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In eyeing Jeep, Chinese automaker nods to home-turf issues

Trefor Moss/WSJ/Shanghai 06 Sep 17 | 02:25 AM

Fiat

Great Wall Motor Co.’s push to go global by acquiring Jeep is being spurred by some tricky realities closer to home, where the Chinese auto maker faces sliding profits, thorny government regulation, and red-hot competition in its core segment.

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As the once-freewheeling China market becomes more competitive and growth slows, Great Wall is signaling through its acquisition plans that foreign expansion could soon be the best way to increase profits amid mounting domestic pressures.

Acquiring Jeep wouldn't only give Great Wall a world-leading brand, but it would also provide instant access to foreign markets, including the U.S., where the Chinese auto maker has little or no presence, and with it new avenues for growth.

"An overseas acquisition would be very helpful to Great Wall," said Janet Lewis, managing director of equity research at Macquarie Capital Securities. Like other analysts, she believes Great Wall's strong financials make it a credible suitor for Jeep despite its relatively small size.

There is less consensus on whether it could secure Jeep without agreeing to buy all of its parent, Fiat Chrysler Automobiles, FCAU 4.82% as some believe the latter may insist. That would dwarf any deal previously attempted by a Chinese auto maker. Great Wall confirmed last week that it is eyeing Great Wall, and possibly all of Fiat Chrsyler. It declined to comment for this article.

Based in China's Hebei province, Great Wall is still a minnow by global standards. The world's biggest car companies- General Motors Co. , Toyota Motor Corp. and Volkswagen AG -each produced 10 times more vehicles than Great Wall last year.

China's top producer, Shanghai Automotive Industry Corp., also eclipsed its local rival, building 6.5 million cars, though most of those were copies of foreign autos built via joint ventures with GM and Volkswagen.

Unlike state-run auto makers like Shanghai Auto, Great Wall has focused solely on building its own brand. Founded in 1984 as a pick-up and later sedan maker, it has transformed itself over the past few years into an SUV specialist. The company's Haval marque accounted for 87% of the company's 2016 unit sales, up from a quarter in 2009. In recent years Great Wall also began focusing on the China market. Exports last year were just 1.5% of total sales, down from 43% a decade earlier, when the company exported in relatively small volumes to developing markets such as Africa and the Middle East.

Ms. Lewis said the China market was growing quickly at the time that local auto makers could afford to disregard exports; and the popularity of SUVs has soared in China over the past few years. Moreover, Great Wall spotted the trend early, establishing itself as the country's top SUV maker.

Last year, Great Wall's sales topped 1 million cars for the first time. In a country where most domestic auto brands struggle to make money, it reported a record $1.6 billion profit on $15 billion in sales. But that was likely the high watermark in terms of China auto-sector growth: Car sales increased 16%, but are unlikely to top 5% growth from 2017 onward, officials predict, as the market enters a "new normal" of slow expansion.

For Great Wall, this year's slowdown coincided with much stiffer competition in the SUV market from foreign and domestic rivals, resulting in flat unit sales in the first half of 2017, and halved profits. Haval slipped to No. 4 among the top-selling Chinese auto brands, according to researcher LMC Automotive, having been second previously.

The company has fought back by launching a new premium brand called Wey in April designed to boost profitability, and unveiling a second generation of its flagship H6 SUV, which accounted for 54% of all Great Wall sales last year. It remains China's best-selling SUV, but its lead has been eroded by an increasingly strong lineup of rivals. With China market saturation on the horizon, Great Wall and other domestic auto makers must start giving foreign markets newfound attention, said Yale Zhang, managing director of consulting firm Automotive Foresight.  A foreign acquisition, like Great Wall's pitch for Jeep, would be the quickest way.

Of more immediate concern, however, are new government regulations requiring auto makers to start building electric cars, and imposing tough efficiency standards on gasoline models.

That is a headache when your specialty is gas-guzzling SUVs.

"If you have a high sales share of big vehicles, it's going to be tough for you to meet the standard," said He Hui of the International Council on Clean Transportation.

Beijing requires auto makers to achieve a fleet fuel efficiency standard of 5 liters per 100 kilometers-equivalent to 2.1 gallons per 100 miles-by 2020. The H6 burns twice that much gas.

Great Wall failed to meet the government's less-stringent fuel-efficiency requirements in 2016, official documents show. The government hasn't yet imposed penalties on auto makers that miss fuel efficiency targets, but pressure is mounting, said Ms. He.

Mr. Zhang said the solution is for Great Wall to start building electric vehicles in volume to improve the fleet's fuel efficiency and satisfy new government quotas mandating EVs.

Great Wall already makes a pure-electric sedan, the C30, but its sedans aren't popular: It sold only 6,000 in the first half of 2017. It would need to build about 40,000 C30s next year to satisfy the quota.

In that context, the recent decision to buy 25% of Hebei Yogomo Motors Co., an electric-car maker based in Great Wall's home province, looks like a smart play, said Ms. Lewis. That partnership could help Great Wall to skirt the regulatory dangers, leaving it to focus on more important matters: rebooting its SUV profits, and landing Jeep.

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