Bulgaria cars: Double first by The Economist Intelligence Unit

February 21, 2012 3:11 PM | Deleted user
Great Wall has just opened the first Chinese car plant on EU soil, and it has chosen to do so in Bulgaria.

At a well-attended ceremony near the north Bulgarian town of Lovech on February 21st, two new beginnings were registered. One was for China, whose Great Wall Motors was opening what it claims is the first Chinese car production plant ever built on EU soil. The other was for Bulgaria, which hasn't produced cars since 1996 but is keen to join its East European neighbours in developing a thriving auto industry.

The Lovech factory is the outcome of a joint venture signed in autumn 2009 between Great Wall and the local Litex Motors. Employing 120 so far, the factory started test production in November last year and is set to produce just 2,000 vehicles this year. But these figures should rise dramatically: by 2014, plant is expected to have a workforce of 2,000 and annual capacity of 50,000 units if it is working in two shiftsundefinedexpandable to 70,000 on a three-shift basis.

Great Wall is targeting EU markets, which neither it nor other Chinese car manufacturers have had much success in penetrating so far. For this year, Great Wall says, the Lovech plant will be producing for Bulgarian and its neighbours, especially Romania, Italy and Spain. But it is expecting to start producing right-hand drive vehicles for the UK market before year-end. And in 2013 it will be targeting all Europe.

Model range, prices and quality will be crucial to its success, as the Chinese carmaker seeks to follow a development path already successful marked out by the likes of South Korea's Hyundai. Starting now with production of Voleex C10 compact sedans, the plant will add Steed 5 pick-ups to its range next month and Hover H5 SUVs before year-end, with more models to come in 2013.

Prices are intended to be low enough to represent a good alternative to second-hand. The Bulgarian press has cited Lv16,000 (around €8,200) for a C10, Lv24,300 for the Steeds and Lv28,700 for the Hovers. There will be seven quality checks in the course of assembly, with the plant's top management poached from a Nissan plant in South Africa.

Great plans

It is all part of a wider pattern of aggressive expansion for Great Wall, which is based in China’s Hebei province. Ranking just tenth among Chinese carmakers in 2011, according to the Chinese Association of Automobile Manufacturers, it is outstripping rivals in terms of growth. It sold 487,000 vehicles last year, up 22.5% year-on-year, compared to a 13-year low of 2.45% growth for the Chinese auto industry as a whole. Moreover, 83,000 of those sales were on foreign markets, up 50% on the previous year. Great Wall is targeting 600,000 unit sales next year.

With current capacity of just 500,000 units a year (upa) in its Baoding plant, those ambitions will require some investment. Last August, Great Wall commissioned the 300,000 upa first stage of a plant in Tianjin, with second and third stages of 250,000 and 300,000 upa respectively slated for completion by end-2012 and end-2015.

Nor is its foreign expansion confined to Bulgaria, or even Europe. According to its website, Great Wall sells in 120 countries, everywhere but North America. It has production facilities in Senegal, the Philippines, Indonesia, Iran, Vietnam and Egypt, and plans to open plants in Venezuela and Malaysia in the next couple of years. Last October, it also announced its intention to set up a factory in Brazil, with capacity of up to 100,000upa.

Bulgarian boom?

Bulgaria, a congenially low-wage, low-tax EU foothold for Chinese investors, could therefore find itself part of something big. Yet it is only a start for the country's auto ambitions. The Great Wall plant is, after all, just an assembly plant operating on the basis of imported kits. Bulgarian batteries should be incorporated soonundefinedthe country boasts a strong producer, Monbatundefinedand Great Wall has said it is in negotiation with other Bulgarian component producers. But this is not yet a Slovak or Czech-style auto boom.

Moreover, there are concerns that Great Wall's ambitions are bigger than its pockets will allow. By world standards, 50,000upa is relatively small for a car plant, and around 90% of the Bulgarian investment (Lv189m to date) has come from local tycoon Grisha Ganchev. And that investment only covers production, not sales. Other Chinese producers that have ventured onto the EU car market have done so by acquisitionundefinedGeely bought Sweden's Volvo last year, while Nanjing Auto bought the UK's MG Rover in 2005. Acquisitions bring infrastructure, suppliers and dealer networks that Great Wall will have to build up from scratch.

Acquisitions also overcome some of the branding and quality problems that all Chinese producers will face for several years yet. By choosing Bulgaria as its base, Great Wall is not even gaining access to a local skills base. Bulgaria assembled Fiats (briefly) and Moskviches under communism, while a Rover joint venture made 2,200 Maestros in 1995-1996 before folding up. But that’s about it. Contrast that with neighbouring Romania, where France’s Renault tapped into a long car-making tradition at Dacia in Pitesti.

The worry is that Great Wall’s prices may not be low enough to overcome the quality perceptions. Dacia-Renault representatives have claimed that Pitesti cars often come out cheaper. And, even in Bulgaria, Great Wall will be competing against a thriving market for second-hand cars. Prestige-conscious drivers may prefer a 3-4 year-old car bearing a well-known West European name rather than that of a new Chinese investor, however welcome its investment may be.

Still, even Hyundai started out small, and few in the auto industry doubt that Chinese carmakers will soon be making inroads into the European market. Great Wall could be at the forefront. By choosing Bulgaria, therefore, Great Wall gave the country a chance to build up its skills in an industry that has served its neighbours well over the past two decades. With a lot of hard work and luck, both sides could eventually find this first step is paying off.

Reprinted from the Economist Intelligence Unit - ViewsWire, February 21, 2012. To view, go tohttp://viewswire.eiu.com/index.asp?layout=ib3Article&article_id=1988827383&pubtypeid=1112462496&country_id=1800000180 
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