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German Diesel Maker: Made In China To Be Exported to the World

BEIJING, April 4, 2003; Phelim Kyne writing for Dow Jones reported that German diesel engine producer Deutz AG plans to begin exports from China after 2005 through a new licensing agreement with First Auto Works Group Corp., or FAW, a Deutz executive said recently.

The deal will enable Cologne-based Deutz to expand its market presence in China as well as provide a platform to sell FAW-made diesel engines under Deutz license in other regional markets, Deutz's senior vice president for marketing and communications George Diderich told Dow Jones Newswires.

"FAW will produce in a new manufacturing facility in Dalian 80,000 to 100,000 engines in a year and part of that production may be sold back to Deutz (for export)," Diderich said. The FAW plant will be operational by 2005, he added.

The production and export plan is the second phase of a 10-year technology cooperation and licensing agreement signed by the two companies in October. In the first phase, Deutz will sell 90 kilowatt to 220kW engines for FAW's 7 to 16 metric ton trucks.

Based in the northeast city of Changchun, FAW is China's largest commercial vehicle maker and the world's fifth-largest truck producer. FAW also has an auto manufacturing joint venture with Germany's Volkswagen AG .

Diderich said the agreement will help boost Deutz's China sales to 10% of the company's total sales from 6% at the end of 2002. Last year, Deutz recorded 83% on-year growth in its China sales to EUR73 million.

Strong domestic demand for Deutz engines in heavy load and construction vehicles has been boosted by a massive state-funded national infrastructure program designed to open up China's underdeveloped rural and western regions to development and investment.

China has funded that infrastructure development with fixed asset investment that grew more than 30% to 193.6 billion yuan ($1=CNY8.28)in the first two months of 2003.

Fixed asset investment has been the centerpiece of China's so-called proactive fiscal policy that has kept the economy growing annually by more than 7% in the past five years.

Agreement Expands Deutz-FAW Cooperation

The new cooperation agreement expands Deutz's decade-long cooperation with FAW in the form of sales of engines for medium-heavy commercial vehicles.

Deutz has also had licensing agreements with China's Norinco and Machimpex since the 1970s and a manufacturing joint venture with Weifang Diesel Engine Works since 1997.

Diderich says the new deal with FAW will allow Deutz to capitalize on strong economic growth in China and the wider Asia region.

Deutz's Asia sales comprised 20% of the company's total sales in 2002 compared with 17% a year earlier.

"We intend to grow further in the Chinese market," he said. "This is part of our strategy to bring our product more and more into parts of the world where the growth rates are high."

Rival U.S. diesel engine maker Cummins Inc. has significantly larger investments and manufacturing capacity in China than Deutz, through wholly-owned facilities as well as 50-50 joint venture with Dongfeng Automobile Co. .

Cummins and Dongfeng agreed in February to double the size of their joint venture's registered capital to $100 million.

Diderich said China's market potential left more than enough room for both Deutz and Cummins, adding that Deutz has no plans for a similarly aggressive expansion in China.

"It's a slower path (than Cummins), but I think it's a profitable path in the right direction," he said.