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Va va voom! Renault SA is planning to launch a joint venture to build cars in China. That will strengthen its foothold in China, adding to a strategic alliance it has there with Japan's Nissan Motor Co. Ltd. And who can blame the French company? In the first half of 2013, car sales in China jumped by 17 per cent year-on-year. In spite of recent wobbles in the financial sector, that growth is expected to remain in double digits for the full year. China's car market still looks attractive against sales growth in the U.S. and Europe.
Yet results have been checkered for carmakers already present in the Middle Kingdom. Success, it seems, comes for participants with a niche, or those with scale. True, overseas names and joint ventures, such as the one Renault plans to embark on with China's Dongfeng Motor once it receives approval from the authorities, have been taking share from local brands over the past five years. Volkswagen AG, helped by its joint ventures with FAW and SAIC Motor, has raised its share of the market by 4 percentage points from 2010 to a fifth of the market (by unit sales). Meanwhile, Chinese carmaker Chery has seen its 5 per cent market share slip to just under 3 per cent over that period. SAIC's own brands have struggled to grab more than 2 per cent of the market.
The kind of scale achieved by VW in China has helped the German company obtain a return on capital employed of more than 50 per cent at its FAW plant, compared with 21 per cent for VW overall. That has been helped by the fact that it sources almost all of its car parts locally. Macquarie estimates that VW derives two-fifths of its profits from China.
Local carmaker Great Wall Motor has benefited from its success with sports utility vehicles – the fastest-growing segment of the Chinese passenger car market. Shares in the company have gained 500 per cent over the past five years. Its Tianjin plants operate at 120 per cent of capacity. New launches expected within the next six months should boost sales further. Renault should take heed.