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Cablegate: Ford Prospers in China Auto Market; Chinese Firms As Future

VZCZCXRO1598
RR RUEHGH RUEHVC
DE RUEHCN #0166/01 2370856
ZNR UUUUU ZZH CCY
R 250856Z AUG 09
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC 3363
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHCN/AMCONSUL CHENGDU 4039

UNCLAS SECTION 01 OF 03 CHENGDU 000166
C O R R E C T E D C O P Y ADDED CAPTIONS

SENSITIVE

SIPDIS

DEPARTMENT FOR EAP/CM
DEPARTMENT PASS USTR

E.O. 12958: N/A
TAGS: ETRD EINV ELAB ECON PREL CH
SUBJECT: FORD PROSPERS IN CHINA AUTO MARKET; CHINESE FIRMS AS FUTURE
CAR EXPORTERS

REF: BEIJING 1339

CHENGDU 00000166 001.4 OF 003


1. (U) This message contains business confidential information.
Not for distribution on the internet.

2. (SBU) Summary. China's 2009 car sales will be 12 million, a
Ford executive told CG in Chongqing on August 7. Ford's China
sales were up 21.5 percent in the first seven months of 2009,
and it has been in discussions about building a third China
plant, possibly in Chongqing. Ford believes its local partner
copied engineering data from the Mazda 3 model, and now more
tightly controls sharing of engineering data. The quality of
Ford cars in Chongqing is almost as good as its best plant in
Belgium, but productivity is much lower. Ford already exceeds
China's minimum local content rules and seeks to further
increase local sourcing as a cost-saving measure.

3. (SBU) Ten years from now, Chinese car manufacturers will
begin large-scale auto exports to the U.S. and European markets.
Their future challenges include: self-developing designs,
meeting more complex safety regulations, and building stronger
supplier bases; one advantage they now enjoy is more
"harmonious" labor relations. China is promoting local
manufacture of hybrid and electric cars, but the current market
is small because of high costs. End Summary.

China's Car Market: Ford Enjoying Success

------------------------------------------

4. (U) China's overall car sales in 2009 will be around 12
million, Changan Ford Mazda Sales General Manager Nigel Harris
told CG on August 7 -- a figure also predicted by Ford's
corporate chief economist on August 18. Overall, Changan Ford
saw its July-over-July sales growth climb by 54 percent; in the
first seven months of 2009, Changan Ford had sales of 123,474
cars, a 21.5 percent increase over the same period last year,
per an August 6 Ford press release. The press release
attributes Ford's success to "increasing consumer acceptance of
its products and rapid improvement in its distribution capacity
across China" (with the 200th Ford dealership opened in May
2008). Strong sales in recent months, Harris said, were also
aided by the Chinese government's decision to halve sales taxes
on vehicles with engines of 1.6 liters or less (as a measure to
spur the economy in light of the global economic slowdown).

5. (U) In Chongqing, Changan Ford produces the Focus sedan and
hatchback, Fiesta, Mondeo, S-Max (a small minivan/sporty
hatchback), Volvo S40 and S80, and the Mazda 2 and 3. The firm
has enjoyed a number of successes in the China market: Changan
Ford announced August 15 the production of its 400,000th Focus,
with sales in July exceeding 10,000 for the fifth consecutive
month. The new Fiesta sold 22,630 units in its first five
months on the market and now averages 4,000 per month -- a 4.5
percent share in its market segment. July sales of the Mondeo
and S-Max increased by 68 and 22 percent respectively over the
same period last year.

Comparison with Belgium Benchmark Plant:

Chongqing Quality Solid, But Productivity Lower

--------------------------------------------- --

6. (SBU) The quality of Ford cars produced in Chongqing is
almost identical to its leading plant in Ghent, Belgium: 94
percent of Chongqing "Mondeo" cars pass the "First Time Through
(FTT)" quality inspection, with only six percent of cars needing
to be taken off-line for repairs, compared to a 95 percent FTT
for Ghent, Changan Ford Manufacturing Director Frank Chuang told
CG August 7. Moreover, while productivity is lower in
Chongqing, with 35 man-hours per car versus only 20 man-hours
for Ghent, the Chongqing factory uses only 25-30 percent as many
robots as Ghent.

Ford in Negotiations for Possible Third Plant in China

--------------------------------------------- ----------

CHENGDU 00000166 002.4 OF 003

7. (SBU) Ford has capacity to produce 285,000 vehicles per year
in Chongqing, and 120,000 per year at its joint venture factory
in Nanjing, Harris said. Changan and Ford are in discussions
about building a third plant in China, possibly doubling its
capacity in China over the next five years. Ford received large
tax breaks and "freight logistics" cost reductions from the
municipal government in order to locate in Chongqing, and these
incentives have been important to Ford in overcoming the higher
costs of shipping its production to China's coastal areas.
Chongqing has been "aggressively" courting Ford to build the
third plant and is offering a five-year tax incentive package as
generous as those offered to greenfield investments. Changan
Ford is already Chongqing's largest taxpayer, adding 300 million
RMB annually. (Note and Comment: One press report indicated in
mid-August that Changan and Ford had agreed to build the plant
in Chongqing, but Ford officials declined to confirm this with
us. Chongqing's mayor received a visa from ConGen Chengdu
recently, in part to travel to Detroit in mid-August to meet
Ford executives, presumably to secure a Ford commitment to build
the plant in Chongqing. End note and Comment.)

Changan Copies Mazda:

Long-term Relationship with Ford Will Depend on Respect for IPR


--------------------------------------------- -------------------

8. (SBU) Similar to the well known case in which General Motors
has sued Chinese automaker Chery, accusing it of stealing
aspects of the design for its Chevy "Spark" to build its "QQ"
model, Ford believes that its Changan partner copied engineering
data for the Mazda 3 model for its recent "Yuexiang" model, a
Ford executive told CG. For this reason, Ford headquarters (in
Dearborn, Michigan) made a decision that any future
manufacturing data could not be released to Changan without
prior authorization from corporate headquarters. Ford's
long-term partnership with Changan will "break apart" in the
future if the two companies are not able to establish a
relationship of mutual trust, the executive stressed.

JV's Local Content Increasing;

China's Future as Auto Exporter; Labor Relations "Harmony"

--------------------------------------------- --------------

9. (SBU) All of Ford's parts suppliers must meet the Chinese
Government's rules of minimum 40 percent local content by value,
Chuang explained. Ford now sources locally 45-50 percent of the
parts used in its Mondeo model, and seeks to increase this
percentage as a cost savings measure. For example, Ford has
localized the production of engines for Mazda at its Nanjing
plant, but imports all of its engine crankshaft parts.

10. (SBU) Chinese car manufacturers today are going through an
evolution similar to that undertaken by Japanese car
manufacturers almost 60 years ago, Chuang stated. Toyota, for
example, started out as a sewing machine company, but purchased
(and copied) automobile technology to get started. Already,
Chinese car manufacturers have started to sell their cars in
small quantities in Europe and North America for reasons of
"face," he asserted. Ten years from now, Chuang predicted,
Chinese firms will start large-scale exports into Europe and the
United States. At present, he felt, Chinese firms are still in
the process of "copying" foreign car makers, and lack an
in-house expertise to self-developed designs. Other major
challenges they face are: meeting more complex safety
regulations overseas, and building a strong local supply base.
Car headlights, for example, need to be outsourced to
world-class suppliers, and Chinese manufacturers will need to
know how to supply manufacturing data to those firms.

11. (SBU) Chuang asserted that one advantage enjoyed by Chinese
automakers is "very good" labor relations - particularly in
comparison to the labor relations between Detroit's "Big Three"
and the United Auto Workers. Chuang, who worked well over 20
years for Ford Taiwan, explained that Chinese workers were
"hungry" for good jobs, and that the Chinese Government promoted
"harmony" between companies and labor. (Comment: One reason

CHENGDU 00000166 003.4 OF 003


for this "harmony," of course, is that Chinese labor unions do
not enjoy the same freedoms as unions in democratic countries.
End Comment.)

Hybrid/Electric Cars:

Government Incentives, But Too Expensive for China Market?

--------------------------------------------- --------------

12. (SBU) China market for hybrid or electric cars is still
small, but is the future number one global market for this kind
of vehicle, Chuang felt. Although the Chinese Government has
been encouraging domestic manufacturers to produce hybrid,
electric and other fuel-efficient cars, and providing incentives
for them to do so, it is not easy to sell hybrid and electric
cars in China because of their higher cost and, in the case of
certain electric cars, the lack of infrastructure, e.g. quick
"charge stations.
BROWN

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