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.”

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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