefit from rising contributions from this joint venture in years to come.
Earlier this year, Yulon Motor announced it had developed a new model for the Chinese mainland market and that it has submitted the vehicle to Nissan Motor of Japan for evaluation. The model is a utility vehicle and if approved it will be assembled by Aeolus Motor in the near future. It would also represent a major endorsement of Yulon Taiwanese R&D operations.
CMC is similarly positioned. It spearheaded Mitsubishi Motor’s expansion into China with the established of a joint venture with Fujian Automobile Industry Group in 1995. Called South-East Asia Motor, it makes Mitsubishi vehicles for sale in the Chinese mainland. More recently, a three-way joint venture has been established, involving Fujian Automobile, DaimlerChrysler and CMC, for the production of Mercedes-Benz vans in the country.
Hungry for further growth
Cash-rich Yulon is opening a new expansion front with the establishment of a new automotive electronics and related IT services division. It has said it is prepared to invest an initial NT$10bn in developing this business and is likely to look for domestic acquisitions and overseas strategic partners as a source of technology. Electronic content and telematic services in vehicles worldwide are expected to rising rapidly in the coming years this is an area Yulon is keen to tap in to.
In a move more closely linked with its dealer and distribution operations, Yulon Group is also looking to expand its operations into property development, including commercial property such as shopping malls.
Tony Pugliese
