WEekly News - 1 July 2007

China's Cheeky Chery challenges chrysler

Mg roewe?

Economics - driving out the filthy habit

Fuel Cells - British firm proposes diy fuel



MG Roewe?


Since SAIC and NAC divided up the spoils of MG Rover between them it has been difficult to distinguish one from the other. Both firms are resurrecting the Rover 75: NAC as the MG7 while SAIC, cruelly denied the Rover brand, have invented the Roewe 750 moniker. NAC have gone further in resurrecting the MG range, promising production of the TF sports car at Longbridge and hinting at the return of the two smaller saloons in MG5 and MG3 guise. The two companies are also continuing with the technically advanced yet troublesome K-Series engines. However, NAC are using a production process for which the engine was not originally designed and there is no way of telling what effect this will have on the fastidious power unit.


With both companies essentially working on the same products there is reported to be political pressure bearing down on them in China to work together more closely. The main motivator seems to be the central government and some commentators have suggested that this will result in a full merger. NAC’s western partner, Fiat, has openly criticised NAC for failing to live up to production expectations, output of the Fiat models being moribund on less than 40,000 a year when rivals such as VW are producing ten times that number. Fiat has a more satisfying joint venture with SAIC and so would no doubt like to see SAIC teach NAC a few tricks.


As always in China, though, the western interpretation may not be the appropriate one. Firstly, SAIC and NAC are not owned by the central government. SAIC is owned by the city of Shanghai while NAC is owned by the government of its state. Apparently there is fierce rivalry between the two governments and so it is likely that any negotiations for cooperation are being conducted through gritted teeth. There is also the question of the relative sizes of the two companies. While NAC struggled on with car production around 30,000 last year, SAIC has been ambitious to join the 1 million club.


Most importantly, however, is the matter of product development. The purchase of MG Rover’s old range was always something of a sideshow, merely a device for introducing the two companies to fully integrated car manufacturing while they learnt how to design the next range for themselves. SAIC has essentially recreated the core of MG Rover’s R&D team at Leamington Spa with the SAIC Motor UK Technical Centre. The engineers there are taking the lead on a complete range of new cars and engines. NAC have claimed to be attempting a similar policy at Longbridge although so far nothing concrete seems to have been achieved.


For the moment, whilst both companies are manufacturing the same products, there appears to be an opportunity to work together. SAIC might envy NAC for its fancy western brand while NAC might appreciate cooperation in bringing its obsolete technology up to date. Once the two companies move into the next phase with their own, distinct, products the two parties will be loath to give up their gains. If NAC cannot overcome its current travails then maybe a joint venture will be to its benefit, otherwise the only possible relationship would be one where SAIC takes over and fills NAC’s new MG factory with forthcoming Roewe models. More likely still, the two bitter rivals will play for time and then go their separate ways once the political pressure has eased.





Fuel cells - british firm proposes diy fuel

With the controversy over global warming and carbon emitting fuels reaching fever pitch one might conclude that the solution is just around the corner. Certainly, research into alternative fuels is gathering pace but the breakthrough that is necessary to finally unseat oil from its throne has yet to find its way out of the laboratory. The most promising alternative fuel seems to be hydrogen since the only emission from its use is pure water.  It can even by burnt in a conventional engine, something that Mazda has found particularly suited to the rotary engine, but the holy grail is the fuel cell.


The technology for fuel cells has been around for some time, since 1838 in fact, being originally proposed by the German-Swiss scientist Christian Friedrich Schönbein. It was further developed by Welshman Sir William Robert Grove a few years later but it was not until the middle of the twentieth century, with advances made by GE, that platinum was put on a membrane to form a catalyst. This acts almost like a filter, stripping the electrons off the hydrogen molecules and sending them on a detour round a circuit to operate electrical items, rejoining the hydrogen on the other side of the membrane where they combine with oxygen to make water. One fuel cell produces a relatively small electric current so they are combined into a stack and the first application by GE was on the Gemini spacecraft.


There are, naturally, certain fundamental problems to be overcome. One is that the membrane is fairly intolerant to changes in temperature, working best at around 60-80°C, or up to 100°C when pressurised. This means that some development needs to be done to bring it into a practical temperature range that would stretch down to -35°C. There are also problems with the storage and distribution of the hydrogen fuel. There are 79 fuel stations in the US and Canada but just one in the UK, operated by BP. Honda, working with Plug Power Inc., has unveiled the Home Energy Station at its Torrance headquarters in California. This uses natural gas to create electricity for the home and hydrogen for the fuel cell powered vehicle, in this case the Honda FCX. At this stage the system is experimental and still very expensive.  


A way round this is to use a cost effective electrolyser that can split water into its constituent components of hydrogen and oxygen to supply the fuel cells. Developments at the British research company ITM have reduced the cost of the electrolyser to about $164 per kW of power, well within the target set by the US government of $500 per kW to be achieved by 2010. This is mainly due to a new membrane formulated by the company that costs a mere $5 per square metre when the usual cost would be around $500 per square metre. The company will start production of electrolysers from its new plant in Sheffield from 2008.


To demonstrate fuel cell applications ITM has joined with HertfordshireUniversity to run a bi-fuel Ford Focus modified to operate a fuel cell stack. Pressurised to 75bar, the vehicle has reached a limit of 25 miles on hydrogen before switching to its petrol engine. The short range again underlines the need for further work before fuel cell technology can be seen on our roads. Honda wants to have some fuel cell cars available on lease next year and GM is aiming to enter the new market commercially in 2010. However, it being likely that these are simply technology demonstrators, it may be many years before they are commonplace.




Economics - driving out the filthy habit

The smoke has now cleared over the UK as England falls into the line with the rest of the Union to ban smoking in all enclosed public places. This includes vehicles that are used in the work place by more than one person. This would appear to be a victory for anti-smokers, but how does the economic argument stack up?


The purpose of the new legislation is to deal with what economists call externalities. These are when costs that have been incurred are levied on those who derive no benefit from the activity. For example, cars create pollution which then affects the health of the general population. While the car users at least have the benefit of cruising around in their shiny machines, non-car users suffer the same health risks but without the benefits of driving a car. The government tries to rebalance the costs by weighing down the car user with a tax burden in excess of the actual cost of running the vehicle. The additional money raised is then used for the benefit of all society, at least in theory. As a counter example, rail users complain that they have to foot the bill for the rail network when the whole population receives beneficial externalities in terms of reduced congestion and lower pollution.


The externality related to tobacco concerns secondary smoke. Unless they are simply too tight-fisted to buy their own cigarettes, those who inhale smoke because they are surrounded by smokers incur a cost without the benefit of enjoying it. The cost could be connected to poorer health, the need to turn the air-conditioning up a notch or the need to carry around an oxygen cylinder. Whatever the externality, the smokers are having all the fun without being required to stump up for the full cost. The government has tried to claw extra funds out of them by raising tobacco taxes to punitive levels, but in the face of impressive obstinacy only a complete ban will right the balance.


In fact, the economic argument does not quite apply to enclosed public places, where people are free to move themselves and their money elsewhere. Even on trains, where a non-smoker has no idea at the time of booking the ticket how many smokers will be on board, there has usually been the provision of segregated carriages. The inclusion of company cars in the definition of enclosed public places will, though, quash the externality that previously existed here. At last, shy underlings will be safe from a loud talking, fag puffing boss. This is not to say that the boss cannot smoke in his own company car, but only if he is the sole user.


The only other alternative is to invest in a fleet of open-top sports cars. Firms may baulk at this idea when they see that the option of a metal folding roof on a Peugeot 307, to take one example, adds around £4000 to the price. Assuming firms embrace the new regulations and improve the health of their minions then BCA, the car auction group, suggests that further benefits will emerge in the residual values at resale time. It is true that cars steeped in the stench of nicotine fetch lower prices at auction, yet BCA do not make clear how non-smoking cars will continue to attract premium bids once the difference is eradicated. From an economic perspective, the lower price of smoking cars perfectly cancels out any potential externality. Effectively, the smoker pays for the privilege of smoking in their car by accepting a lower resale value, which then compensates the new buyer for having to put up with the stench. The buyer might also indulge their savings in having the vehicle valeted. If all cars are non-smokers then the cost differentiation in residual values simply evens out without affecting average prices across the market as a whole.  Of course the losers in this are then the car valeters: perhaps there should be a tax on non-smokers to compensate them…




China's cheeky chery challenges chrysler

July 4th is a special day in the US: it was the day the country threw off the yolk of a far away imperial power and began its own path to glory. How the mighty have been brought low. This year the holiday will mark the signing of an agreement between Chrysler, erstwhile member of Detroit’s Big 3, and fast rising Chery of China. This helping hand from Chery is the final indignity for the American firm, suffering spiralling sales, rejection by its adoptive parent Daimler and then descent into the jaws of private equity.


Chery is an impertinent upstart even by Chinese standards. It was founded just ten years ago as a catalyst for bringing industry to the Wuhu province. Starting with second-hand technology from Ford of Europe it based its first car on the SEAT Toledo. Officially, though, it was not a car at all but a collection of components driven  in close formation. This was because Chery could only gain government recognition as a parts supplier. By 2003 the company had brought together its own design team working with consultants around the world, such as Lotus and Ricardo.


In the same year Chery overstepped its ambitions when it released the QQ, a clone of the Daewoo Matiz. This had been part of a proposed joint venture with Daewoo but the Korean company collapsed before the deal could be signed. Chery went ahead with its side of the joint venture anyway, apparently even using a Daewoo version for certification purposes. Daewoo’s new owner GM was infuriated but has been able to do little about it under China’s inscrutable legal system.


Now Chery is coming to the rescue of GM’s smaller compatriot, Chrysler. The plan is for Chery’s small cars to be exported to worldwide markets and badged as Chryslers to fill a hole in the US company’s model range. It will also help the American company to break out of its dependence on the domestic market, 90% of its sales being in North America, and make a high volume entry into European and Asian markets. At the same time it is a Trojan Horse allowing Chery to build a presence in those markets under the Chrysler banner. Chery will further benefit as it finds itself on a steep learning curve with Chrysler, the QQ for example being poorly executed when inspected in detail.


If all this is a little embarrassing for the struggling US giant it may also be a case of ‘no pain, no gain’. The company is highly dependent on its gas-guzzling SUVs and the smallest vehicle it currently makes is the Dodge Caliber. It desperately needs new small models and the collaboration with Chery will allow it to do this in a very short space of time. There must be concerns that Chrysler is risking its already dented reputation on a foreign model range that lacks capability in depth, yet this could also be a chance for Chrysler to get the inside story on one of the fastest growing car makers in the world. As the Chinese general Sun Tzu would say: “know your enemy”.


Feature Analysis
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Marketing the MG TF
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Ford and PAG
Longbridge Reopens
Salvation of Chrysler
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