China Seeking Auto Industry, Piece by Piece

By KEITH BRADSHER
The New York Times
Published: February 17, 2006

CHONGQING, China, Feb. 16 — China is pursuing a novel way to catapult its automaking into a global force: buy one of the world's most sophisticated engine plants, take it apart, piece by piece, transport it halfway around the globe and put it back together again at home.

In the latest sign of this country's manufacturing ambitions, a major Chinese company, hand-in-hand with the Communist Party, is bidding to buy from DaimlerChrysler and BMW a car engine plant in Brazil.

Because the plant is so sophisticated, it is far more feasible for the Chinese carmaker, the Lifan Group, to go through such an effort to move it 8,300 miles, rather than to develop its own technology in this industrial hub in western China, the company's president said Thursday.

If the purchase succeeds — and it is early in the process — China could leapfrog competitors like South Korea to catch up with Japan, Germany and the United States in selling some of the most fuel-efficient yet comfortable cars on the market, like the Honda Civic or the Toyota Corolla.

The failure of China to develop its own version of sophisticated, reliable engines has been the biggest technical obstacle facing Chinese automakers as they modernize and prepare to export to the United States and Europe, Western auto executives and analysts said.

Buying that technology from overseas would not only remove this obstacle but would also plant China's auto industry solidly in a position to produce roomy cars that can also get more than 30 miles to the gallon.

The engine plant is one of the most famous and unusual in the auto industry. Built in southern Brazil in the late 1990's at a cost of $500 million by a 50-50 joint venture of Chrysler and BMW, the Campo Largo factory combines the latest American and German technology to produce the 1.6-liter, 16-valve Tritec engine.

Lifan says it is the sole bidder for the factory and wants to bring it here to start producing engines in 2008. Though China's Communist Party is actively behind the effort, the bold moves are being driven by one of China's remarkable entrepreneurs: Yin Mingshan has become one of China's most successful and most politically connected corporate executives, with a hardscrabble upbringing that included spending 22 years of his earlier life in Communist labor camps and prison as punishment for his political dissent.

Now the enormously wealthy and prominent president and principal owner of Lifan, Mr. Yin has his sights on exporting to Europe in 2008 and the American market in 2009.

Trevor Hale, a DaimlerChrysler spokesman, and Marc Hassinger, a Bayerische Motoren Werke spokesman, each said separately that their companies were assessing their options for when their joint venture legal agreement expires at the end of next year, but that it was premature to provide details.

The Tritec engine is one of the most technologically sophisticated and fuel-efficient car engines in the world, said Yale Zhang, an analyst in the Shanghai office of CSM Worldwide, a big auto consulting company based in the Detroit suburbs. Mr. Yin said he wanted to rebuild the factory on vacant land next door to his car assembly plant here. His goal is to understand the technology thoroughly so that he can supply engines not only for Lifan but also for other Chinese automakers.

In an interview on Thursday in a glass-walled conference room overlooking his recently completed car assembly plant, Mr. Yin, 67, said that while Lifan would pay for the factory, the Chinese negotiating team is being led not by a Lifan official but by a senior Chinese Communist party official, Huang Zhendong.

Mr. Huang, 65, is a member of the party's powerful Central Committee and led the party's Chongqing branch until December, when he became a senior member of the influential legal committee of the National People's Congress in Beijing.

Mr. Yin's deputy, Yang Jong, Lifan's chief executive, has accompanied Mr. Huang on a visit to Brazil. "Everyone knows you need government support — the government may provide land," Mr. Yin said.

Any attempt to buy a comparable factory in the United States might be blocked. But Mr. Yin said that Brazil did not have comparable restrictions on the export of high technology.

Lifan, already one of the world's largest motorcycle manufacturers with sales in 112 countries, is about to start exporting its remarkably well-built, $9,700 midsize sedans to developing countries in Asia, the Mideast and the Caribbean. But several more years of work is needed before the company is ready to compete in industrialized countries, Mr. Yin said.

"Chairman Mao taught us: if you can win then fight the war, if you cannot win, then run away," he said. "I want to train my army in these smaller markets, and when we are ready, we will move on to bigger markets."

Accustomed to producing lightweight, fuel-sipping cars for cost-conscious Chinese families, Chinese automakers want to use that expertise as a competitive advantage around the world while oil prices stay high. Geely, a separate Chinese carmaker that surprised American and European manufacturers by announcing plans at Detroit's auto show last month to enter the American market in 2007, was emphasizing gas mileage even before oil prices surged in the last two years.

When crude oil prices were much lower than they are today, Geely switched from an inexpensive electronic engine control and fuel injections system made by Denso of Japan to a more expensive but more fuel-efficient model made by Bosch of Germany, said Lawrence Ang, an executive director of Geely.

Multinational automakers have struggled in China to keep up with the public's growing appetite for fuel-efficient models. Chinese carmakers like Chery and Geely captured a quarter of the Chinese market last year, up from less than 10 percent just two years earlier, said Michael Dunne, the president of Automotive Resources Asia, a consulting firm.

"Why the spurt? Small cars powered by gas-sipping engines that start at $4,000," Mr. Dunne said.

Raymond Bierzynski, the president of the Pan Asia Technical Automotive Center of General Motors in Shanghai, said that gasoline costs were more important to consumers in China than elsewhere because these costs represent a higher share of the low household incomes in China. G.M. sells its Buick Excelle compact sedan with special, low-rolling-resistance tires in China, which it does not do in any other market and which increases gas mileage by up to 2 percent, he said.

Chrysler and BMW began construction of the Campo Largo factory in April 1998, a month before Daimler-Benz began a takeover of Chrysler that it completed in November of that year. Heralded in the automotive press at the time as arguably the most advanced engine factory ever built, the factory had already become a corporate orphan by the time production began in September, 1999.

The Brazilian auto market had entered a slump by then and Daimler already had ample engine manufacturing capacity of its own and was uncomfortable collaborating with its longtime German rival, BMW.

BMW installs its half of the engines from the factory in its award-winning Mini Coopers. But it has already announced that future engines for these cars will come from a factory in France that is owned and operated by PSA Peugeot Citro๋n.

Chrysler used to put the Brazilian-made engines in its Neon compact cars and the PT Cruiser. But it is now selling its half of the engines to Lifan and to Chery Automotive and a Chinese joint venture by Mazda.

Mr. Yin and spokesmen from DaimlerChrysler and BMW declined to comment on the price under negotiation for the factory.

Lifan made its debut into the car market just last month with the introduction of the Lifan 520 sedan, assembled in the company's sprawling new assembly plant here, where the conveyor belt is bright red and the giant clamps holding unfinished cars are bright yellow — the colors of China's flag. Lifan models itself on Honda, another motorcycle manufacturer that entered the car market, and shares Honda's emphasis on efficient, energy-saving designs.

Lifan has also copied Honda's focus on quality. Huge characters of Mr. Yin's sayings adorn a Lifan motorcycle engine factory inside and out; an illuminated board over the assembly line reads: "Whoever wrecks Lifan's brand, Lifan will wreck that person's rice bowl."

A test drive here of the Lifan 520 sedan showed it to have an impressively sturdy body with no rattles or wiggles even when traveling over very rough pavement — although this is no guarantee of long-term reliability. There is ample headroom in the front seats and even the rear seats for a 6-foot-4 occupant.

The $9,700 price tag includes leather seats, dual air bags, a huge trunk and a DVD system with a video screen facing the front passenger — a combination that could cost twice as much in a comparably equipped midsize sedan in the United States.

Wages of less than $100 a month have helped control the cost. The assembly plant is better organized than many Chinese factories, although it still maintains large inventories of parts and materials awaiting assembly, incurring interest charges to finance these supplies.

Mr. Yin has no doubts that China can also compete with the United States.

"Americans work 5 days a week, we in China work 7 days," he said. "Americans work 8 hours a day, and we work 16 hours."

 

The evil empire (China) financed by the evil store (Walmart) wich in turn is financed by people trying to have a higher living standard than they can afford (Americans). In the end the North American economy collapses as China becomes the economic powerhouse of the world.

 

Or another way to put it: Those willing to work the hardest, smartest, and for the least, will inevitable level the playing field, decimating the other players (aka "race to the bottom?").

 

Doesn't surprise me. Look at their military, it's almost all old Soviet stuff.

 

But this factory is the latest and greatest. Piecemealing it, and shipping it back to China for reassembly will save them tens of billions of dollars in R&D, and allow them to "leapfrog Korea" and "catch up to Honda."

 

Just because you have the best doesn't mean you are the best. If they don't have the best people working at the the highest level possible, it won't mean jack.

 

Just because they buy a factory doesn't mean they'll own the IP of the engine. Even if they have all the equipment i don't see how they can legally continue to make the same engine without a further agreements and royalty payments.

 

BMW-DaimlerChrysler sold them the factory, knowing they were going to strip it down, ship it China, and use the very same technology the developed (along with the machinery, etc.) to produce motor vehicle engines.

I'd argue that BMW-DaimlerChrysler licensed the technology along with the factory, both expressly and impliedly.

 

Nah, they're probably gonna let them make a few engines, then sue and get ownership of the company. Then they get to pocket the profits, and don't have to pay to build a new factory in a place where the labor is cheap.

 

Well the world powers do shift every few centuries.

Earlier the British used to rule over more than half of the world, then the US became a major player but the UK was and is still pretty big (though not as big and powerful as the US). China and India will eventually become really big world powers, but it wont mean the US will not be relevant as it once was, it'll just mean that China will probably be bigger than the US in buying power but the US will still be a pretty big and powerful country. This of course will continue for the next few centuries till we leave this planet and colonise some other planets. Then we'll eventually meet up with other civilisations in the rest of galaxy and realise there was no God.