Changan Ford was established in 2001 as a 50:50 joint venture with state-owned Changan Automotive Corp and is now in the process of expanding capacity to 200,000 units. In July, Ford committed to build a second 200,000-capacity plant in Nanjing. Australian- born Ron Tyack, president and CEO of Changan Ford, spoke to China Economic Review about how he sees China's auto industry and Ford Motor Company's part in it. Excerpts:
Q: Why Chongqing?
A: When we established a joint venture more than three years ago prior to WTO, we were established as a "refurbishment program" – [setting up in Chongqing] was the only way you could get a manufacturer's license?so we decided to partner with Changan who is now? number three in terms of volume of passenger and small commercial vehicles.
Q: What about labor costs?
A: Labor costs are a lot cheaper? so instead of putting huge capital investment in, we opted to put capital investment only where we absolutely needed it – like the paint shop. Conversely in the body shop, traditionally one of the areas that do have high labor costs with automation and robots, we actually have no robots at all. But the bodies that we are producing are just as good quality as anywhere else in the world.
Q: Why not produce more for export?
A: Ford Motor Company is exporting about a billion US dollars' worth of components out of China. So from a component point of view that's already happening. We have not indicated that we are planning to export manufactured vehicles yet. If you take global costs of producing vehicles, prior to the introduction of WTO, a significant quantity of materials were imported so you were paying premiums of 25-30% so the cost to produce a vehicle in China, five years ago, was 25-30% higher than in established countries producing, say, 4 or 5 million vehicles a year. But under WTO the cost of [imported components] has substantially come down, the volume economic scales have substantially gone up. So if you took the Polo, which is already being exported [by Shanghai VW], the cost of those vehicles globally is probably the same. But in the next two or three years, the cost to produce a vehicle in China will be lower than a traditional higher-cost market so that potentially will drive the opportunity to export… Whether the major global companies decide to do that is another question. We have no plans to export at the moment.
Q: What proportion of content is locally supplied?
A: Our small vehicle, the Fiesta, is about 70% local content. The Mondeo is more than 45% and that will increase… It's now not a question of technology or capability, it's really volume, particularly in power train – how your power train lines up with your volume requirements. By power train, I mean engines and transmissions – which are high-cost items to localize.
Q: What changes have you made to cars?
A: In the case of the Fiesta, there have been more than 200 changes made to the vehicle. Some were subtle changes and some were major. Simple things like the stepover between the accelerator and the clutch – we actually did a lot of customer research and changed what we call the stepover position between the clutch, accelerator and brake to suit the Chinese stature and driving conditions…. The vehicle also didn't have an automatic transmission in Europe, which we put in for the Chinese market. We also completely retuned the suspension and handling for Chinese conditions.
Q: What future models are you planning?
A: We don't normally talk about timings and models that we plan to launch. We've got the Mondeo in what we call the CD segment competing with the Passat and the Accord and those sort of vehicles. The Fiesta is in a smaller segment… We need to have other vehicles in those segments, which we're certainly planning. We're in the process of expanding to 200,000 units capacity by February next year. So we will be bringing more products to utilize that capacity.
Q: That's a big increase at a time when many are talking about overcapacity.
A: I think there is going to be overcapacity for periods of time. Clearly today, there is overcapacity versus demand. The central government considers the economy to be overheated, and put out very clear indicators earlier this year that they were going to try and cool it down, which they have successfully. I think one of the things that was driving them from the macro point of view, was the fact that for the first four months of this year they had a negative balance of trade. So they could see that the economy was overheated and the costs coming into the country were starting to climb substantially. [Government] measures have had an impact on the auto market. It's also had an impact on incoming costs and the balance of trade has started to go back into positive. So today the inventories of vehicles in the market in the last three months have increased by at least 150,000 vehicles. To me this is just a minor cyclic effect where the economy is going to continue to grow. Some companies have indicated huge investments – the reality is I don't think they will happen in the same time phase… so it's just a question of managing your investments appropriately. Growth rates have certainly slowed. But if you take the growth rates compared to this time last year there are similar sort of growth rates to what it was then. In the early part of this year we had growth rates that just couldn't be sustained – they were just too high.
Q: How do you see sales developing?
A: There is going to be sustainable growth. The whole Chinese economy is going to continue to grow. It's been running at double digit figures. The central government has indicated it wants it to run at about 7 or 8 percent and it will probably grow at that level.
Q: And you see that sustaining demand?
A: It's one of the pillar industries central to the government's economic plan… As the earning rates of people start to increase there will be more opportunity to purchase vehicles… The number of new vehicle products being brought to China is just incredible compared to even most developed countries. China is now releasing just as many [models] into its market, although in a much smaller volume.
Q: You were a late starter in the Chinese market. How do you plan to boost share?
A: To me it's not a question of going blindly after market share. It's a question of going after good sustainable growth in segments that we want to get into. There has been a lot of publicity recently about GM for the first time outselling VW and VW now saying they will come back. The reality is that VW had the market for many years, because they were the only major international brand here. Now just about every major producer in the world is here, so they must lose some market share.
Q: How will auto financing drive the market?
A: Seven years ago, 80% of the purchases were government purchases. In a very short period of time it reversed, to being 80% consumer, [many] using the traditional Chinese financing system – i.e. turning to friends and relations and then arriving at the dealership literally with a bag of cash. Over the last three or fours years, roughly 15-18% of car purchases have been bought on financing from the banks. That's going to grow significantly, because the Chinese consumer is starting to get used to borrowing. The first step in that was housing and now a significant number of consumers borrow for their own homes. Soon they'll move into the next biggest purchase: vehicles. Financing will grow with the establishing of proper risk management.
Q: Most of China's big cities have congestion problems, yet there are forecasts for massive growth of auto sales. What can be done to tackle the problem?
A: I think the central government has got an opportunity over time to phase out a lot of the older vehicles and get them off the road. The economics now of having newer vehicles that meet environmental and safety requirements gives the opportunity to get rid of a lot of these older vehicles. There is a tremendous amount of infrastructure being put into China. Chongqing, for example, is just a huge construction site. It's following Shanghai which five years ago was a disaster from a traffic point of view… Overall the key is putting more infrastructure in and getting rid of some of the cheaper older vehicles that are still on the roads.
Q: Do you see China becoming a global center for auto production?
A: I recently had a delegation here from the US Congress and they were asking much the same question – how is this going the affect the US? The reality is that the US automotive industry is certainly not going to die, but it has to be globally competitive. To be globally competitive you need to have cost structures that are appropriate? So China's involvement in automotive products is certainly going to affect higher cost countries. And going forward there will certainly be the potential for manufacturers in China to export. Already the component industry here is very substantially involved in exporting its products.
Q: Should Birmingham and Detroit be worried?
A: Certainly they need to be worried. They need to be worried about the total automotive industry globally. But you can't just say that places like China will necessarily take over completely. Industrial manufacturing in places like the UK have been hit hard by the shift to lower-cost European alternates. Those pressures are always going to be there. So the higher-cost countries have got to look at how they sustain their capabilities, in the high tech area, particularly with innovation.