Chinese Carmakers Eye Europe

Producing 800,000 cars per year and with annual revenues of almost €10 billion ($13 billion), Shanghai Automotive Industry Corporation (SAIC) is the undisputed No. 1 of China's automotive industry. But success at home is no longer sufficient: SAIC aims to become one of the world's six largest car makers by 2010.

First steps to achieve this goal have already been taken. If the Chinese government approves the deal, state-owned SAIC has announced a cooperation with struggling British car maker Rover that will basically result in a takeover. The company plans to produce one million Rover cars per year and sell them in Europe and China.

The deal is expected to cost SAIC about €1.4 billion and comes just weeks after the Chinese paid almost €400 million for South Korean SUV maker SsangYong. But SAIC expects to get more than just brand names by investing in these companies, according to experts.

Collecting know-how

"The Chinese want to collect know-how and not just produce cars for other companies under license agreements" such as Volkswagen and General Motors, who have kept control over technology, said Albrecht Denninghoff, a car market analyst for Germany's HypoVereinsbank.

By buying Rover, SAIC now also wants to produce its own cars. The company plans to make 50,000 automobiles under its own name by 2007. Growing competition in China's automotive industry is one of the reasons why companies are looking to expand abroad: Too many cars are being produced, causing the prices to fall.

Other Chinese firms have also started to eye the European market -- albeit employing a different strategy. Carmaker Chery, for example, wants to export its discount models overseas. While the company sold 1,200 cars abroad in 2003, it aims to export 10,000 vehicles this year.

Volkswagen and General Motors, who have invested billions in the People's Republic, are starting to be concerned about such expansionist plans and accuse the Chinese of copying their cars and throwing them on the market at dumping prices. There have been allegations that Chery has developed a car that is mainly built with VW Jetta parts.

Investment is backfiring

"The investment in China is beginning to backfire," Denninghoff said. "Yesterday's partners are today's competitors. How are people going to prevent technology that's been transferred under license agreements from returning to Europe?"

German car industry representatives estimate that China will become the world's third largest producer -- behind the US and Japan -- and push Germany in the No. 4 spot, according to Die Welt newspaper: Chinese car production will overtake Germany's output by the second half of 2005 at the latest.

The Chinese arrival on the European market has local carmakers worried about falling prices. This reduces profits, which are already not that great, at least as far as the big carmakers are concerned, Denninghoff said.

Pontential VW or Opel customers are less and less willing to pay premium prices while others, such as Toyota, offer the same amount of car for less money. Japanese and South Korean carmakers already control 17 percent of the European market.

"European cars have to become more distinguished again," Denninghoff said, adding that costs need to come down in order to stay competitive.