Beware the Chinese Dragon

January 28, 2008
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As the North American International Auto Show closes in Detroit, conventional wisdom has it that the five Chinese makers who displayed are years away from being a real threat: The cars and light trucks displayed are too crude in design and assembly, their technology is copied too badly from established makers, and there’s no proven ability to certify, service and warranty to western standards. The near incomprehensible press conferences and prevarications of the executives over timing and plans made it easy, all to easy, to hold this view. Proponents say, “Look how long it took the Japanese or the Koreans to become international players in the business.”

Years away does not mean never, though. The Chinese threat to established automakers is now greater than ever. In addition, it is accelerating. And Chinese brand exports are actually the last step of sophisticated central government plan for the automobile business. Saying they won’t be here this year or next, misses the point.

First, consider the protected Chinese market is now the world’s second largest since it passed Japan in 2006. Preliminary numbers for 2007 show it at almost 9 million units. Projections by the Chinese Association of Automobile Manufacturers have the Chinese market growing to 10 million units in 2008. The U.S. market will contract this year. It is just a question of how much. Chinese makers will continue to grow stronger in their home market, no matter what happens here.

China is also now clearly established as a global automotive force to be reckoned with. All major foreign automakers have been forced by the government to accept joint ventures with Chinese makers as the price of access to the booming market. Conventional “free trade’ wisdom at these carmakers has it that this is good for them because it expands their sales into the lucrative Chinese one and provides a source for inexpensive components they use in their home and other markets. And to be fair, western makers had no choice if they wanted to operate in China. Unlike the U.S., the government controls access to the Chinese market.

Vehicles and components are now being exported from these “foreign” makers in China and their joint venture partners. Some western automakers have sourcing goals of Chinese made components as high 30 percent no matter where their final assembly plants are located. All want their suppliers to match the “China price” where they build. The “foreign” makers in China supply technical expertise, the marketing magic of brand recognition and access to their excellent suppliers.

Rarely spoken of is the other side of this deal with the Chinese dragon that is emerging. Western makers including Toyota, General Motors, Volkswagen, Mercedes-Benz, and Honda are teaching the Chinese how to compete against themselves.

China America Cooperative Automotive said at the show that it would import small SUVs and pickups into the North American market by the end of this year. The vehicles will come from Hebei Zhongxing Automobile Company or ZXAuto. ZXAuto is currently exporting these in small volumes from China to 52 countries. While the timing may be suspect, Chamco’s intent is not.

Changfeng Motors showed a small SUV, CS6, its successor, the Liebro CS7 and Kylin, a 5-door hatchback that is on sale in Japan. Both are Mitsubishi based. When Changfeng displayed vehicles last year, they were engineering prototypes. This year all the vehicles on the display are in production and headed for export markets.

Geely showed its FC sedan currently in production in China. FC in size and equipment is a Corolla knock-off, and not as crude as you might think. Originally promised for 2008 here, it will appear in the U.S. sometime during an unspecified year. “It’s tough to say... but not anytime soon,” according to Mr. Li Shufu, chairman of Geely holdings. Geely is already producing its own engines and transmissions in China based on what it says are its own designs. The Chairman’s ambitions seem to be as vast as China. Stated goals by 2015 include a 2.5 percent share of the world market, production of 20 million cars annually, of which 65 percent are for export under the Geely brand.

As audacious in ambition were the claims by BYD Auto Company – for Build Your Dream – that its Camry-sized sedan, the F6DM, will be the world’s first Dual Mode plug-in hybrid when it goes on sale this summer in China for about $28,000. Unlike competing plug-in hybrid entries from Toyota and General Motors that appear to be at least two years away from production, the F6 hybrid does not use lithium Ion batteries, which are thought to be needed to accept the high charging and discharging rates that a plug-in requires. Instead, F6DM uses a new type of rechargeable battery that is based on iron with a stated 60-mile range. Skeptics are laughing, but the parent company is one of the largest producers of cell-phone batteries in the world. And, yes there are export plans but not for a few more years to meet U.S. standards, according to BYD.

This Chinese global export machine now emerging is due to the policies of the Chinese central government that were developed after careful study of the rise of the Japanese automotive industry, and the Koreans. The motivation of the government is simple. In order to survive in power it has to do something about the grinding poverty of 700 million of its 1.3 billion subjects. Economic growth is key. And it has been averaging a staggering 7 percent or better increase in gross domestic product for more than a decade by carefully managing access to the economy.

One of the key industries targeted by the government is automotive with a serious of goals: Meet growing Chinese domestic demand with local production – not imports. Use joint ventures to supply the local market and to make domestic Chinese makers competitive with the best in the world. Consolidate the fragmented local industry so that strong companies survive. Then promote the development of independent Chinese makers with their own technology and expertise and brands. Finally, export globally on massive scales.

It took the Japanese roughly 40 to 50 years to become global players, and the Koreans roughly 25. Both countries did it by restricting access to the home market while building the capabilities of local companies. The Chinese look on track to do it in about 15 or so. When they do start exporting, it will be the last step of a long-term plan. -- Ken Zino

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