AUTOSHOW-Carmakers seek solace in growing but tough China mkt

Wed Apr 21, 2010 5:37am EDT

* Global auto execs to flock to Beijing auto show

* China market still surging, but competition fierce

* About 90 world premiere models at biennial show

By Chang-Ran Kim and Michael Wei

BEIJING, April 21 (Reuters) - A big turnout at the Beijing auto show this week will again underline the importance of China as car demand drops off in many other markets this year, but the crowded arena will also drive home how tough the race will get.

China, now the world's biggest auto market, has long ceased to be an easy battleground for the industry as indigenous carmakers from upstarts Chery and BYD (1211.HK) to big, state-backed groups such as SAIC Motor (600104.SS) seek to snatch more business away from established global brands.

While most expect it to be a while before the locals catch up to the likes of Volkswagen (VOWG_p.DE), Toyota Motor (7203.T) or General Motors [GM.UL] in vehicle quality, analysts say they are fast becoming a force to contend with as they secure a solid foothold first in the basic, entry-level segment of the market.

"A company like Chery is relying on its own technology, and it's now ranked sixth in market share," said Fumikazu Kitazawa, head of global automotive practice at Nomura Research Institute.

"I don't think there will be a drastic change in market share distribution this year, but it'll be interesting to see what kind of strategies global automakers will put in place to compete with them," he said.

Following a strong showing at the Shanghai auto show last year, chief executives from Volkswagen, BMW (BMWG.DE), Honda Motor (7267.T), Nissan Motor (7201.T) and others are due in Beijing this week -- volcanic ash permitting. Shanghai and Beijing take turns hosting China's biggest auto show every year.

International brands will showcase 14 world premiere models, including the long wheel-base versions of the BMW 5-series and Audi A8 favoured by high ranking officials. Chinese makers will unveil a further 75. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a FACTBOX on China's car market: [ID:nTOE63J05C] For a FACTBOX on premiers at Beijing show: [ID:nTOE63I02B] For a graphic on China car sales: link.reuters.com/fuh26j For a graphic on top models: link.reuters.com/cuz68j ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ > Chinese sales of cars, trucks and buses soared 46 percent to a record 13.6 million units last year, taking the country past the United States as the world's biggest market. With 51 new models launched in 2009, passenger cars grew at a faster 54 percent to 10.3 million units.

In the first three months of this year, car sales were up 76 percent, in a sign the momentum has not slowed despite a reduction in government tax incentives on car purchases.

With vehicle ownership per 1,000 people still about 60 in China -- versus the global average of 120, and 800 in the United States -- automakers are jockeying to build brand recognition and a long-lasting business as motorisation rages on.

Many expect China's vehicle market to grow about 10 percent to 15 million for the full year as comparisons become difficult from last year, when government stimulus steps inflated demand.

"Last year was an extraordinary year. We probably won't see that kind of growth again in the next 10 years," said Ricon Xia, a Hong Kong-based analyst with Daiwa Securities.

SMALL CARS

With so much latent demand in the fast-growing economy, automakers expect all types of vehicles from low-end to SUVs and luxury sedans to expand sales. But the growth has been pronounced for small cars, giving pure Chinese automakers and some foreign ones such as Nissan, Hyundai Motor (005380.KS) and GM a leg-up over Toyota and others with a line-up skewed to the mid- to high-range.

"Much of the growth will rely on cars with smaller engines -- 1.6 litre or below -- which accounted for two-thirds of total sales last year," said Rebecca Tang, an analyst with securities firm CIMB-GK in Hong Kong. "The trend is likely to continue."

She added that Chinese firms could grab a bigger market share if they follow through with plans to expand production capacity at faster paces.

Some of the bigger players including SAIC And BYD are also moving more aggressively to offer cleaner, next-generation vehicles such as hybrids and pure electric cars while foreign players tread cautiously to see which technologies the government endorses before making any big investments. [ID:nTOE63C07G]

POTHOLES, UNCERTAINTIES

But for all the promise of growth, doing business in China is no walk in the park, analysts say.

With the heavy hand of government regulating everything from partnership structures to what cars companies can build, foreign automakers have little freedom to expand at the speed or scale they manage in freer markets.

Beijing has said it wants half of all passenger cars sold in China to be self-developed by 2015 -- a policy no foreign automaker dares openly criticise for fear of retribution.

Soon, more of those cars will come from new brands formed by Chinese carmakers with the help of their foreign partners.

State-backed SAIC, which operates ventures with China's top two automakers, Volkswagen and GM, began producing cars under its own brand, Roewe, in 2007. Honda Motor's (7267.T) venture with Guangzhou Automobile will roll out the first car under its proprietary brand, Linian, in 2011.

Foreign automakers are currently allowed no more than a 50 percent stake in local ventures for cars sold in China.

"As China becomes the largest auto market globally, both foreign (carmakers) and their Chinese partners would like to seize control over the joint ventures," Nomura Securities analyst Yankun Hou wrote in a recent report.

"Given such clear conflicts of interest, the outlook for the JVs is unclear," he said.

The Beijing auto show will open to the media on Friday, and to the public from April 27 to May 2. (Editing by Lincoln Feast)