China Automotive Systems Inc.

views updated

China Automotive Systems Inc.

1993: POWER STEERING PIONEER

2003: TAPPING THE U.S.INVESTMENT MARKET

1993: POWER STEERING PIONEER

China Automotive Systems Inc. (CAAS) originated as a holding company, Ji Long Enterprise Investment Limited, established in Hong Kong in 1992 in order to develop automotive components joint ventures on the Chinese mainland. Ji Long in turn was owned by the mainland-based Great Genesis Holding Company. Under Chinese ownership laws, the automobile market remained strictly limited, with foreign ownership restricted to less than 50 percent. Foreign ownership of automotive components producers, however, was not subject to the same restrictions, and therefore provided an attractive vehicle for foreign investors eager to gain a share of the soon-to-boom Chinese automotive market.

Nonetheless, for its first joint venture, Ji Long found a mainland partner, Hubei Military. The companies established Shashi Jiulong Power Steering Co. Ltd., held at 81 percent by Ji Long. By 1993, that company had launched production of power steering gears for the truck market. The joint venture’s main customer at that time was China First Auto, in Changchun.

Hanlin Chen, who later served among other capacities as a board member of the Political Consulting Committee of Jingzhou City, and as vice-president of the Foreign Investors Association in Hubei Province, was named as the joint venture’s general manager. Chen later claimed to have earned an M.B.A. from controversial distance-learning start-up Barrington University, nominally based in Alabama, in the United States. That university was later discredited, however, by the Government Accountability Office’s Office of Special Investigations, which described that operation as a “diploma mill” selling diplomas “on a flat-fee basis.”

The small scale of the Chinese automotive market during this period meant that the Jiulong joint venture grew only slowly in its first years. Into the mid-1990s, the company’s production remained only at 200 sets per year. Starting from 1996, when the Chinese automotive industry entered its first growth phase, the Jiulong joint venture geared up its own gear production. By the end of the decade, the company’s production had surged to more than 60,000 sets per year. This helped the group build its sales to $50 million by the beginning of the 2000s.

The rise of the automotive market, and Ji Long’s growing manufacturing expertise, enabled the company to begin seeking to expand its production operations. In 1997, the Hong Kong-based holding vehicle established a new mainland joint venture, Jingzhou Henglong Automotive Parts Co. Ltd. The new company, held at 44.5 percent by Ji Long, targeted the car market, as well as light duty vehicles, with the production of rack and pinion power steering gears at the Jiulong factory. Following its creation, Hanlin Chen was named as chairman of Henglong as well.

The company quickly ramped up production capacity for both joint ventures, and by 2002 their combined output rate topped 230,000 sets per year. The company’s extraordinary growth reflected the growth of the Chinese automotive market; by the end of 2003, production at the Jiulong and Henglong joint ventures topped 400,000 sets per year. While the company took advantage of the vast and inexpensive manual labor pool, it also launched a series of investments, spending more than $10 million to install improved and more automated production machinery. The completion of this investment program, launched in 2003, helped raise total production past 600,000 sets per year, with the potential to reach as much as one million sets per year.

2003: TAPPING THE U.S.INVESTMENT MARKET

The Great Genesis/Ji Long group had by then sought new production opportunities. In 2002, the company entered two more joint venture partnerships. The first of these was Shengyang Jinbei Henglong Auto-Steering System Co., in partnership with Shengyang Jinbei Automobile, with Ji Long controlling the majority stake of 70 percent. That company in turn was part of Brilliance Auto, one of China’s leading automakers. The Shengyang joint venture specialized in the production of rack and pinion steering gears, and launched production on a 35,000-square-meter facility that same year. The second joint venture created that year was Zhejiang Henglong & Vie Pump Manufacturing Co., Ltd. Held at 51 percent by Ji Long, that company expanded the group’s power steering components production range to include power steering pumps.

COMPANY PERSPECTIVES

CAAS’ broad spectrum, high quality and reasonable price products, strong R & D capabilities and leading position will support it for continuous growth and to become an international power steering system supplier in the future.

With the Chinese automotive industry growing by nearly 40 percent per year in the early years of the new century, Great Genesis/Ji Long sought to expand its capital base. In 2003, the company completed a reverse merger with a dormant U.S.-based company, Visions-in-Glass, Inc., which had been founded in 1999 as a web-based distributor of custom-designed stain glass and related items. After listing on the NASDAQ, however, Visions-in-Glass had largely ceased to exist. The reverse merger agreement, a controversial but not uncommon maneuver among companies seeking rapid access to investment capital, provided for Visions-in-Glass to acquire Great Genesis Holdings. Following the transaction, the company changed its name to China Automotive Systems Inc. Ji Long remained the company’s holding vehicle for its joint ventures.

The public offering enabled Hanlin Chen and CAAS to envision growth beyond the Chinese market to include operations supplying the North American, European, and Korean automotive markets as well. For the time being, however, the company’s expansion efforts focused on the Chinese market, which in less than ten years had risen to the ranks of the world’s third largest automobile market.

In 2003, CAAS made a brief foray outside of the automotive market, forming the Jingzhou Henglong Fulida Textile Co., Ltd., environmental textiles joint venture. By the middle of the following year, however, the company decided to refocus itself around its steering and automotive components operations, and disposed of its holding in the textiles business to another vehicle owned by Hanlin Chane, Hubei Wanlong Investment Co.

In 2003, the company joined with Tsinghua University in order to found a research institute devoted toward developing electronic power steering and electronic hydraulic steering systems. Both technologies were expected to play an important role in providing greater fuel economy and environmental protection in the future. The following year, the company established a technology joint venture with Advanced Custom Sensors, of Irvine, California, to develop and produce sensors for automotive control systems. Production of the joint venture was slated to start in 2005. This joint venture was followed in 2005 by a second technology joint venture, with Sensor System Solutions, Inc., also based in Irvine.

CAAS’s rise as a major producer of power steering components had in the meantime made it an important partner not only with nearly all of the major Chinese automakers, but also with the increasing number of foreign automakers establishing operations in the country. In 2004, for example, CAAS’s international profile received a giant boost when it was named as the exclusive steering pump supplier to SAIC GM Wuling Co., established by the U.S. automaker to produce its Spark 1.0 vehicle for the Chinese market. Similarly, in 2005 the company entered an agreement to supply power steering components for the new Chinese-built Peugeot 206 launched in that country by the French automotive giant.

CAAS formed two new joint ventures in 2006. The first of these came with Chery Automobile Co., one of the fastest-growing non-state-owned automakers in China, to supply power steering components and systems. That joint venture was named Wuhu Henglong Auto Steering Systems, and began construction of a factory in Wuhu, Anhui, China. The second joint venture, Wuhan Jielong Electric Steering Systems Co., was set up with minority partner Hong Kong Tongda, in order to produce electric power steering systems and components. The company expected that operation to launch production by 2007, ramping up to full capacity of 300,000 sets per year by 2011.

As it entered the second half of the first decade of the 2000s, CAAS began seeking to make good on its international expansion objectives. The company began working with a venture capital firm in the United States seeking potential takeover targets, in part to acquire technology, but also to acquire customer contracts in that market. By 2006, the company had spotted a number of candidates, and had even signed a letter of intent for one purchase.

KEY DATES

1992:: Hanlin Chen establishes Ji Long Enterprise Investment Limited; first joint venture, Shashi Jiulong Power Steering, launches production of power steering gears.
1997:: Company creates power steering pump joint venture Jingzhou Henglong Automotive Parts Co. Ltd.
2003:: Company goes public through reverse merger into U.S.-based Visions in Glass, and changes name to China Automotive Systems.
2006:: China Automotive establishes two power steering components joint ventures, Wuhu Henglong Auto Steering Systems and Wuhan Jielong Electric Steering Systems Co.
2007:: Company opens U.S. distribution and sales office in Detroit, Michigan.

The company’s first move into the United States, however, came at the beginning of 2007, with the opening of an office in Detroit, Michigan. As Hanlin Chen stated in a company press release: “We are very excited about the opening of our first office in the overseas market. We hope to leverage the resources available in the United States to upgrade our product quality, enhance new product R&D and extend our leadership in the Chinese domestic market.” China Automotive Systems appeared ready to move into high gear as a major Chinese automotive components manufacturer.

M. L. Cohen

PRINCIPAL SUBSIDIARIES

Jingzhou Henglong Automotive Parts Co. Ltd. (44.5%); Shashi Jiulong Power Steering Co. Ltd. (81%); Shenyang Jinbei Auto Steering Systems Co. Ltd. (70%); Universal Sensors Inc. (60%); Wuhan Jielong Electric Power Steering Co. Ltd. (85%); Wuhu Henglong Auto Steering Systems (77.3%); Zhejiang Henglong & VIE Pump Co. Ltd. (51%).

PRINCIPAL COMPETITORS

Yuejin Motor Group; Shanghai Automotive Industry Corp.; Zonda Group; Xinxiang Yituo Ltd; Shanghai Huizhong Automobile Manufacture Company Ltd.; Jintan Changjiang Automobile Parts Factory; Dongfeng Auto Company Limited; Loudi Huada Automobile Gear Factory; Henan Jianghe Machinery Factory; Zhuhai National Motor Company Ltd; Dongfeng (Liuzhou) Automobile Company Ltd.; Shanghai Hezhong Automobile Parts Co.