Dunne: Who’s Afraid of the Chinese Wolf?

March 24, 2006

China Steers Demand to Smaller Cars by Michael J. Dunne (9/26/2005)
Super-sizing may mean status, but the market's going smaller.


So much din comes out of China, it’s tough to separate fact from fiction — or to distinguish the crucially important from the “so what?”


When China announced that vehicle exports had surpassed imports for the first time in 2005, the world wasn’t sure whether to panic or yawn. Lazy exhales are safe for now. But do brace for some shocks by 2009.


Made-in-China vehicle exports grew 121 percent to 172,639 units in 2005. Within this total, passenger cars galloped to 31,124 units — up from 10,114 the year before. That is spectacular growth, to be sure. But it is expansion from a small base. In fact, exports accounted for less than three percent of China’s total vehicle production. And the vast majority of those car and truck exports were shipped to poor countries.


Sixty percent of exports were light trucks produced by four Chinese state-owned companies — Dongfeng Motors, Jiangling Motors, the Jianghuai Automotive Company, and Foton, part of the Beijing Automotive Industry Corporation. If you have never heard of these truck companies, it’s probably because you do not live in their primary overseas markets — Syria, Algeria and Vietnam.


Passenger car exports followed a similar pattern. Chery Automobile, the state enterprise based in Wuhu, Anhui Province, led the industry with exports of 18,000 units in 2005, according to company reports. The second largest Chinese car exporter was Geely, a private company based south of Shanghai.


Chery and Geely found buyers for their $4000-$7500 sedans in Syria, Moldova, Chile, and Egypt, where customers accept uncertain reliability in exchange for cheap sticker prices. Chinese companies did not to ship cars to Europe, Japan, or America because their current products would have failed to meet even the minimum quality, safety, or emissions standards.


There was, in fact, one premature attempt to enter Europe last year, which ended in tears. Jiangling Motors shipped a container full of Landwinds, their sport-utility vehicle, to an importer in Holland. But the Landwind failed when subjected to standard European crash tests.


The long march ahead


From examples like these, it is clear that the Chinese can produce cheap cars, just as they make the world’s least expensive textiles, shoes, and buttons. But when it comes to quality and safety and the environment, Chinese firms still face a “long march” ahead, right?


Not necessarily. There is no doubt that the current stable of Chinese offerings — both cars and trucks — is not anywhere near ready to compete in Europe or North America. Warranty costs alone would bury the upstarts.


But the key point here is that Chinese companies are not standing still. Chery and its Chinese brethren make no secret of their ambition to enter and compete for the American and European markets. They are right now, today, preparing for future assaults by investing hundreds of millions of dollars in new engines and vehicles. Chinese companies are also improving product reliability by enlisting the services of quality measurement and assurance firms.


In December 2005, I walked through Chery’s brand-new $200 million engine plant in Wuhu. Beyond the spaciousness and the new-ness, the first thing I noticed was the tooling: high-quality machinery imported from Germany and Austria. For the next generations of cars, Chery will not be taking any shortcuts on quality.

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