22 January 2019

Sedan bandwagon ride can cost an arm and a leg

Anyone familiar with the auto industry knows that sedans, not coaches or trucks, make a car company. 

In China, sedans also make fine trophies. Corporates and cadres, businessmen and boys covet the status a sedan bestows.

And because getting one takes a whole lot of doing — China keeps a tight rein on the application process — a lively but exclusive market has emerged on the fringes.

Manufacturers naturally want in, but few care to find out the price of entry and whether being in is at all worthwhile.

Weichai Power (02338.HK, 000338.CN), one of China’s biggest makers of auto parts and engines, is the latest to jump on the sedan bandwagon.

With much fanfare, it unveiled its EnRanger {英致} brand on Sunday. Weichai Auto chairman Ye Ziqing {葉子青} told Xinhua that one to two sedan brands will be launched “within a few months”.

Earlier, Zhongxing Auto, an SUV maker based in Hebei, spent 1 billion yuan (US$165 million) to buy a sedan manufacturing license from Guangzhou Automobile Group (02238.HK, 601238.CN). And reports say Dongfeng Liuzhou Motor will debut its first sedan at the upcoming Auto China Expo in Beijing.

Family cars developed by Beiqi Foton Motor (600166.CN), a truck and MPV maker, will roll off production lines later this year.

The astonishing growth in car sales across all brands — 15.7 percent to 17.92 million units last year — is undoubtedly the biggest motivation, but these domestic manufacturers could find they have little legroom as much stronger, more popular foreign brands continue to muscle in on the sedan market.

An industrial expert told the Economic Observer what it takes and what it costs to be in the game.

First thing is car design, development and licensing. That could set you back 300 million to 400 million yuan.

Domestic automakers tend to get foreign companies to do the design, typically to the tune of 50 million yuan to 100 million yuan. Parts and prototype molding is another 100 million yuan at least. Mandatory emission and safety tests to qualify for licensing are not cheap either. Frontal and side impact tests, the Chinese version of the New Car Assessment Program, can top 10 million yuan.

Second is assembly line construction. Initial annual capacity is usually set at 100,000 units, meaning 2 billion yuan in upfront costs.

Manufacturers rarely break even with annual sales of 80,000 units, and they’re likely to take years to achieve it at that pace. Lifan (601777.CN), for instance, took six years to lift itself out of the red after it launched its first sedan model.

New entrants will have to figure out how much loss is acceptable to them from the get-go to marketing and, finally, sale.

China Business News reports that the Guangxi Zhuang Autonomous Region government and Liuzhou municipal authorities have lent 450 million yuan to Dongfeng Liuzhou Motor to start sedan production, but the money is still 1 billion yuan short of its plant expansion plan.

The capital market could help these players get some financing, but with investors wary of their challenges, such an option looks forbidding.

– Contact the writer at [email protected]



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