CHANG'AN HOPES TO BUILD ENVIRONMENTALLY FRIENDLY CAR WITH

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SUBJECT: CHANG'AN HOPES TO BUILD ENVIRONMENTALLY FRIENDLY CAR WITH
PARTNER FORD, CRACK U.S. MARKET WITH MINI-CARS

REF: 09 CHENGDU 166

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1. (U) This message contains company proprietary information.
Not for Internet distribution.




2. (SBU) Summary. Ford's principal partner in China, Chongqing
Chang'an, recently became the PRC's third-largest automaker
after purchasing the auto assets of another state-owned
enterprise. Some analysts believe Chang'an's purchase could set
off a series of mergers and acquisitions that would help
consolidate China's highly fragmented car industry into
Beijing's hoped-for four auto giants, including Chang'an. In
2009, Chang'an enjoyed more than a 10 percent share of China's
13-million-unit auto market -- the world's largest. Twenty
percent of Chang'an's production came from joint ventures with
Ford, Mazda, and Suzuki; Chang'an's third auto plant with Ford
will be completed in 2011. Chang'an is negotiating with Ford to
jointly develop a "new energy" vehicle, and with U.S. firm
Honeywell to produce fuel efficient turbochargers for
small-displacement engines. Chang'an also hopes Ford will help
it crack a promising emerging market in the United States for
mini-cars -- a Chang'an strength because of its link-up with
Suzuki. End Summary.



China's Car Market:

World's Largest and Growing; Chang'an Has 10 percent Share

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3. (SBU) China's annual car production of 13 million in 2009 was
the world highest, and will "soon" reach 16 million, Chongqing
Chang'an Vice Chairman Wang Chongsheng recently told Consul
General. China's potential as a car market is huge because as
many as 150 million Chinese now have the financial means to
purchase a car, he explained.




4. (SBU) Chang'an is China's third largest automaker, after
Shanghai Automotive and FAW-Volkswagen Automotive, Wang said.
Chang'an's 2009 output -- almost 1.4 million cars -- was its
highest ever, accounting for over 10 percent of China's total
production. Chang'an's sales were significantly aided by the
Chinese government's economic stimulus package, which included a
50 percent reduction in sales taxes on vehicles, with tax-free
purchases of models in rural areas. According to government
officials at an economic conference in late 2009, these sales
incentives will continue into 2010, he said. Chongqing Chang'an
was set up in 1996, and is a listed company on the Shanghai
Stock Exchange. Its primary shareholder, the Beijing-based
China Chang'an Group (Zhongguo Bingqi Zhuangbei Jituan Gongsi),
is a state-owned enterprise that owns 45.27 percent of shares,
Wang noted.



Chang'an's Foreign Joint Ventures: Cooperation

with Ford on Third Auto Plant, "New Energy" Car

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5. (SBU) Twenty percent of Chang'an's production comes from its
joint ventures with Ford, Mazda, and Suzuki, Wang said. From
January-November 2009, these joint ventures produced 420,000
vehicles, earning 18 billion RMB (2.64 billion USD) on sales of
45.6 billion RMB (6.69 billion USD). The Chang'an-Ford joint
venture was set up in 2001 and was later restructured as the
Chang'an-Ford-Mazda company, with Chang'an owning 50 percent of
shares, Ford 35 percent, and Mazda 15 percent.
Chang'an-Ford-Mazda's January-November 2009 unit sales and
profits were, respectively, 300,000 cars and 2.5 billion RMB
(367 million USD). Chang'an set up its joint venture with
Suzuki in 1993 and has profitably produced mini-cars since
production started in 1995. (Note: Chang'an Ford told the press
recently that its full-year 2009 production was 316,139 cars, up
54.5 percent over 2008. End Note.)




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6. (SBU) Construction of a third Chang'an-Ford plant will be
completed in 2011 at a cost of 380 million USD, Wang said.
Phase one will boost annual capacity by 200,000; phase two will
increase it by 100,000 more. Ford will not have to contribute
additional capital for the new plant's construction, relying
instead on retained earnings. The Chongqing Government, which
receives 5 billion RMB (733 million USD) in taxes annually from
Chang'an, has offered 1,000 mu (66 hectares) of free land for
the new plant's construction, as well as a reduction in income
taxes for 10 years. (Note: Recent press reports have listed the
cost of the new Chang'an-Ford plant at 490 million USD. End
Note.)




7. (SBU) Ford is Chang'an's top strategic partner, and the two
will be working together on a "new energy" car, which Chang'an
hopes will be produced at Chang'an-Ford's Chongqing factory with
"full support" from the central and Chongqing governments.
Chang'an seeks Ford's assistance with the "new energy" car's
design and technology, and hopes to establish a joint R&D center
with Ford in Detroit for this purpose. (Note: Wang did not
clarify whether the "new energy" car would be a hybrid
gas-electric, an all-electric vehicle, or potentially an
alternative fuel vehicle. End Note.)



Negotiation Deal with U.S Firm Honeywell for Turbochargers

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8. (SBU) Chang'an has been negotiating with another U.S. firm,
Honeywell, about a cooperation agreement to help Chang'an
produce turbochargers for 0.8 - 1.5 liter engines used in
mini-cars. These turbochargers can provide 10 percent gas
savings, and a 30 percent boost in power. Chang'an hopes to
conclude the deal soon and start construction of production
facilities for turbochargers in 2010.



Chang'an to Be One of Four Chinese Car "Champions" After

Industry Restructuring; Purchase of AVIC Car Assets is Step One

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9. (SBU) China's State Council issued in January 2009 a document
"Planning for the Restructuring and Revitalization of China's
Automobile Industry," Wang explained. At present, there are 108
"automobile companies" in China. The State Council hopes to
create 10-15 large automobile groups after restructuring, with
four lead companies -- Chang'an, Shanghai, FAW-Volkswagen, and
Dongfeng -- absorbing smaller auto makers. The State Council
hopes that much of this consolidation process can occur over the
next three years. One important step in this regard was
Chang'an's November 1, 2009 deal with Aviation Industries of
China (AVIC),under which Chang'an will receive 77 percent of
shares in AVIC auto plants -- including those making Hafei cars
and Chenghe cars and minivans -- bringing its total to 22
plants. In return, AVIC will take a 23 percent share in
Chang'an, Wang explained.




10. (U) Note: Press reports indicate that AVIC agreed to
transfer its auto assets, valued at 17 billion RMB (2.49 billion
USD),to Chongqing Chang'an's parent company in exchange for a
23 percent stake in Chang'an, after which Chang'an's annual
production capacity would increase to 2.2 million units. One
western auto analyst quoted in the press called the
Chang'an-AVIC deal a "significant development in China's auto
industry" that "might also signal a quickening of the pace of
consolidation of the ... highly fragmented automotive industry."
End Note.



Chang'an: Foreign Plants; R&D Centers;

Ambitions to Sell Mini-cars in U.S.

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11. (SBU) Chongqing Chang'an has assembly plants in Malaysia,
Vietnam, Iran, Egypt, and Mexico, but currently principally
produces cars in China for the domestic market, Wang said. In
2009, it exported 35,000 cars, 4,000 of them to the United
States, "where there is a shortage of mini-cars, especially on
farms and golf courses."




12. (SBU) To develop new cars, Chang'an invests annually about 2
billion RMB (293 million USD),Wang stated. The firm already
has R&D centers in four cities in three countries. It is also
considering establishing R&D centers in Italy, where design of
car exteriors is strong, and in Japan, which is strong in
designing auto interiors.




13. (SBU) In the future, China will not only be a huge car
market, but also an important car exporter, Wang stressed.
Chang'an is in discussions with Ford on how to boost mini-car
exports to the United States from its base in Chongqing. At one
point, U.S. car producers had a chance to develop the mini-car
market in China, Wang asserted, but failed to do so. Chang'an's
mini-cars already meet international safety, emissions, and
noise standards, he noted, at the same time acknowledging that
quality and safety levels would need to be increased further
before Americans could be enticed to buy Chang'an's mini-cars.
BROWN