Southeast Fujian Motor Corp (Soueast) believes the secret to success in China’s cut-throat, but still inefficient, car market is to have all suppliers very close to the plant to cut costs.

“For some firms, their components have to come from hundreds of kilometres away,” Steven Tseng, a senior executive at the Taiwan-invested firm, told Reuters, adding: “Most of ours come from just a few hundred metres away.”

The news agency noted that, despite lower labour costs, analysts say it costs up to 20% more to make a car in China than it does in Europe or the United States, due to a lack of economies of scale, poor transport networks and problems in sourcing parts locally.

For now, Reuters added, these inefficiencies mean it is uneconomic for China to export cars to the developed world [though VW China recently started shipping a few hundred Polo sedans a year to Australia].

Once this cost hurdle is cleared, the mainland’s car makers will be able to join the rest of China’s exporting machine that is transforming global trade – and give Detroit one more headache, the report noted.

According to Reuters, Soueast thinks it has found a way to cut costs and rival just-in-time logistics systems that have made Japan’s carmakers so efficient in both Japan and the United States.

The Taiwanese-managed car maker reportedly says it has found a 10% cost advantage over foreign carmakers in China such as Toyota and Nissan Motor.

Tseng told Reuters that Soueast’s key advantage is its partners – not only Fujian Motor Industry Corp, which half owns Soueast with Taiwan’s China Motor Corp – but the 35 automotive parts companies clustered around the plant.

“We have inventory of just 1.5 days,” said Sen Chang-fu, manager of Southeast Metal Industry, whose machines bang out bonnets, doors and other body parts just a minute’s drive from the main plant, told the news agency, adding: “We can instantly react to changes in demand.”

“We’ve been working with some of these companies in Taiwan for 30 years,” company president Kuo-ming Lin told Reuters, adding: “We know each other intimately.”

Reuters said that Soueast, while still a minor player in China’s booming car market, has grand ambitions. Its next investment, which could top 900 million yuan ($US108.7 million), is to double capacity to 300,000 units by 2006.

“Once we do that, we’ll be able to make as many vehicles as all the factories in Taiwan,” Lin reportedly said.

But Reuters noted that pales in comparison to larger rivals in China such as Volkswagen and General Motors whose local ventures sold 386,710 units in 2003.

According to Reuters, Lin dismissed worries the company could become a target for a takeover under government plans to consolidate the industry, arguing it has a unique position because of its close China-Taiwan links.

“We’re seen as being a test bed for cross-Strait relations,” the bespectacled Taiwanese businessman told the news agency, adding: “We receive a great deal of attention from the central and local governments.”

Reuters said Soueast officials point to a string of high-level visits by senior people in the Chinese government, including vice premier Zeng Peiyan, who has a big hand in economic issues, to the facility which 10 years ago was a patchwork of fields and banana trees.

But the company reportedly relies on just three products – the Delica minivan, the Freeca sport utility vehicle and the Lioncel sedan, which is modelled on Mitsubishi Motors‘ popular Lancer.

Yet it is highly profitable and will roll out two more products in the first half of this year from the plant, which lies in a province directly across the water from Taiwan, Reuters said, noting that a new car, likely to be based on a Mitsubishi, is also in the pipeline as the Japanese firm owns 20% of China Motor.

Reuters said Soueast’s rise in sales should push revenues up 43% to 12 billion yuan ($1.5 billion) this year, although Lin reportedly said 2004 profits would only rise to 750 million to 800 million yuan, compared with 720 million yuan last year.

Reuters noted that the company, located in a valley surrounded by mist-covered hills a 45-minute drive away from provincial capital Fuzhou, has not had it all plain sailing – last year, production was threatened by sweeping power cuts as a drought lowered levels in nearby hydroelectric power plants that supply about half of the city’s electricity.

“The shoe plant next door lost power, but the government guaranteed we wouldn’t and we didn’t,” Tseng, the president’s right-hand man, told Reuters, adding that the worry remained.