BEIJING/SHANGHAI (Reuters) - Renault SA clinched full access to China's auto market on Monday by sealing a joint venture agreement with state-owned Dongfeng Motor Group in Wuhan, a city fast shaping up as China's own Detroit.
Nine years after the two companies first announced plans for the joint venture, they finally inked a US$1.3 billion (S$1.6 billion) 50-50 partnership to introduce the French carmaker's own locally assembled models in the world's biggest auto market.
The deal allows Renault to fully tap demand in China, something it has been unable to do until now because of the lack of a strong local partner. China's central government requires all foreign automakers to have a local partner to be allowed to produce cars in the country.
To build a Chinese presence, Renault has been forced to rely on imports from South Korea. Now with Dongfeng, it will invest 7.76 billion yuan (S$1.6 billion) to build a factory in the central city of Wuhan, with the first car due to roll off the production line in 2016.
Renault, which has a long-standing alliance with Japan's Nissan Motor Co with whom it shares technology, plans to manufacture 150,000 cars a year in Wuhan and set up a jointly run network of retail stores.
The carmaker's investment is a boon to Wuhan, located about 700km west of Shanghai and where the Yangtze and Han rivers intersect. The city, with a population of 17 million including its surrounding suburbs, is home to Dongfeng, China's second-biggest automaker.
The Wuhan government is aiming to transform itself into a major automotive manufacturing and a logistics hub in China by attracting global automakers and their Chinese partners to open shop, which some say has turned the city into a dust-ball due to the frenzied construction activity.
Thanks to its central position and its rail, road and waterway networks it is better-positioned than other cities to become China's Detroit - minus the bankruptcy, said Mr Peng Zhimin, a regional economics researcher at the Hubei office of Chinese Academy of Social Sciences who advises the provincial government.
Mr Peng sees Wuhan as a combination of Detroit, home of the US auto industry, and Chicago, North America's transportation hub.
"Wuhan has a reputation of being the Oriental Chicago. The city's developed transportation and logistics systems give it an advantage," Mr Peng said. "We can easily deliver vehicles and auto components via the Yangtze River to consumers in Shanghai, for example."
In addition to Renault, Wuhan is also home to the headquarters of Dongfeng's joint ventures with Nissan, Honda Motor Co. and PSA Peugeot Citroen. Honda, Dongfeng and Peugeot also assemble cars in or around Wuhan.
The city, which currently has the capacity to produce roughly one million vehicles a year, is aiming to boost that to three million by 2016. Much of that planned capacity boost will come from Renault's joint venture with Dongfeng and other global automakers such as Peugeot, which is close to getting a sizeable capital injection from Dongfeng.
The French carmaker's venture will also benefit Nissan, which has been operating in China in a joint venture with Dongfeng since the early 2000s. Japan's second-biggest carmaker has two manufacturing centres within a 470km radius of Wuhan in the cities of Zhengzhou and Xiangyang.
"Between Renault and Nissan in this three-city triangle of auto-manufacturing operations, we plan to use commonised vehicle underpinnings and major parts," a senior Nissan executive in Yokohama said. He declined to be identified because he is not allowed to speak to the media.
"That allows us to make huge cost savings and our scale would allow us to bring competitive parts suppliers to this region."
Wuhan has already successfully attracted General Motors (GM) and its Chinese partner SAIC Motor Group.
Earlier this year, the companies started building an assembly plant in the city capable of producing 300,000 cars a year when production starts in 2015. They are also building an engine plant.
Wuhan government officials say GM's long-term blueprint for its Wuhan assembly plant includes an option of adding another assembly line to double its overall annual capacity to 600,000 cars.
"I am a pretty seasoned manufacturing guy, right? I've never seen anything like this before," GM China chairman Tim Lee, who has overseen GM's manufacturing operations around the world throughout his career, said earlier this year in an interview, referring to the booming auto towns in China including Wuhan.
Other cities, such as Chengdu and Shenyang, are also competing to become auto hubs. That worries China's industrial policymakers, as well as industry insiders and experts, over the possibility of a glut in auto manufacturing capacity.
"It's a big cause for concern," said Mr Peng, of the Chinese Academy of Social Sciences. "Too many cities are competing to become auto capitals."