China's carmakers grab local sales, vie with partners

SHANGHAI (Reuters) - China's unsung home-grown car makers could capture 40 percent of their domestic market, the world's second biggest, within 3-4 years, industry executives say, as they roll out own-brand models using both their own and acquired technology.

But the major global automakers scrapping for market share in the world's fourth-biggest economy should still have room to grow as the local brands target the cheaper end of the market.

Chinese car firms such as state-controlled SAIC Motor Corp. and privately-run Geely Automobile Holdings Ltd. are ramping up their R&D investment, hoping to emulate at home the success of Japanese and South Korean rivals such as Toyota Motor Corp. across global markets.

Local brands already account for around a quarter of China's car sales -- a market that roared ahead at 30 percent last year.

Ziliang Wang, vice president of Geely, which makes cars aimed at the lower-end of China's market but which aims to be selling 1 million cars a year, matching General Motors' local venture's output target, says local firms could be selling four cars in every 10 by 2010.

"We're seeing incredible growth from the locals. Will they start to pose a problem for the foreign brands? They already are," said Ashvin Chotai, director of Asian Automotive Industry Research at Global Insight.

Ambitious Chinese carmakers, who have been turning out Buicks and Santanas with foreign partners for years, are working harder than ever to develop own-brand models to compete head-on with cars made at the joint ventures.

Some are already dipping a toe in overseas markets, too.

SAIC, China's biggest car maker with tie-ups with both GM and Volkswagen, last year introduced its first own-brand sedan, the Roewe 750, based on technology acquired from the now-defunct MG Rover and priced to compete with Toyota Motor Corp.'s locally-made Camry.

At this week's Shanghai Auto Show, SAIC is unveiling a mid-range Roewe W2 concept car as well as a new fuel-cell car, and plans another 30 or so models over the next few years.

Nanjing Automotive Group, based in a gritty industrial suburb in east China, last month produced its first China-made MG cars aimed at the home and export markets. Nanjing stunned the automotive industry in 2005 by snapping up assets of failed British car make MG Rover for little more than $100 million.

FAW Car Co. Ltd. has revamped its "Red Flag" sedan, reviving China's first own-brand car that used to be reserved for state leaders and distinguished foreign guests.

Others such as Chery Automobile Co., which partners DaimlerChrysler in China, and Geely, are quietly adding medium and higher-end models while building volume at the lower end of the market.

Chery outsold Shanghai-GM in March, the first Chinese firm to overtake the Detroit giant's flagship venture in a month's sales.

"Chinese carmakers have good reason to take pride in the achievement as they are gaining strength in the domestic market," said Matthew Kong, associate director with Fitch's corporate team in Beijing.

MULTINATIONALS UNFAZED

The big global players, seeing a squeeze at the bottom of the market and limited by law to producing for China's market only in partnership with a local firm, in which they cannot own more than 50 percent, are mostly focusing on the more lucrative luxury and super-luxury cars sought by China's newly affluent.

And industry experts say the fast-expanding market is big enough for everyone -- as long as the market keeps growing at double-digit rates.

"With a market this big, it's only natural for at least a few national brands to rise up and be competitive and strong. That's the way it should be," said Toyota executive vice president Yoshimi Inaba.

"For us to thrive here, it's much better to have strong local competitors."

Car-buying trends show that as household incomes grow faster than ever, consumers are willing to pay a premium for quality and style, which gives the edge to foreign marques.

Most sales of Chinese compacts such as the Chery QQ are in China's vast inland provinces, while foreign models such as the Honda Accord and VW Passat are more popular in the wealthier coastal regions.

But GM's Asia Pacific President Nick Reilly noted consumers were still buying GM's entry-level Chevrolet Spark despite a price tag $1,000-$1,500 higher than the equivalent Chery, because of quality and brand image.

And local firms' profits remain small.

Honda Motor's southern China venture posted a 2005 profit of almost $600 million, 60 times that of Chery.

"Local brands are growing in volume, but that has not been matched by earnings," said Chen Guangzhu, a member of China's state-backed auto industry consulting committee.

"When they will catch up with foreign brands in profitability, I really don't know."