Despite the continued restrictions on new joint venture automobile plants in China, Toyota thinks it is close to a deal to manufacture a small and affordable car model in Tianjin. The State Development and Planning Commission has been examining a proposal for the new project since last year. Approval could be granted by the end of this year for a project to produce 30,000 cars a year once the first phase of construction has been completed.
"We are now in negotiation and waiting for approval," says Shinji Shimahara, general manager of Toyota Motor Corporation China Office. "We are very eager to set up this small car project because we think such a model will be suitable for the future family car in China."
Existing bus joint venture
For Toyota, it would be a turning point in a two decades relationship with China. The Japanese 'group has invested more than US$360m in 29 joint ventures in China, 28 of which involve making components. The exception is a US$67m joint venture with Sichuan Passenger Vehicle Manufacturing. Sichuan Toyota Motor was set up last year and is expected to start production of the Coaster compact bus in 2001 with an annual aroduction capacity of 3,000 units. By 2005 be joint venture should be making 10,000 vehicles a year. These manufacturing and Assembly operations have been backed up by strong presence in maintenance – 59 Toyota sales and services stations integrating spare parts supply have been set up throughout the country.
Most of Toyota's investments are located in Tianjin, where the group has 16 joint ventures. Cooperation there is concentrated on Tianjin Automotive Industrial Corporation (TAIC). Through a technology transfer with Toyota affiliated company Daihatsu, TAIC has been manufacturing the Charade (Xiali) model since 1994, a car well suited to the needs of the Chinese taxi market. The partnership has been successful but is now in need of invigoration.
"It is logical to go on with the cooperation and to keep on targeting the taxi market, but we will also look at the future economic growth that can enable the Chinese to afford a small car themselves," says Shinji Shimahara.
In order to achieve this goal, the group recognises the need to rejuvenate the Xiali model. In several Chinese cities and especially in Beijing, the ZX Fukang manufactured by France's Citroen in Wuhan has proved a potent competitor to the Xiali in the taxi market. "The Xiali market share is going down," admits Masayuki Okada, vice president of engineering division at the Toyota Motor Technical Center in Tianjin. 'Therefore TALC has to develop a new car, and the Chinese government wants the company to have the necessary level of technology to achieve that."
This is why Beijing has asked Toyota to provide a substantial transfer of technology in the development of the new car project, before it can be approved. "The government thinks TAIC has inadequate technical competence to undertake such a programme. But if this technological transfer development works properly with the company, the government would certainly approve the joint venture project," says Okada.
Toyota considered two training options – sending TAIC engineers to Japan or building facilities for them in Tianjin. Preferring the second solution of doing most of the training in China, the Japanese manufacturer recently built an US$11 m technical centre on an area of 25,000 sq metres. "The programme is not finalised yet we are still talking and it is only after discussion that we will decide what exchange of technology will take place. We are thinking of setting up computerised work stations to edit design," says Okada.
Toyota reckons this is the only way it can get a car assembly operation in China after the government's decision to freeze new automotive joint venture projects. The Japanese manufacturer is even more eager to achieve this aim since Honda took over the Guangzhou production facilities of the French carmaker Peugeot in 1997.
The biggest obstacle to progress appears to be the weak financial position of its main Chinese partner. This could be decisive as China still bans foreign car manufacturers from holding a majority stake in a joint venture. In common with many state-owned car assembly operations, TAIC is in dire financial straits and it has limited funds to bring to the new joint venture.
"We are very concerned about it, because according to the current regulations we can only have a 50 percent share in the project," says Shimahara. "The Chinese side has to make available its share of the capital, otherwise we cannot make the joint venture."
In order to raise funds, TAIC planned a public offer in Japan last year, but it was cancelled because of weak sentiment on the Tokyo Stock Exchange in the depths of the Asian crisis. However, in June this year TAIL, along with Hubei's Dong Feng Automobile, the partner of Citroen in Wuhan, were granted permission by the central government to raise funds on the stock market. Dong Feng aims to list 300 million A-shares at Yn4.10 each on the Shanghai stock market. For its part, TAIC hopes to raise Yn1.28bn from a sale of 218 million A-shares at Yn6 each.
It reflects the importance attached to the automobile sector that these two big groups have been chosen to mark the re-entry of large state enterprises into the capital market, after a year-long listing monopoly of small state companies. Both companies will use some of the funds realised from the issue to conduct a debt-for-equity swap. But it is believed part of the funds will be released for additional investment – upgrading Dong Feng's operations and setting up a new joint venture for TAIL.
"We consider the public offer as a move in the right direction to set up the project and we hope the green light given by the central government means it could soon reach a favourable conclusion," concludes general manager Shimahara.
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