Here Come Chinese Cars

[Perian]

Link: http://yahoo.businessweek.com/bwdail...0195_db016.htm

Source: Business Week
--------------------------------------------------------------

China aims to be a big auto exporter, with help from big names manufacturing in the country. Detroit isn't looking in its rearview mirror -- yet


Audacious, gutsy, and maybe a little nutty -- how else to describe the push by New York auto entrepreneur Malcolm Bricklin and China's Chery Automobile Co. President Yin Tongyao to import and sell 250,000 mainland-made sport utilities, sedans, and sports coupes in the U.S. starting in 2007?

After all, Chery produced only 80,000 cars in all of 2004, has near-zero brand recognition outside China, and has been sued by General Motors' (GM ) South Korean unit for allegedly ripping off the design for its best-selling QQ minicars in China -- a charge Chery denies. And while Bricklin was expected to announce his first dealer on May 26, U.S. auto execs aren't exactly losing sleep over the Chery threat -- not yet, anyway.

EARLY DAYS. Big Three execs did take notice, however, when Honda (HMC ) announced plans to export compact cars from China to Europe starting in June. Honda already sells about 200,000 locally built vehicles in China a year, ranging from Accord sedans to Odyssey SUVs. In April, with local partners, it began production at a new assembly plant in Guangzhou that will eventually build and export 50,000 Fit compacts a year to be sold in Europe as the Jazz. Honda won't say if it plans to send China-built cars to the U.S., but it hasn't ruled out exporting other models from China eventually.

In the global auto industry, Chery and Honda are on opposite ends of the spectrum. But they do share this: Both are betting big that the Chinese auto industry is entering a new phase that will see a shift from manufacturing only for the fast-growing local market to become an export base for the rest of the world, too.

This transition is in the early stages. Of the 405,000 vehicles exported last year, according to J.D. Power & Associates, just 10,000 were passenger cars. Low quality and high component costs will keep Chinese auto exports to the U.S. and Europe in the novelty category for the next few years, analysts say.

RISING QUALITY. That's no reason for Western carmakers to be complacent, though. China is closing the quality gap and building a base of low-cost suppliers that could eventually allow it to unleash inexpensive, well-made cars on the West.

And because local production capacity of 3 million vehicles a year is currently outstripping demand by about half a million vehicles, there are already a lot of wheels looking for a garage. "It's inevitable," says Mark LaNeve, chief of sales and marketing at GM. "They'll follow the example of the Koreans and Japanese."

Korean cars gave Detroit fits in the late '90s by undercutting domestic small cars on price and outdoing them on quality -- then moving up into other segments. Autos from China could provide more lower-cost competition for the Big Three at a time when GM and Ford (F ) are already reeling. That could cost them, along with Chrysler, more market share and prod them to move more of their own production offshore.

GOVERNMENT PUSH. How fast can the Chinese gear up? The way things are going, it won't take 20 years to match Toyota (TM) quality levels, as it did for the Koreans. And with Chinese auto assembly workers earning $2 an hour -- vs. $22 in Korea and nearly $60 in the U.S. for wages and benefits -- it may not be long before China has the wherewithal to start selling competitively priced cars overseas. "The Chinese are probably five or six years away from being able to sell a competent low-end car," says auto analyst Maryann N. Keller.

The Chinese government is putting its heft behind the export push -- subsidizing the export drive of such local players as Chery and giving the likes of Honda big incentives. Beijing also is nudging foreign auto makers to divert investment into export production so local partners can become familiar with managing foreign-exchange risk and global supply chains. It's also pushing domestic companies such as Chery, Geely Auto, Brilliance China Automotive (CBA ), and Shanghai Automotive Industry to develop their own brands overseas.

For smaller players such as Chery and Geely, the crucial test will be delivering quality products. Chinese carmakers have made big strides, with a 19% boost in quality last year over 2003, says a recent study on initial quality by J.D. Power. Still, Chery's locally sold QQs have 374 problems per 100 vehicles, vs. the '04 U.S. average of 118 problems per 100.

PARTS PREDICAMENT. Quality isn't the only challenge facing Chinese carmakers. They also will have to meet U.S. safety and emissions standards -- an exhaustive process that includes expensive testing. Without a global partner experienced in meeting U.S. standards, the task will be especially tough.

Another challenge is a bit of a mind-bender: While China's labor costs are dirt cheap, the overall cost of bolting a car together there is anything but. Honda officials say the cost of making the Accord in China is still higher than in Japan or the U.S. And it costs about the same to build the Fit compact in China as it does in Japan. Honda makes money selling cars locally because prices are high.

Blame expensive parts for the high costs. Despite a major production shift to China by Western partsmakers, the nation remains a net importer of auto components, especially high-end gear such as engines and transmissions. Those parts face tariffs of up to 20%, plus shipping costs.

STARTER WHEELS. Parts made by Chinese partners or foreign transplants are pricey, too, because of local-content rules that result in generally low production runs. Bernd Leissner, president of Volkswagen Group China, notes that while labor accounts for only 6% of production costs, materials eat up 85%.

That will begin to change as higher volumes start bringing costs down. Jack Perkowski, CEO of ASMICO Technologies, which owns 13 parts factories in China, figures that will happen once the domestic market gets closer to 10 million units a year. Analysts see economies of scale kicking in by 2010. That's when China should be able to start beating Thailand, Japan, and the U.S. on cost.

The first cars to reach the U.S. from China will be starter wheels that won't pose a threat to Western auto makers. By early 2006, for example, Scottsdale (Ariz.)-based China Motor Corp. expects to begin selling Geely's bare-bones Solo sedan for about $7,000.

COUNTER-STRATEGIES. But Bricklin and Chery aim to begin with models that will compete with mainstream vehicles. Starting in 2007, they plan to roll out a four-door sedan, a crossover SUV, and a sports car. The SUV, which Bricklin grandly compares to the $31,000 BMW X3, will sell for $15,000. While analysts say Chery will face a marketing challenge, analyst Jim Hall of AutoPacific Inc. says its cars will generate interest "because of a price advantage, just as Hyundai did in the beginning."

But what Detroit really fears are exports from Chinese joint ventures with the likes of Volkswagen, Honda, or Toyota. They know how to build cars that meet U.S. safety and emissions requirements and Western quality expectations. Just as important, they have established dealer networks that could be used to sell China-built models with familiar brand names. The potential threat: ultra-low-priced Honda Civics or VW Passats.

For Detroit, that's a scary prospect. "Our strategy is to become competitive at the low end of the market," says GM's LaNeve. That means importing cars built by its Korean affiliate, Daewoo, to sell as Chevys, such as the $10,000 Aveo subcompact launched in fall, 2003.

ROARING INTO THE FUTURE. LaNeve wouldn't discuss GM's long-term plans. But analysts say that, under pressure from Chinese cars, the auto giant could step up exports from Korea, where quality and supplier connections are already established. Eventually, though, it might turn to its own plants in China, where it has been producing cars since 1999.

Latecomer Ford is still expanding its factory base in China just to meet local demand. Analysts note that Ford could one day choose to start bringing cars over from its plants in Thailand, which now supply the Asian market. Moving production offshore would be sure to anger the United Auto Workers, though. Indeed, when DaimlerChrysler (DCX ) said in April that it is considering exports of small cars from China to the U.S., the union squawked.

In the meantime, China's auto industry is roaring into the future -- building out its supplier networks and boosting quality. Sho Minekawa, president of joint venture Guangzhou Honda Automobile, says that when an assembly error in the braking system of its Fit model surfaced this spring, a team of Japanese and Chinese workers fixed the problem in a matter of weeks. What's more, Honda says in-house quality tests show that the China-made Accord is actually superior to the one made in the U.S.

If those quality gains hold and a far bigger market drives down costs, China could start throwing its heft around the global auto market in a big way. Look out, Detroit.

[Perian]

Originally Posted by Perian

What's more, Honda says in-house quality tests show that the China-made Accord is actually superior to the one made in the U.S.

My day was going well until I read this.

Could the light at the end of the GM tunnel be a "Chery"?

Let's hope not.

[GMCSonoma]

One wonders if it will be a mtter of time when all the Asian (or anyone else for that matter) car companies that produce in the US will then head to China instead.

[Hudson]

GMCSonoma:

Similar things have been said at different times about Mexico, Brazil, India, and Eastern Europe. I understand the "worry" about it, but it has been shown time and time again that people prefer (especially in North America) locally-sourced products. More vehicles are built in the US than in Canada and Mexico combined, even though there's basically no cost to build in those other countries and sell in the US.

There's a good reason to build in countries like China: price. Very price-sensitive vehicles, like entry-level subcompacts, would fit into the build-in-China/sell-in-North America scenario. But these vehicles (Hyundai Accent, Kia Rio, Chevrolet Aveo, Toyota Echo) aren't currently produced in North America now.

It won't be anytime soon that a vehicle of siginificant content is produced (by a non-Chinese VM) in China and sold in North America. But, as was said above, don't turn your back to the idea.

[driverblogger]

I would rather not have the Chinese come. I feel bad for the companies affected by the copied designs(GM, Toyota, Nissan, and the list could maybe go on forever).

I should start a petition to prevent the Chinese.

I don't want to see a low-quality GM-car look-alike driving around. People may actually get it confused with the actual GM car and say that they run like P.O.S.

[nota]

The VW Polo sedan already on sale in Australia is Chinese made .. thin edge of the wedge imo

[citric acid]

Originally Posted by driverblogger

I would rather not have the Chinese come. I feel bad for the companies affected by the copied designs(GM, Toyota, Nissan, and the list could maybe go on forever).

I should start a petition to prevent the Chinese.

I don't want to see a low-quality GM-car look-alike driving around. People may actually get it confused with the actual GM car and say that they run like P.O.S.

Well, not all Chinese companies blatantly rip off other car companies. Mind you, Chery has done it in the past, and there are a few other companies that do, but there are also those who don't. There are a few bad apples in every batch, but don't assume all Chinese car companies are like them.

[yoblues]

If you were alive and paying attention during the free trade debates many years ago this has always been the problem with global free trade. Once any country has an educated low cost labor force they are going to wax countries with educated high cost labor in big maufacturing industries. The US manufactuing base is a joke compared to what it was 30 years ago. Face it, 60 dollar an hour labor cannot compeate with 5 dollar an hour labor. You just need to develope a set of skills that can be usefull in this kind of topsy turvey economy because the jobs market is likely to get even crazier in the future. China is going to be scary to deal with in another 25 years.

[FightingChance]

Eventually, China and the US will stand toe to toe at the edge of the world, and this world ain't big enough for both.

[ChevroletRevived]

I know, FightingChance...and it's scary..very scary. Can you imagine in a few years if we face off? They have almost unlimited manpower, cheap products and a huge country...

[ChevroletRevived]

OH and I will never buy a Chinese vehicle! They are a threat to all automakers and every one of them should want to stop them. If I was Toyota I would be worried. GM shouldn't do what they did with the Japanese...disregard them until they are too big to quelch!

[nota]

Originally Posted by FightingChance

Eventually, China and the US will stand toe to toe at the edge of the world, and this world ain't big enough for both.

You'll soon have to make room for India as well. America needs to rationalise & accept that it can not forevermore be the worlds only superpower. Or continue with the Taiwan nonsense, into disaster and deny itself (and the rest of mankind) a sane future

A huge ocean lies between America and China, yet Hawks within the US seems to think its rightful military border is literally 10 miles off the Chinese coastline. That's crazy

[Hudson]

Originally Posted by ChevroletRevived

OH and I will never buy a Chinese vehicle! They are a threat to all automakers and every one of them should want to stop them. If I was Toyota I would be worried. GM shouldn't do what they did with the Japanese...disregard them until they are too big to quelch!

There was a time when many people said the same thing about South Korean vehicles (Hyundai is one of the fastest growing brands in the US now), and before that Japanese vehicles (Toyota is the third best-selling brand in the US), and before that German vehicles (Volkswagen was the first import-brand to be the best-selling car in the US) and before that it was a non-Ford product (back when the Model T was their only product)....


Mindsets change. It's a global economy, we need to adapt.

[citric acid]

One thing people here need to notice, it seems, is that GM (and Volkswagen and Toyota and Honda among others) aren't just sitting around being afraid of the Chinese, but trying to get in there too so they can keep up with their progress. Buick has a presence in the Chinese market - ironically much more of a presence there than here - and GM is likely going to continue to make and sell cars there, and might even start exporting Chinese built vehicles here because of cheap labour. So before you say you'll never buy a Chinese car, be aware that there are likely to be a few entry-level GM products built there. Honda is already making its cheapest model (Fit/Jazz) there for export.

[ChevroletRevived]

Well I don't buy entry level models from Gm or anyone, Citric Acid. All I am saying it is good to support American industry...