Geely warns of growing international pressure on Chinese brands

March 19, 2014 12:29 pm
Geely warns of growing international pressure on Chinese brands
By Tom Mitchell in Beijing
One of China’s most successful private car companies has warned that “tremendous cost pressure” is building on already flagging domestic auto brands, and also predicted difficulties overseas as political turmoil in Ukraine and Egypt affect two of its biggest export markets.

On Wednesday, Hong Kong-listed Geely Automobile Holdings reported a 31 per cent surge in net profit to Rmb2.68bn ($430m) for 2013, but has gotten off to a terrible start in 2014 with January and February sales down more 40 per cent over the same period last year. Geely Auto is a subsidiary of Li Shufu’s Zhejiang Geely Group, which also owns Volvo Cars of Sweden.
“Competitive pressure on indigenous brands in the China market should intensify considerably in the coming years as most major international brands have been strengthening their presence in the China market,” Mr Li said in a statement. “The implementation of more stringent regulatory requirements . . . could [also] put tremendous cost pressure on indigenous brands.”
In spite of the pressure on domestic brands, whose share of China’s passenger car market has recently fallen from 27 per cent to 23 per cent, Mr Li supports a relaxation on the 50 per cent ownership ceiling for foreign car companies operating in China.
Industry experts have attributed the fall in part to a Chinese government requirement that foreign-invested car plants develop “indigenous” brands for the China market, such as the Baojun sedan produced by GM’s joint venture with SAIC Motor and Liuzhou Wuling Motors. “The JVs are going down market with their indigenous brands and that’s putting a lot of pressure on the domestic companies,” said John Jullens, a Shanghai-based partner with Booz & Company. “There’s a real battle shaping up.”
Mr Li also predicted a “mixed” outlook for Geely Auto’s exports, which currently account for 20 per cent of sales, citing “political and social instability” in Ukraine and Egypt.
In a report earlier this month, analysts at Bernstein Research calculated that Geely Auto dealers had built up a large stock of inventory equivalent to 2.5 months of extra supply. The company has attributed its slow start this year to an “ongoing reshuffle of the group’s sales and marketing system” and said it is “still in the traditional slack season for export sales”.
On Tuesday, Zhejiang Geely’s overseas ambitions received a huge boost from The Export-Import Bank of China, which announced that it would provide the Hangzhou-based group with a Rmb20bn credit line to fund its overseas operations. “As a state financial institution, China ExIm Bank sees it as our responsibility to help Chinese companies expand overseas,” the bank said.
Under a new leadership team installed last year, the Chinese government has promised to reduce the advantages traditionally enjoyed by the country’s largest state-owned enterprises over private companies such as Geely. “I’m surprised Geely is getting that credit line because the previous government heavily favoured state firms,” said Clemens Wasner, Asia head of automotive consultancy EFS Business. “Geely used to be treated as an ugly stepchild.”