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DE RUEHCN #0017/01 0260857
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O 260857Z JAN 10
FM AMCONSUL CHENGDU
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3702
INFO RUCPDOC/USDOC WASHDC IMMEDIATE 0048
RUEHOO/CHINA POSTS COLLECTIVE
RUEHCN/AMCONSUL CHENGDU 4425

UNCLAS SECTION 01 OF 03 CHENGDU 000017 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON EINV ELTN ETRD PGOV SENV CH
SUBJECT: CHANG'AN HOPES TO BUILD ENVIRONMENTALLY FRIENDLY CAR WITH 
PARTNER FORD, CRACK U.S. MARKET WITH MINI-CARS 
 
REF: 09 CHENGDU 166 
 
CHENGDU 00000017  001.2 OF 003 
 
 
¶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 
 
--------------------------------------------- ------------ 
 
 
 
¶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 
 
--------------------------------------------- -- 
 
 
 
¶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.) 
 
 
 
 
CHENGDU 00000017  002.2 OF 003 
 
 
¶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 
 
--------------------------------------------- ------------- 
 
 
 
¶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 
 
--------------------------------------------- ------------------ 
 
 
 
¶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. 
 
-------------------------------------- 
 
CHENGDU 00000017  003.2 OF 003 
 
 
 
 
 
¶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