WUHAN, China - By next year, Citroen may discover if its plant in China will ever make a profit. Despite the optimism surrounding Western carmakers' expansion into China in the early 1990s, Citroen has found that cultural differences, competition, and the downturn in the Asian economy have all made it harder than expected to make money.
Dongfeng Citroen Automobile Co. was launched in 1992 as a joint venture with Chinese truckmaker Dongfeng Motor. The FF7 billion ($1.24 billion) project was set up with the aim of making 150,000 units a year of the lower-medium ZX. But so far production has fallen short of that level.
Citroen has a 25 percent stake in the joint venture. French banks Banque Nationale de Paris and Societe Generale hold 5 percent, while Dongfeng Motor has 70 percent.
'We are targeting sales of 10 billion yuan ($1.24 billion) in 1999, up from 6 billion yuan this year,' said Michel Allain, the French co-general manager of Dongfeng Citroen in Wuhan. 'We also expect to break even at the operating level.'
That never occurred at PSA/Peugeot-Citroen's other joint venture in China, Guangzhou Peugeot in Guangdong Province. The partners closed that operation two years ago after more than 10 years building the outdated 505 sedan in limited numbers.
Allain is one of 40 Citroen expatriates who co-manage the joint venture with Chinese counterparts. Most are engineers, but there are also accountants and sales executives. All discussion between the French and the Chinese is through interpreters.
'We expect to sell 47,000 cars in 1998,' said Jean-Marie Boillot, Dongfeng Citroen spokesman. Although only 23,000 units were manufactured up to September, Dongfeng Citroen is aiming for a total of 50,000 by the end of the year. The daily output at Wuhan has increased from 270 to 380 vehicles. In 1997, 28,000 units were produced.
Dongfeng Citroen wants to raise production progressively. It is aiming for 75,000 units next year, 120,000 in 2000, and full capacity of 150,000 in 2001.
The joint venture makes the ZX hatchback, equipped with 1.4- and 1.6-liter gasoline engines. The engines are manufactured in a second plant in Xiang Fan, 400km west of Wuhan. Xiang Fan will also provide all the Wuhan plant's gearboxes starting in early 1999.
In China, the ZX hatchback is called the Fukang - meaning 'health and prosperity.' It was joined by a three-box version designed by French coachbuilder Heuliez in October.
Prices range from 120,000 to 170,000 yuan. A typical Dongfeng Citroen worker earns 1,000 yuan a month - about $125. This is considered a good wage by Chinese standards. An engineer earns 3,000 yuan a month.
The three-box ZX will compete with the local best-selling Volkswagen Santana, and should make up 50 percent of the company's sales next year. Volkswagen sold 210,000 Santanas and 42,000 Jettas in 1997. With its two factories in China, it has a 53 percent passenger-car share.
The Chinese passenger car market is predicted to reach 500,000 to 530,000 units this year, including 30,000 official imports.
'Growth in 1998 will be only 4 percent, instead of the forecast level of 20 percent,' Allain said. He expects the market to recover to a level of 575,000 to 600,000 units next year.
The government recently allowed four Chinese banks to start car finance programs. One of these - the China Construction Bank - has already started to offer loans to motorists in Shanghai, according to the government newspaper China Daily. Two other cities, Beijing and Guangzhou, will follow.
'The loans will extend over three to five years, and the rates will be 6 to 8 percent. The credit go-ahead is a very important and favorable decision for us,' said Zhang Shi Duan, the Chinese co-general manager of Dongfeng Citroen.
Zhang is also deputy general manager of Dongfeng Motor, and a member of the National People's Assembly, the Chinese parliament.
'Thanks to the credit, we think 30 percent of our sales could be with individual customers next year,' Zhang said. 'The Chinese government is also thinking of allowing the executives who work for government- and state-owned companies to buy a car for private use.'
Brave new world
Car loans are a critical issue to all automakers in China - and especially to a newcomer like Dongfeng Citroen.
But China cannot be compared with car markets in the West. 'The Chinese car market does not exist,' said Dongfeng Citroen sales manager Jean-Marie Walch. Sixty percent of Chinese sales are made to government bodies, state-owned companies and city organizations that control taxi companies. 'That figure was 85 percent four years ago,' said Walch.
Carmakers suffer from a number of restrictions from local authorities, and 'regionalism' is a major problem. It is almost impossible for Dongfeng Citroen to sell a Fukang to a taxi company in Shanghai, which is VW's domain. Similarly, not many VW Santanas are seen among the 7,000 red Fukang taxis in Wuhan. Although Dongfeng Citroen has about 200 outlets across China, 50 percent of its sales are made in Beijing, Wuhan and Hubei province.
Dongfeng Citroen has a total workforce of 5,400, including 2,700 at Wuhan and 800 at the Xiang Fan engine plant. The workers' average age is 21.
'Wuhan is a Chinese plant with European technology,' said Jean-Pierre Chantoselle, co-manager of manufacturing and engineering. Wuhan is organized like Citroen's Aulnay plant, near Paris, with four main shops: stamping, body, painting and final assembly. Most of the machinery comes from Europe. The entire plant looks like a European facility. The only exception is the body shop, which has just 20 welding robots. Most of the welding points are processed by workers.
A joint venture such as Wuhan gives Chinese companies access to state-of-the-art technology.
'Our vice minister for industry visited the Citroen and Volkswagen plants in Europe,' said Li Lan Qing, co-manager of manufacturing and engineering.
'He saw that mini-bowls (automatic painting devices) were used for painting. Considering that it's the best technology available, we wanted it for the Wuhan plant. At the moment, the quality of painting is lower at Wuhan than at VW's Shanghai plant, because it's done by hand.' Dongfeng Citroen will have automatic painting equipment in 2000, at a cost of $7 million.
In spite of a friendly working atmosphere between Citroen and Dongfeng, no joint venture is without its tensions.
A Citroen insider said: 'We were supposed to transfer not only our technology, but our management methods as well. A backlash occurred two years ago. The former Chinese manager was fired because he favored a Western style of management. The Chinese have taken our technology, but they have kept their own management rules.'
Dongfeng Citroen has firm plans for the future. 'The product range is spreading,' said Zhang Shi Duan. 'We currently have two-box and three-box versions of the Fukang. Next year we'll have a Berlingo and an automatic gearbox. We could also make a diesel engine licensed by Citroen.'
Dongfeng Citroen hopes to sell the Fukang in other Asian countries. Next year, it will provide 5,000 stripped-down Fukangs to a local coachbuilder for conversion into commercial vehicles. It will also manufacture all the spare ZX body parts for the rest of the world.
It has also been approached by Renault to provide engines and gearboxes. Renault is currently in talks with Beijing Automotive Industry to make a Chinese version of the Scenic. When the Asian economy improves, Dongfeng Citroen figures to be well situated to capitalize.