December 2009

By William Mellor Dec. 29 (Bloomberg) — In a sprawling factory south of Shanghai, Li Shufu , the self-made Chinese billionaire who is poised to buy Volvo Car Corp. from Ford Motor Co., is presiding over a new-model launch party. If he has any concerns that his Geely Automobile Holdings Ltd .’s rising sales and surging stock price could falter, he’s not showing them on that summer day. Geely, the publicly traded automaker that Goldman Sachs Group Inc. is backing to the tune of $334 million, is unveiling its first homegrown model specifically designed for Western markets, Bloomberg Markets reported in its February 2010 issue. The gleaming-white four-door compact, which retails for $11,700 to $17,600 in China, is called the Emgrand, a name made up to conjure grandeur. To the strains of the company song, willowy models in split-to-the-thigh cheongsams pin bouquets on pudgy Communist Party VIPs. Policemen salute as the first Emgrands leave this plant in the port city of Ningbo through clouds of theatrical smoke. Li, Geely’s chairman, already has an international auto business. Since 2006, Geely Automobile has been a 23 percent shareholder in the company that’s the biggest maker of London’s iconic black cabs. In October, Ford named Geely Holding Group Co., Geely Automobile’s closely held parent, as the preferred bidder for Volvo. On Dec. 23, Ford said the companies had agreed on most terms of the sale, which would be completed in the second quarter. Emulating Toyota? As Li, 46, answers questions at the factory, a reporter asks whether he wants to emulate Japan’s Toyota Motor Corp . Toyota, the planet’s No. 1 carmaker, lost 437 billion yen ($4.85 billion) in the year that ended on March 31, 2009. “Why should I want to be Toyota?” Li deadpans. “They’re losing billions.” If any product illustrates China’s place in the new economic order, it’s the automobile. The country has averaged annual 10 percent increases in gross domestic product since 1978 — growth that has helped turn a nation of bicyclists into a land of car-craving consumers. China, with its 1.37 billion people, overtook the U.S. in 2009 to become the world’s largest vehicle market by sales. The government projected that auto sales for the full year would soar 39 percent to more than 13 million vehicles. In November alone, they shot up 96 percent. China’s Rise While U.S. manufacturers shrink, China had 117 automakers at the end of 2008, according to the China Association of Automobile Manufacturers . Amid a global recession, the collapse of Detroit and trouble at Toyota, investors are wild about China’s prospects. Geely, in which a Goldman-managed fund holds bonds and warrants that can be converted into 15 percent of the company, saw its shares jump 573 percent on the Hong Kong stock exchange in 2009 through Dec. 28. That’s more than 10 times the rise in the benchmark Hang Seng Index. BYD Co., maker of the world’s first commercially available plug-in hybrid, an electric-powered car with a small gasoline engine for backup, attracted Warren Buffett . He bought a 10 percent stake for $232 million in September 2008. BYD shares surged more than fivefold in 2009 through Dec. 28. Shares of six other Chinese car companies, including SAIC Motor Corp ., China’s biggest domestic manufacturer, have at least tripled. Goldman’s September 2009 investment in Geely increased in value by 50 percent in the first two months. Impressing Goldman “Geely’s track record of growth, profitability and innovation has impressed us,” says Andrew Wolff , Hong Kong- based head of Goldman’s merchant-banking division in Asia outside Japan. Charles Munger , vice chairman of Buffett’s Berkshire Hathaway Inc. , is equally bullish on Berkshire’s investment. “BYD is one of the most-interesting small companies in the world,” Munger, 85, told Bloomberg Television in May. Now, spurred by the government, Chinese automobile companies are challenging Western, Japanese and Korean rivals on the global stage. By 2015, China is aiming for 10 percent, or an $85 billion share, of the world’s vehicle and auto parts sales, the Ministry of Commerce said in November. “There’s no doubt that 2009 marked the year that China became king of the automotive hill,” says Michael Dunne , president of Beijing-based Dunne & Co., which advises fund managers on buying shares in Chinese automakers. Looming Roadblocks There may be roadblocks ahead. The most immediate threat would be if the government winds down its $586 billion stimulus at the end of 2010. The incentive package has given tax breaks and subsidies to more than 700 million rural residents, enabling them to buy minivans and light trucks for as little as $3,800. Already, on Dec. 9, China said it would raise the sales tax on cars with engines of 1.6 liters or smaller, although not to pre-financial crisis levels. A bid for General Motors Co.’s Saab unit, backed by another Chinese automaker, Beijing Automotive Industry Holding Co., or BAIC, came unstuck. GM said on Dec. 18 it would close Saab; BAIC ended up paying $200 million for some of Saab’s technology, according to a Dec. 23 statement. Chinese carmakers, including Geely, have yet to make inroads into developed markets partly because quality, safety and brand recognition still lag behind rivals’. At home, the car frenzy has sparked traffic jams and worsened air quality in some of the world’s most polluted cities. Profit margins in China can be fractions of what they are in the West. And the torrid growth that’s luring investors may slow to 10 percent to 15 percent in 2010, according to SAIC and Volkswagen AG , which sells more cars in China than in its home country of Germany. ‘Crucial Time’ “This is a crucial time for Chinese carmakers,” Dunne said in December. “What happens in the next six months will have a major impact on whether they will succeed or struggle.” The U.S. shows how the top auto market can stumble. Sales in 2009 fell to about 10.3 million vehicles from 13.2 million, research firm J.D. Power & Associates predicts. GM amassed $88 billion of losses from 2004 through the first quarter of 2009 before it was forced into bankruptcy on June 1. After emerging on July 10, GM lost another $1.15 billion in the third quarter. Chrysler LLC sought bankruptcy protection on April 30, after losing $8 billion in 2008. It emerged, slimmed down, as Chrysler Group LLC on June 10. Khiem Do , who oversees $7 billion at Baring Asset Management (Asia) Ltd. in Hong Kong, says some Chinese companies have risen too far. He’s sold auto holdings that he declines to name. Still Cheap Enough In December, he still liked Dongfeng Motor Group Co., China’s fourth-biggest carmaker, which has joint ventures with Honda Motor Co., Nissan Motor Co. and PSA Peugeot Citroen. Its sales leapt 91 percent in November from a year earlier and its shares rocketed more than fourfold in 2009 through Dec. 28, when it had a price-earnings ratio of 22. “We still don’t think it is outrageously expensive,” Do says. China’s growth has spawned a class of superrich, who are snapping up luxury models. The country had 130 billionaires and 825,000 people with a net worth of at least $1.5 million in 2009, according to research firm Hurun Report Inc . In 2010, China will overtake the U.K. to become the third- biggest market for Mercedes-Benz vehicles, after Germany and the U.S., says Klaus Maier , who heads the Chinese operations of the division of Daimler AG. He estimates that Mercedes sales in China will have risen 65 percent to 65,000 vehicles in 2009. BMW in China Bayerische Motoren Werke AG , the world’s biggest luxury-car maker, announced in November that the Munich-based company would build a new $732 million factory in China. Sales of BMW’s vehicles, including the Mini, jumped more than 37 percent in China in the first 11 months of 2009. BMW makes cars in a venture with Brilliance China Automotive Holdings Ltd ., a Hong Kong-listed company whose shares soared more than fivefold in 2009. The Chinese are fast-tracking their global strategies by acquiring Western brands, sometimes at knocked-down prices. In 2006, Geely acquired 23 percent of Manganese Bronze Holdings Plc, the Coventry, England-based maker of London cabs. The 55 million pound ($90 million) deal enables Geely and Manganese Bronze to manufacture the taxis in Shanghai, where some workers earn one-thirtieth of the average salary of their British counterparts, Geely Executive Director Lawrence Ang says. Buying Spree In March, Geely purchased the assets of Australian gearbox maker Drivetrain Systems International Pty, which was operating under a receiver and in the process of liquidating, for A$47.4 million ($43 million). Buying the world’s No. 2 independent maker of automatic gearboxes gives Geely more-advanced technology for its automatic transmissions. Other Chinese automakers aren’t standing still. In September, state-owned BAIC joined a bid to buy GM’s Saab unit for an undisclosed price in a partnership led by Swedish sports car maker Koenigsegg Group AB. Koenigsegg pulled out on Nov. 23. On Dec. 14, BAIC said it had reached an agreement with GM to buy some Saab assets, including vehicle platforms and turbo-engine and gearbox technology. The company said it would use the technology to develop as many as four car models and three turbo engines. In October, Chinese heavy-equipment maker Sichuan Tengzhong Heavy Industrial Machinery Co. struck a $150 million deal to acquire GM’s Hummer brand. Li says the acquisition of international names will help Geely gain customers at home, where only 38 Chinese in 1,000 own a car. That compares with 985 per 1,000 in the U.S. driving population, according to J.D. Power. Targeting U.S. and Europe China is still dominated by joint ventures of foreign carmakers and state-owned enterprises such as SAIC, which between them have about 55 percent of the car market, excluding SUVs, minivans and multipurpose vehicles, according to Bloomberg calculations. BYD, founded by entrepreneur Wang Chuanfu , and Geely have less than 7 percent apiece. “We need to show domestic consumers that foreign customers like the Geely brand,” Li says. “We can become stronger and stronger by getting into European and American markets.” China’s modern auto industry began to take shape in 1978 when there were barely 1 million cars — or 2 percent of today’s total — and hardly any in private hands. The world’s most populous nation was emerging from 30 years of doctrinaire communism. Reformist leader Deng Xiaoping was desperate for technology and allowed Western carmakers to build and sell in China — if they took a Chinese partner. Beijing Jeep The first such venture — between the old American Motors Corp., later taken over by Chrysler, and Beijing Auto Works, a predecessor of BAIC — began disastrously. AMC was making the Jeep Cherokee, while the Chinese company was manufacturing a military vehicle based on a Soviet design in a primitive factory called The East Is Red. In 1983, the two companies agreed to produce what would become the Beijing Jeep. Cultural differences proved almost insurmountable, according to Jim Mann, author of “Beijing Jeep” (Simon & Schuster, 1989). The Chinese were shocked by a dealer gathering in Las Vegas that featured bikini-wearing showgirls and a performance by the Beach Boys. The Americans were horrified that Chinese workers kept beds in their offices for afternoon naps. In 1985, on a trial run of the assembly line, the first Chinese-built Jeep had to be pushed out of the factory because it wasn’t drivable, Mann wrote. Rags to Riches By then, however, China’s economic boom was creating consumers and entrepreneurs. Among them were Geely’s Li and BYD’s Wang. Li had made his first yuan photographing tourists. In 1986, he began manufacturing compressors for refrigerators. He switched to motorcycles three years later and produced his first car, a subcompact, in 1997. In 2005, he listed Geely Automobile on the Hong Kong exchange. Today, his 50 percent stake is valued at almost $2 billion. Financially, Wang has done even better. Orphaned in his teens, he started making batteries for mobile phones before launching gasoline-powered and plug-in hybrid versions of a compact car called the F3. Since Buffett’s investment, BYD’s market value has soared to $19.6 billion on Dec. 28, making Wang’s 25 percent stake worth $4.9 billion. In 2009, the gasoline­powered F3 was China’s biggest seller, ahead of the Hyundai Elantra Yuedong and GM’s Buick Excelle. China’s car lust is propping up some of automaking’s biggest names. GM’s sales in China soared 63 percent in the first 11 months of 2009 while they fell 32 percent in the U.S. ‘China Saved GM’ “I firmly believe that China saved GM,” says Klaus Paur , Shanghai-based North Asia director for TNS Research International in London. “Without the good performance of the General Motors joint venture in China, it would have been much more difficult for GM to emerge from bankruptcy.” Half of the Chinese sales were of Sunshine minivans, which start at $3,800. “Our China business has been profitable from Day One,” Fritz Henderson , the GM chief executive officer who resigned on Dec. 1, said in November, without disclosing numbers. “That business is throwing off cash.” Volkswagen , Europe’s biggest carmaker, reported an 86 percent profit plunge in the third quarter of 2009. Again, the bright spot was China, where it plans to invest 4 billion euros ($5.8 billion). “This is probably the most competitive market in the world,” says Joerg Mull, Beijing-based executive vice president of Volkswagen Group China. ‘So Awesome’ China’s growth lured Ford CEO Alan Mulally to Chongqing, a smog-shrouded megalopolis of 32 million people some 1,400 miles (2,250 kilometers) up the Yangtze River from Shanghai. On a gray September morning, Mulally and executives leave their downtown hotel in a convoy of Ford Mondeos to break ground in a muddy field for a $490 million, 1 million-square-meter (10.7 million-square-foot) factory — Ford’s third in China. Ford makes the Focus and other models with Chongqing Changan Automobile Co ., a former weapons manufacturer that graduated to clocks and other consumer products before going into the auto business in 1983. Mulally, 64, is in an ebullient mood despite the drab surroundings as he’s greeted by an all-female brass band whose musicians wear bright-blue uniforms, scarlet lipstick and high heels that are sinking slowly into the mud. “We have got to get a picture of that all-woman band,” he whispers to an aide. “So awesome.” Mulally is even more impressed by the business opportunity. Unlike its two biggest U.S. rivals, Ford wasn’t forced into bankruptcy despite losing a record $14.7 billion in 2008. In November 2009, it posted a $997 million third-quarter profit. ‘Very Gratified’ Still, since Mulally took the helm in 2006, Ford has closed more factories than it has opened. And Ford’s sales of cars and light trucks in the U.S. were little changed in November while they more than doubled in China. “We are very gratified at how dynamic the Chinese market is,” Mulally says. Chinese car companies are benefiting from a brain drain in Detroit. In a northern suburb beyond Beijing’s 2008 Olympic village, BAIC is celebrating the 1 millionth vehicle to roll off its lines in 2009. At first glance, the automaker exudes the air of an unreconstructed communist behemoth as the event begins with the socialist anthem “Internationale.” Then the company president starts talking about his global ambitions in American-accented English. ‘Growth, Growth, Growth’ Wang Dazong , 55, who has a Ph.D. in mechanical engineering from Cornell University in Ithaca, New York, worked for GM for 22 years. He rose to director of engineering and even acquired a U.S. passport. In 2007, he left GM to return to China. He worked as vice president of SAIC before being appointed president of BAIC in 2008. Today, Wang has about 30 former U.S. auto executives on his team. “In Detroit, I was always downsizing, downsizing, downsizing,” he says. “Here, it’s nothing but growth, growth, growth.” Wang’s auto empire is China’s second fastest growing by virtue of its joint venture with South Korea’s Hyundai Motor Co. that makes two-thirds of Beijing’s taxis. BAIC also has ties with Daimler. That venture makes Mercedes-Benz cars. BAIC also owns publicly traded Beiqi Foton Motor Co. , the world’s second- biggest truckmaker. Beiqi shares almost quadrupled on the Shanghai stock exchange in 2009 through Dec. 28. ‘As Good as Koreans’ Geely’s Li has also been headhunting Detroit talent. His research chief, Frank Zhao, formerly a research director at Chrysler, returned to China in 2006 after 18 years in Japan, the U.K. and the U.S. While Dunne & Co.’s Dunne says Chinese automakers are at least three years behind foreign rivals, Zhao says Geely’s technology is sound enough to compete internationally. “We are at least as good as the Koreans,” he says. Speaking at the launch party last summer, Li reflects on Geely’s new Emgrand. “It’s the best yet for a homegrown model, but I am still far away from realizing my dream,” he says. Then he escapes a pack of Chinese reporters by leaping into one of the London- style taxis he manufactures in China. If he’s successful in closing his next big deal, he’ll be able to use a more luxurious getaway vehicle — a Volvo. To contact the reporter on this story: William Mellor in Sydney at wmellor@bloomberg.net ;