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Last Updated: Tuesday, 12 April, 2005, 23:15 GMT 00:15 UK
What next for Shanghai Automotive?
By Jorn Madslien
BBC News business reporter

Shanghai Automotive Industry Corporation (SAIC) has become a global giant to be reckoned with.

Car manufacturing in China
Overcapacity has come to haunt China's car industry

A rising star on the Fortune Global 500 list of leading international firms, which it entered last June, the state-owned Chinese company's goals are nothing if not ambitious.

SAIC wants to sell well over three million cars per year by 2020, a lift that would make it one of the world's six leading automotive groups.

With sales of about 850,000 vehicles last year, SAIC is already the biggest in China, where it is hailed as central to the government's economic strategy. This year it hopes to sell more than a million.

SAIC's ascent has been fuelled by a boom in car sales in its home market China where it has expanded from tractor making to become a diversified automotive group, in part thanks to its joint ventures with both the German car group Volkswagen and the US car group General Motors.

Its vertical integration, which has established the corporation as a major player in both car retailing and leasing, and as a provider of car loans, has also helped.

Sluggish sales

But SAIC is facing a dilemma. True, the Chinese car market's potential is undeniably massive in the long run. Also true, SAIC is hugely profitable.

Yet the company's position is not as stable as it might seem.

Ferrari at Shanghai motor show
Foreign car makers are queuing up to enter China

Car sales have been sluggish in China ever since May 2004, when the government introduced new rules governing car financing, along with fresh measures to calm consumer spending as part of efforts to cool an overheating economy.

As a consequence, the sales of basic passenger vehicles fell by more than 35% in January when compared with the previous month, according to Chinese state media.

Overall, sales rose 12% in 2004, with 14% growth expected in 2005, according to Wang Qing of the Economic Research Institute.

Longer-term estimates suggest that the market will grow at 10-15% over the next decade.

The growth rates may appear high seen with Western eyes, but they signify a "sharp drop compared with the growth rate in 2003", Mr Wang says.

Moreover, despite this double-digit growth rate, it will take a long time before Chinese car sales rival those in Europe or the US.

Production figures are rising much faster than sales, though. In January, 423,000 motor vehicles were made in China, up 37.6% year-on-year.

According to media estimates, the consequence is a backlog of some 500,000 unsold vehicles.

Compare that with total sales of motor vehicles, expected to reach 5.8 million this year according to the State Information Centre, and it becomes clear that the disease of overcapacity that has long marred the US and European automotive industry has arrived in China.

Plans to lower car import tariffs for cars to 30% and abolish the quota system on car imports this year will not help local firms.

By 2007, about 7 million motor vehicles will be sold in China, less than half the 15 million that will be made, predicts the State Development and Reform Commission.

Victims and victors

Rather more troubling for SAIC is the way margins were squeezed in 2004.

Traffic in Beijing at night
Almost six million more cars will take to Beijing's roads this year

"The profitability of the sector dropped from 8.6% in 2003 to 6.6% in 2004," according to the news service Xinhua.

In fact, about one in five of China's almost 6,000 automotive enterprises suffered losses last year, according to the Ministry of Commerce.

Within the market, competition is heating up, though many of SAIC's rivals are suffering badly.

Brilliance BMW, Dongfeng Peugeot Citroen Automobile, Jiangsu and Yueda Kia Automobile all suffered losses last year, and a further 19 mainstream car makers saw their performances slide in 2004, according to China Association of Auto Manufacturers.

Among those faring better are the smaller domestic players, such as Geely, Chery and Shuanghuan.

These automotive firms pride themselves on offering simply engineered cars, often at less than half the price of their rivals. Their market entries have sparked inevitable price wars.

International ambitions

In this environment, SAIC has realised that it must look far beyond its home market to achieve rapid growth.

The company has about 50 plants in the Shanghai area where it makes everything from cars and car parts to trucks and tractors, buses and motorcycles.

Many of them are ripe for development, so the US and European markets are firmly on SAIC's radar.

No-one expect SAIC to fail - it is a massively cash rich company backed by the Chinese Government - but the road ahead is far from clear.

The company's chairman Chen Xianglin and its president Hu Maoyuan are both rated highly in the automotive world.

But whereas SAIC's senior managers are seen as ready to manoeuvre in international circles, sceptics express doubts about the skills further down the hierarchy, in terms of managerial abilities, sales and marketing skills, and crucially, research and development, technology and engineering.

Some of these shortcomings could be dealt with by acquiring Western companies - and this is what SAIC had hoped to do by getting into bed with MG Rover.

New targets

Having walked away from the Rover deal, SAIC is now in desperate need of a new strategy.

Key to its next move could be a deal that gives it access to both the expertise and the brand names of an established car maker, industry observers say.

But there are precious few around. Troubled Mitsubishi Motor Company could be among the candidates, along the criteria that it is in need of a new backer after DaimlerChrysler pulled the plug last year.

A more likely target would be Fiat Auto, though, with its stable of the Fiat, Lancia, Alfa Romeo and Maserati marques, observers say.

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