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Chinese Car Maker SAIC Motor Corp Faces Roadblocks in Thailand

SAIC Motor-CP boss Wu Huan isn't sure 'who the real customers of our MG are.' SAIC Motor-CP

SAIC Motor-CP boss Wu Huan isn’t sure ‘who the real customers of our MG are.’ SAIC Motor-CP

 

BANGKOK—When SAIC Motor Corp. announced plans to make cars in Thailand by 2014, it was seen as a significant move by the Chinese auto industry to secure a foothold in Southeast Asia’s largest manufacturing hub.

But China’s top auto maker appears to be running into trouble in one of its first major attempts to produce cars outside the mainland.

SAIC, which is joining with CP Group, Thailand’s largest conglomerate, is entering Thailand at a time when car sales are slumping and political unrest has unnerved foreign investors. In a market dominated by Japanese brands, the joint venture said it is struggling to figure out the target customer for its British-designed MG cars.

Meanwhile, CP Group has said that production is scheduled to start in the fourth quarter, according to an email obtained by The Wall Street Journal, a delay from the expected July start date.

CP Group declined to comment on the email, referring questions to Wu Huan, president of the joint venture, SAIC Motor-CP Co.

“Nothing will stop us from launching the car in July,” said Mr. Wu.

But IHS Automotive, a research firm, also expects production to be delayed up to six months “given the domestic market slowdown and sluggish vehicle demand,” said senior analyst Jessada Thongpak.

It is common for car makers to face production hiccups, especially when they are entering a market for the first time. But SAIC’s problems provide a glimpse into the challenges that Chinese car makers face as they venture into Southeast Asia to target the swelling and upwardly mobile middle class in countries from Thailand and Indonesia to Vietnam.

The high-profile union between China’s leading auto maker and a company backed by Thailand’s wealthiest family, the Chearavanonts, faces the challenge of carving a niche for itself in a market where Japanese vehicles have been the mainstay. A handful of senior Thai executives have also left the joint venture in recent months due to conflict with the Chinese staff, according to two sources within the joint venture.

Thailand has long been attractive for car production because of its more than 50-year-old auto supply chain and its central location in the region. Car makers including Toyota Motor Corp. , Honda Motor Co. and Ford Motor Co. manufacture cars in Thailand for export throughout Southeast Asia, a region that global auto makers expect to be a key engine of growth.

SAIC Motor-CP Co. initially plans to bring only the MG brand to Thailand. But the Chinese-Thai company wants to use Thailand as its manufacturing base to export to right-hand-drive markets such as Indonesia and Malaysia.

Chinese car makers, however, have yet to make inroads in the market. Less than 1% of Thailand’s 1.3 million cars sold last year were Chinese brands, while around 90% were Japanese brands, according to LMC Automotive, a consulting firm.

“In countries like Thailand, where Japanese companies already have established sales networks and good reputation, for competitors to enter this market, they have to have very, very low-price cars,” said Shingo Ikeda, a Singapore-based principal at Roland Berger Strategy Consultants.

The SAIC Motor-CP joint venture is a “hugely important” step forward for the Chinese auto industry, according to Uli Kaiser, publisher of the Thai AutoBook 2014, an industry resource. The joint venture shows “they have capital, they are hungry and they are a formidable force,” said Mr. Kaiser. “I expect the Chinese to be extremely successful, but it will take time.”

For now, Chinese auto makers are having difficulty gaining traction in Thailand.

Great Wall Motor Co. said last week it had postponed plans to build a sport-utility vehicle manufacturing plant in Thailand because of the country’s protracted political unrest.

Meanwhile, Dongfeng Motors (Thailand) Co., an independent distributor of China’s Dongfeng brand minivans and minitrucks in Thailand, postponed a $10 million expansion plan last year, citing political unrest and a weak economy. The brand belongs to a unit of Dongfeng Motor Group Co. , China’s second largest auto maker by volume.

China’s Dongfeng isn’t a shareholder in Dongfeng Motors (Thailand).

Pitaya Tanadamrongsak, managing director of Dongfeng Motors (Thailand), said the company is expanding again because of stable demand for compact commercial cars and export opportunities.

For the SAIC Motor-CP Co. joint venture, the decision of whether to import auto parts from China or to procure them locally is likely to be a key issue.

Mr. Jessada expects a majority of the MG car components to be imported from China initially. Yet if the cars don’t have at least 40% local content, the joint venture could be heavily taxed on exports from Thailand to Southeast Asia, which could make the cars more expensive for consumers.

“If you have the taxation, you can’t compete,” said Mr. Ikeda, noting that it can be difficult to determine what is considered local content.

Mr. Wu, the SAIC Motor-CP Co. president, said he expects to meet the local-content requirement.

The joint venture’s key challenge, he said, is that “before we sell the car, I’m not quite sure what the real requirements are, who the real customers of our MG are.”

In recent months, the joint venture, 51% owned by SAIC Motor and 49% owned by CP Group, also lost a handful of its senior executives, according to two executives who left. The executives said that Chinese employees were reluctant to listen to the ideas of their Thai colleagues, even those who had been hired from the local auto industry, on how to run the car-making operation. They declined to be named because they aren’t authorized to speak on the record.

An SAIC spokeswoman in China, when asked about personnel issues at its Thailand joint venture Friday, said: “I don’t think that is true.” Later in an emailed response, the spokeswoman wrote: “For both SAIC and CP, our focus is to make the project a success and to build an excellent joint team.”

CP Group referred comments to the joint venture. The joint venture didn’t respond to requests for comment Friday.

Mr. Wu expects its manufacturing plant in eastern Thailand’s Rayong province to be able to produce 25,000 cars in the first year and 50,000 cars in the second year.

But IHS Automotive estimates that the joint venture’s actual production in 2015 will be less than 10,000 cars, and may rise to only 15,000 cars by 2020.

Because Japanese brands are so ubiquitous and accepted, SAIC “may not be very successful in the domestic market” for a while, predicts Mr. Jessada.

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