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Driven
Are China’s car manufacturers ready
to compete in the US and Europe?
C
M
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CM
MY
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CMY
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An Economist Intelligence Unit briefing paper
Sponsored by Roland Berger Strategy Consultants
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
Contents
3
Preface
4
Executive summary
6
Introduction
7
China’s carmakers: state of play
11
How will China’s carmakers compete?
21
The push and the pull to go international
23
The road ahead: up and down
26
Conclusion
© The Economist Intelligence Unit 2006
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Driven
Are China’s car manufacturers ready to compete in the US and Europe?
© 2006 Economist Intelligence Unit. All rights
reserved. All information in this report is verified
to the best of the author’s and the publisher’s
ability. However, the Economist Intelligence Unit
does not accept responsibility for any loss arising
from reliance on it.
Neither this publication nor any part of it may
be reproduced, stored in a retrieval system, or
transmitted in any form or by any means,
electronic, mechanical, photocopying, recording
or otherwise, without the prior permission of the
Economist Intelligence Unit.
2
© The Economist Intelligence Unit 2006
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
Preface
Driven: Are China’s car manufacturers ready to
compete in the US and Europe? is a briefing paper
by the Economist Intelligence Unit and sponsored
by Roland Berger Strategy Consultants (RBSC). The
report is based on interviews in May and June 2006
with car manufacturers and suppliers, consultants,
and Chinese and joint-venture carmakers, as well
as analyses of China’s standing in the global
automotive industry.
The findings and views expressed in this report
are those of the Economist Intelligence Unit alone
and do not necessarly reflect those of the sponsor.
The Economist Intelligence Unit’s editorial team
conducted the interviews, wrote and edited the
report. The co-authors of the report are Katherine
Peavy Sima and Graeme Maxton. The project
manager and editor was Bina Jang.
Our sincere thanks are due to the interviewees
for their time and insights. We would also like to
thank Vivian Zheng, Wim van Acker, Christian Paul
and John Shen at RBSC for their contribution to
the research.
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
Executive summary
China’s car manufacturers may not have taken the
world by storm yet, but will they soon be competing
successfully in the US and Europe markets? The
Chinese automotive industry has the political and
financial support of its government, which is
encouraging automakers to develop a made-in-China
vehicle and take it international. The government
wants the industry to contribute strongly to the
economy by 2010, and envisages a robust increase in
vehicle exports from 2005 onwards that would
translate conservatively to about US$1.2bn in export
sales. China also wants China-made vehicles to hold
10% of worldwide automotive trade by 2020-35.
Quick to spot an opportunity, European and
American auto dealers have begun to promote
China’s cheap cars in the US and European
markets, much to the alarm of US and European
automakers, many of which are already fending off
inexpensive imports from Eastern Europe or South
Korea. But is it possible for China’s carmakers to
take on their muscular Western, Japanese and
South Korean rivals in the highly competitive and
highly regulated markets of the US and Europe?
No—not yet, say automotive industry analysts,
manufacturers, suppliers and consultants interviewed
for Driven: Are China’s car manufacturers ready to
compete in the US and Europe?, a briefing paper by the
Economist Intelligence Unit (EIU) sponsored by
Roland Berger Strategy Consultants (RBSC).
The EIU report puts this opinion in perspective.
Among the findings:
• China belongs to the “autarkic” group of
countries, according to one analysis. This group,
which includes Malaysia, Iran, India and China,
has under-developed automotive sectors that are
striving to become fully integrated. The analysis
maintains that it will take around 10-15 years for a
Chinese auto manufacturer to become a serious
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© The Economist Intelligence Unit 2006
•
•
threat to domestic producers in North America
and Europe. The research adds that developing a
fully integrated automotive manufacturing
enterprise will take longer than Chinese industry
executives and government officials think.
China’s automotive industry is in the
“intermediate” stage of development. At this
point, China is considered an “intermediate”
country in terms of production, with a low
percentage of vehicle ownership, says
autopolis, an auto industry strategy
consultancy. Autopolis charted the automotive
industry by country based on the number of
vehicles produced relative to population, and
found that to succeed in the automotive
business a country needed a population of at
least 50m, a GDP of at least US$500bn and a
production output of at least 2m units a year.
China makes the grade by those measures, but
this is only because of the production volumes
of foreign-owned firms. To succeed, China needs
domestic firms to produce at least 2m units per
year, and to have a band of independent massmarket automakers that own their technology.
China’s cars will initially enter the US and
Europe on low prices, but they will be
hamstrung by poor quality and safety
standards. Industry experts believe that
China’s carmakers will initially enter the US
and Europe markets with a price play in all
segments—offering a low-cost car of doubtful
quality just to get a foot in the door. Western
consumers are used to this strategy through
their previous dealings with Japanese and
South Korean carmakers. But price alone will
not be sufficient, and China’s cars will
increasingly have to compete on brand, and to
radically improve quality and safety standards.
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
• China’s carmakers are likely to focus on
•
•
value and engines. China’s main domestic
carmakers are developing a range of vehicles,
in different segments, all with low prices—
often so low that international rivals cannot
match them. Chinese firms are also keen to
develop hybrid and fuel cell vehicles, and they
have the backing of the government to do so.
All are working on new engine types and the
government has a clear plan for their gradual
implementation over the next 15 years.
Building better engines will require China’s
carmakers to ramp up their research and
development (R&D) abilities and technology.
Most have already begun to do so. Shanghai
Automotive Industry Corporation (SAIC), for
one, has a venture in the UK with Ricardo
Engineering, a UK-based design and
engineering firm, where it develops engines
and trains a number of its engineers. SAIC also
has access to a top-of-the-line development
centre through its venture with Volkswagen
and General Motors.
China’s carmakers must develop a strategy to
become fully integrated automaking
enterprises. Chinese companies own very little
technology and rely mainly on reverse
engineering. However, a few have moved away
from reverse engineering and begun to partner
with global design and engineering consultants.
The intellectual property rights (IPRs) that result
are then the property of the Chinese company.
Domestic carmakers also are not shy about
picking up management and technological skills
from their European, US and Japanese jointventure partners. In the short term, this will
assist carmakers to bring a vehicle to market. But
in the long term, the reliance on outside
assistance could delay the development of
indigenous design and engineering expertise.
It is essential to build or buy a brand. While
•
•
companies like SAIC may have the courage and
money to develop their own brands, some of
China’s carmakers are choosing a quicker
strategy to enter Western markets by buying
existing brands and using them as a base to build
upon, as Nanjing Automobile has done with MG
Rover of the UK. This strategy encourages the
buying of distressed assets (such as MG Rover),
especially as several Western automotive and
auto-parts companies are ailing. Acquisition
would give China’s carmakers access not only to
a target-company’s products, but also to its
technical knowledge, technology and customerbase. But such overtures by China’s carmakers
might also provoke a political backlash in the
target companies’ countries of origin.
The Chinese government has put its political
and financial might behind automotive
exports. The central government wants auto
exports to increase substantially from 2005,
and China’s share of the global vehicle trade to
climb to 10% between 2020 and 2035. Towards
that end, it is helping automakers with
funding—for example, by giving low-interest
loans to Nanjing Automobile and SAIC to buy
shares in the assets of MG Rover. The
government is also introducing beneficial
policies—for example, it will require
automakers to apply for export licences from
January 2007 onwards. This is intended to
prevent undercutting on prices as China’s
domestic automakers export their vehicles
because of over-production at home.
Foreign investors and dealers are putting
their money on China’s cars. The Chinese
government’s support is being augmented by
financing from foreign investors keen to
import Chinese-made cars to Western markets.
Chery’s entry into the US is being championed
by American auto dealer Malcolm Bricklin and
reportedly by American investor George Soros.
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
Introduction
A
sk a European or an American about a QQ
or a Hongqi, and the chances are they
would never have heard of these Chinese
cars. Why should they? China’s
automotive industry is nascent, and its brands
largely unknown. But two years ago China became
a net exporter of vehicles, and in 2005 sold a total
of 172,639 units overseas, according to China’s
Ministry of Commerce. And the country’s policy
makers have even grander dreams—the 11th FiveYear Plan expects vehicle exports to jump by 40%
per year between 2005 and 2010; and the National
Development and Reform Commission expects the
industry to grow in production capacity to an
estimated 9m units in 2010, from an estimated
6m-7m units currently.
This growth has been fuelled in part by strong
government support to the automotive industry in
the form of financing and policy initiatives. The
sizzling pace has prompted some auto dealers in
the US and Europe to predict that Chinese cars will
form the next wave of cheap imports to compete in
the US and Europe—the two world’s oldest, largest
and toughest markets for cars. Indeed, industry
experts, manufacturers, suppliers and consultants
interviewed by the Economist Intelligence Unit for
this report say it is not a matter of if, but when,
Chinese companies will make their presence felt in
the US and Europe.
At home private car sales have been spurred on
by China’s newly wealthy urban elite. They are an
eager market for the trendy, cheap vehicles
offered by provincial and private upstarts like
Chery Motor (owned by the Anhui provincial
government) and Zhejiang Geely Holding (a
private company that listed on the Hong Kong
stock exchange in 2003). The three big stateowned enterprises (SOEs)—First Automotive
6
© The Economist Intelligence Unit 2006
Works, now known as the FAW Group, Shanghai
Automotive Industry Corporation (SAIC) and
Dongfeng Motor—have been caught flat-footed by
this trend. Although the three SOEs are still
strong, thanks mainly to robust partnerships with
major US, European and Japanese automakers,
they are being nudged into ratcheting up their
development activities.
The good news for the SOEs (as well as the
private companies) is that the Chinese government
has put its might behind the domestic automotive
industry. China’s automakers have been officially
encouraged to develop a true made-in-China
vehicle and to plunge head first into global waters.
The goal is for China-made vehicles to hold 10% of
worldwide vehicle trade by 2020-35.
Whether that goal is realistic or not, European
and American auto dealers have begun to take
notice. Looking for the next Japan or South Korea
of the global automotive industry, they have
started to tout China’s inexpensive cars to the US
and European markets. This has begun to worry US
and European automakers, many of which are
riddled with financial and operational problems,
and are already beleaguered in their home turf by
cheap imports from Eastern Europe.
Should they fret over Chinese vehicles taking a
bite out of their market share? Or is the China auto
invasion just so much sales talk? If not, when
should they reasonably expect inexpensive
Chinese vehicles to compete with them in the US
and Europe? Driven: Are China’s manufacturers
ready to compete in the US and Europe?, a briefing
paper by the Economist Intelligence Unit,
sponsored by RBSC, aims to address these
questions and to examine what China’s automotive
manufacturers will offer, and when, in the US,
Europe and at home.
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
China’s carmakers: state of play
W
ho are China’s key automakers? Stateowned enterprises such as FAW, SAIC
and Dongfeng are undoubtedly among
the leaders, along with a clutch of joint
ventures with foreign multinational companies such
as FAW-Volkswagen, Shanghai Volkswagen, Tianjin
Toyota, Beijing Hyundai, Guangzhou Honda and
Shanghai General Motors. Then there are the fastmoving, quick-to-spot-trends Chery and Geely. Add
to this group provincial-level SOEs such as Beijing
Automotive Industry Holding, Nanjing Automobile
and Chang’an Automobile. Together these
automakers create a market that is diverse and
competitive, at least at home.
Of these, Chery and Geely depend on design and
engineering consulting firms to bring models to
market. The bigger automakers rely on their joint
ventures, like FAW and SAIC, for example, with
Volkswagen and General Motors (GM), respectively.
Indeed, China’s automakers have yet to design and
build a car from the ground up. Prior to the
establishment of the first Sino-foreign automotive
venture between SAIC and Volkswagen in 1984,
China’s automakers sourced their designs from the
Communist bloc countries. Not much has changed
on that front. In fact, China’s auto companies face
additional hurdles of intellectual property rights
and inadequate technological skills.
On the positive side, government support counts
for a lot in the automotive industry—just ask the
Japanese and the South Koreans. China’s
automakers also do not have to deal with the legacy
issues of the US carmakers nor the need to lay off
staff as do the European manufacturers. Moreover,
as the domestic automotive market grows, Chinese
companies can benefit from economies of scale and
produce even cheaper vehicles.
But these developments will take time. China is
still considered an intermediate country in terms of
production, with a low percentage of vehicle
ownership, according to autopolis, an auto industry
strategy consultancy. By charting the automotive
industry by country based on the number of vehicles
produced relative to population (see chart, Forecasts
for the global automotive industry), autopolis found
that to succeed in the automotive business a country
needs a population of at least 50m, a GDP of at least
US$500bn and a production output of at least 2m
units a year. By those standards, China clearly makes
the grade—but only because of the production
volumes of foreign firms. Until the output volumes of
local firms break the 2m mark, and until the country
develops successful independent scale-driven mass
market manufacturers with their own technology,
China will be classed as “intermediate”.
Consider the numbers. In 2005 the leading
automakers in terms of sales were joint ventures.
In the elite club were FAW’s joint ventures with
Toyota (Tianjin-FAW Toyota) and Volkswagen
(FAW-Volkswagen), which together produced a
sales volume of 983,000 units, according to the
China Association of Automobile Manufacturers.
For their part, SAIC’s joint ventures with
Volkswagen and General Motors sold 918,000
units. Other top automakers in terms of sales:
Dongfeng Motor, Chang’an Automobile and
Beijing Automotive Industry Holdings (popularly
known as Beiqi). By contrast, purely domestic
automakers—Hafei Motor, Chery, Anhui Jianghui
Automobile and Geely—together posted sales of
just 724,000 units. This is less than half the
amount needed to push China’s automotive
industry out of autopolis’ categorisation as an
intermediate player (see chart, China’s top ten
automotive manufacturers, by sales volume).
The trend looks set to continue for 2006, but
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
with joint ventures competing more aggressively.
For example, Beiqi’s joint venture with Hyundai is
grabbing market share with its Elantra model,
which sold 85,400 units from January to June
2006, according to the China Association of
Automobile Manufacturers.
But is it possible for a youthful company like
Chery (barely 10 years old) or a staid company like
SAIC (that for 20 years has depended heavily on
foreign partners for its production and market
growth) to compete anytime soon against bigger
international players in the hyper-competitive,
highly regulated auto markets of the US and Europe?
Industry experts, manufacturers, suppliers and
consultants interviewed for this paper say no. True,
billionaire American investor George Soros may be
putting millions into Chery and SAIC, like other
domestic companies in China, may be reaching out
to the stockmarket to pick up much-needed funding
for expansion. But even with injections of funds,
and the best of intentions, the 11th Five-Year Plan’s
ambition for China’s automotive exports to jump by
40% per year between 2005 and 2010 looks wildly
optimistic under current conditions.
More possibly, it will be between 2012 and 2015
that Chinese vehicles will start to become a force
Forecasts for the global automotive industry, 2004
GDP (US$bn)
10,000
US
Japan
China
Italy
Canada
1,000
Germany
UK
France
Mexico
Brazil
Spain
India
500
Belgium
South Korea
Australia
Russia
Turkey
Poland
Sweden
Malaysia
Thailand
Argentina
= independent mass market manufacturers
Czech
100
South Africa
Iran
= branch operations
Hungary
Romania
= intermediate
= 2m units
10
10
50
Source: autopolis
8
© The Economist Intelligence Unit 2006
100
Total population (m)
1,000
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
China’s top ten automotive manufacturers, by sales volume: in the fast lane
10,000 units
Sales volume, 2005, left axis
Sales volume, Jan-March 2006, left axis
98.3
100
%
Growth, 2005,
right axis
120
91.8
80
Growth, Jan-March 2006,
right axis
72.9
63.1
80
59.7
60
100
60
40
40
31.1
23.7
23
26.1
20
18.9
21.3
15.4
15.1
20.1
20
17.3
5.9
7.5
7
4.6
5.2
0
Au
t
om
C
ot hin
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In ang
s
du h
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ry u
Co to
rp mo
or ti
at ve
io
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ng
Mo
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r
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an
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an
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ng
Wo Aut
rk om
s( o
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r y ho
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to gh
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0
Source: China Association of Automobile Manufacturers
Automotive strategies of countries: highs and lows
Core countries (Examples: US, Germany, France, Japan)
Fully integrated companies, producing vehicles 100% designed, manufactured, distributed, marketed in-house
Solid branding and after-sales service programmes
Limited government support
Automotive industry accounts for 10.5% of GDP, and health of industry is considered an economic indicator.
Peripheral countries (Examples: Canada, Turkey, Australia, Mexico)
Large industries, but companies involved are controlled by companies from the core group.
National policy does not control the fate of the industry
Automotive industry accounts of an estimated 9-10% of GDP
Networked countries (Examples: Indonesia, Thailand, South Africa)
Industry adds value to blueprints of the core countries, but is not manufacturing
Automotive industry accounts for an estimated 5-7% of GDP
Autarkic countries (Examples: China, India, Malaysia, Iran, South Korea)
Government takes active role in development of the industry via subsidies, loans, preferential policies
Companies ultimately owned by the government of car industry seen as a national patriotic goal as well as an economic incentive
Automotive industry accounts for an estimated 7-8% of GDP
Source: Time for a Model Change, Maxton Wormald, Cambridge University Press 2005
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
in the advanced export markets. That is, it seems
more likely that Chinese firms will follow the
pattern of the Japanese and South Korean
carmakers. They will launch an assault on
developed markets in the next few years, meet
fierce resistance (even trade barriers) or find a
lukewarm response from consumers, think again
and then come back with much more competitive
products or some way around any political hurdles
several years down the road.
In their 1994 book, Time for a Model Change: Reengineering the Global Automotive Industry,
Graeme Maxton and John Wormald explain that
the government’s heavy hand in the automotive
industry is just one strategy countries take in
managing an industry that accounts for a
significant portion of GDP and becomes an
advertisement for the nation in overseas markets.
Countries broadly are divided into four
categories—core, peripheral, networked and
autarkic (see chart, Automotive strategies of
countries). Core countries are those that have a
fully integrated auto industry. They have all the
technologies needed, as well as their own massmarket manufacturers selling under their own
brands with the capability to cover the entire value
chain. After 100 years of the industry there are
only a few countries in this group: the US, Japan,
Germany and France. It arguably might contain
Italy and South Korea, too. Ten years ago it
contained Sweden and the UK, but these countries
have now been dropped, says Mr Maxton, who is
now regional director of the Economist
Intelligence Unit’s Corporate Network, and a
director of autopolis.
The second group, the peripheral countries,
often have very big auto industries—countries like
Canada, Spain, Mexico and Brazil. But they are all
satellite manufacturing operations controlled by
firms in the core countries. The carmakers in Brazil
add little brand, technological or intellectual
10
© The Economist Intelligence Unit 2006
value.
The third group, the networked countries, are
like the peripheral ones except that they add some
value. They build particular sorts of vehicles or
have their own designs, but still depend almost
entirely on the companies in the core markets.
This group includes countries like Thailand, which
specialises in pick-ups; Indonesia, which has
developed the Kijiang commercial cars; and South
Africa, which focuses on the production of righthand drive vehicles.
The final group is the most interesting, the
autarkic countries. These have under-developed
auto sectors but intend to become core. These
countries want to join the elite club of countries
that have a fully integrated auto sector—countries
such as Malaysia, Iran, India and, of course, China.
This group arguably still contains South Korea, as
the country remains dependent on foreign
technology and may yet be squeezed from the
industry as lower-cost producers move into
Hyundai’s territory. The question for the next
decade is which of these countries will succeed in
their goal and which will be relegated to being
peripheral or networked.
Looking at this group, it is not too difficult to
imagine which countries could make a leap into
the group of core countries. Nor is it difficult to
see that it will take time. South Korea, even with
government assistance, has taken 30 years just to
have its brands recognised in the US and Europe.
Based on their research, Mr Maxton and
Mr Wormald suggest that India might succeed, but
that “China will clearly become a core country”.
But they also believe that it will take around 10-15
years for a Chinese auto manufacturer to become a
serious concern to domestic enterprises in North
America and Europe. Developing a fully integrated
automotive manufacturing enterprise will take
longer than Chinese companies think, they
predict.
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
How will China’s carmakers compete?
S
o what must China’s carmakers do to
compete in the US and Europe with any real
chance of success? Looking to the Japanese
and South Koreans for tips on entering the
US and European markets will only help a little. This
is because both markets today are fundamentally
different from when they were first assaulted by the
Japanese or South Korean car companies. Then, the
markets were growing but competitively stable.
Today, they are mature and competitively volatile,
and a battleground for some of the biggest names
among US and European carmakers, many of which
are struggling to survive. As such, there is likely to
be a political backlash against Chinese (and other)
carmakers driving into their markets. If companies
like Ford and GM of the US are on the edge (or over)
of filing for Chapter 11 and Chinese carmakers start
cutting their share further, Washington may be
compelled to intervene.
The US and Europe will be tough markets for
China’s carmakers—tougher than the domestic
market where many consumers are buying their
first car. China’s carmakers in the US and Europe
will compete against mature competitors and
mature consumers for a piece of a finite pie. This is
a different exercise from exporting to the Middle
East, Russia, Africa and South-east Asia, the
current destinations of China’s cars. Consumers in
the current export markets, like those in China,
see price as an important factor in the buying
decision. (Value is important in the US, but not to
quite the same extent.) Moreover, unlike the US or
Europe, most of these export markets have no
intrinsic automotive industry, and have lower
national regulations on quality and safety.
To make headway in the developed markets,
China’s carmakers will need to grow quickly and
have internationally competitive marketing,
branding and customer service. They will also need
to cater to the different buyer needs in each
market—consumers in Europe tend to value brand
more than their US counterparts. Stephen Clarke,
Shanghai-based executive vice-president of Ricardo
Engineering, believes Chinese carmakers are aware
of the challenges of the US and Europe, and will
develop their position by first exporting to Russia,
the Middle East and South-east Asia for a few years.
Selling at low prices is first step
As they advance, the Chinese are likely to focus first
on two things: value and engines. The intertwined
issues of quality, brand and technology should
follow. The main indigenous carmakers in China are
developing a range of vehicles, in different
segments, all with low prices—often so low that
international rivals cannot match them. Despite
their lack of economies of scale, the carmakers
appear to be defying the laws of automotive
economics, which suggests that there is at least
some sort of cross-subsidisation going on.
Shanghai Maple, for example, is selling cars for less
than the market value of the steel that goes into
them. Competition is most likely to come from
South Korean firms, which also seem able to sell
cars below cost; from companies like Renault with
its low-cost Logan model; and from other Chinese
firms. However, China’s carmakers do not expect
much competition in the US or Europe from their
counterparts from India—another “autarkic”
country. The reason? Cheap Indian-made cars—
such as the Tata group’s US$2,500 model, which is
to be launched in 2008 and will be engineered to
this price, not subsidised, will be targeted at
consumers in India and other developing
economies. They are not likely to meet US or
European safety or emissions regulations.
© The Economist Intelligence Unit 2006
11
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
Neither will most of China’s cars. Industry
experts believe that China’s carmakers will initially
enter the US and Europe markets with a price play
in all segments-offering a low-cost car of
questionable quality just to get a foot in the door.
Western consumers are used to this strategy
through their previous dealings with Japanese and
South Korean carmakers.
Moving forward, however, China’s carmakers will
not be able to rely on price advantage alone. For a
start, they risk a political backlash in the US and
Europe if they sell below cost (if they are subsidised
as indeed they may be). Moreover, depending on
the price range, China-made cars will also be
competing with used cars from established
automakers. Consumers can choose between a new
car of unknown brand and quality, or a used Toyota
or Volkswagen—both known for their good value
and long life. China’s carmakers will increasingly
have to compete on brand, and therefore on quality
Snapshot of some of China’s carmakers
Pricing
Chery. It made its name on the low-priced,
economy subcompact QQ model. But it also
makes economical sedans for the China
market and commissioned the design of a
sports car from Italian design firm Bertone.
Yet, even Chery’s biggest supporter in the
US, Malcolm Bricklin, has said that China
prices will not translate to the US. He said
that safety and quality upgrades would put
Chery cars in the same price range as
Hyundai models (US$10,000-16,000).
Shanghai Automotive Industry
Corporation. SAIC will likely enter foreign
markets with a mid-priced brand of quality,
but perhaps in 15-20 years’ time, says Tang
Weiyan of the Shanghai Automotive Trade
Association. Industry insiders familiar with
SAIC say the company is not interested in
going the “cheap” route, and it is not clear
yet if the Rover models will be the basis for
SAIC’s own brand.
Shanghai Maple. New carmakers, like
this Geely subsidiary, apparently can break
even by selling only 8,000 units per year.
Perhaps the lack of legacy costs for these
new players will give them a helping hand.
But without experienced staff, they would
lag in research and development.
12
Branding
Chery. Mr Bricklin told interviewers that
his strategy is to upgrade the interiors and
engines to compete with the BMW3 and
BMW6 series, but at a much lower price. If
interiors and engines alone can make the
brand, then Mr Bricklin might have a formula. For its part, Chery is said to be still
trying to understand the US and European
markets. The company has ventures starting up in Malaysia and Russia, which would
give Chery cars a firmer footing in the
international market.
Nanjing Automobile. It plans to cash
in on the power of the MG Rover brand, but
the extent of the brand's decline is yet to
be determined. Nanjing Automobile says it
has a strategy to re-launch the brand, but
has not released any details as yet.
Reviving an old, beleaguered brand could
be more expensive and difficult than
establishing a new one.
First Automotive Works, SAIC and
Dongfeng Motor. For these three, the
stakes are higher in entering foreign
markets because their brands are wellestablished at home. Any failure in the
international markets could affect the
brands at home. By comparison, the
© The Economist Intelligence Unit 2006
international markets have no frame of
reference for these brands, which already
have a long history.
Quality
Most of the domestic carmakers have
started sourcing from multinational suppliers in order to upgrade their quality.
Herbert Qi of Altair Engineering, a product
design and engineering consultancy, says
a number of domestic manufacturers are
using his company’s software and consulting services to enhance their R&D capability. Key Safety Systems began supplying
airbags to Chery earlier this year, and is
purported to have other domestic enterprises on their customer list.
FAW, SAIC and Dongfeng Motor are
likely to have learned the most in terms of
quality control and R&D through their joint
ventures. SAIC still cooperates closely with
its joint-venture partners, Volkswagen and
General Motors, and two decades of
engineers have come through the ranks
with positions in these two companies.
They are bringing that experience to SAIC’s
own vehicles.
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
and technology. John Humphrey, managing
director of the Asia-Pacific operations of JD Power,
puts it clearly: “Price alone will fail.”
Building better engines
Some of China’s manufacturers may have come to
the same conclusion. Despite its rather stodgy
image, FAW seems to have kept pace with the
green-friendly trend by developing a hybrid
engine for its Hongqi brand. Another FAW vehicle
in May 2006 moved stealthily into the US market
with 60 units of a zero-emission electric car. The
FAW-Hongta MPV has been built by FAW-Hongta
Yunnan Automobile Manufacturing, a FAW
subsidiary, and is reportedly being marketed in the
US by Miles Automotive Group.
Chinese firms are keen to develop hybrid and
fuel cell vehicles and have the backing of the
central government, provincial governments and
universities. All are working on new engine types
and the government has a clear plan for their
gradual implementation over the next 15 years.
This is being done for two reasons. First, it allows
China to limit the amount of oil it has to import.
Second, it offers the chance for Chinese firms to
leap-frog some of the global companies who have
lagged in the development of these technologies
despite the rhetoric put out by their publicrelations departments.
Industry experts point out that certain
manufacturers in Europe and the US (Volkswagen,
GM and Ford, for example) have developed fuel
cells, hybrid engines and all-electric engines, but
they have realised that it will require too many
changes in their traditional markets to use the new
technologies cost-effectively. Moreover, they have
a vested interest in maintaining the status quo,
having invested so much in traditional
technologies. China does not have the same
issues. Since its automotive infrastructure is less
ingrained than those in the US and Europe, the
leap to a new technology can be less burdened by
legacy issues for the long term.
Building better engines requires China’s
carmakers to ramp up their research and
development (R&D) capabilities and technology.
Most have already begun to do so. SAIC has a
venture in the UK with Ricardo Engineering, a UKbased design and engineering firm, where it
produces engines and trains a number of its
engineers. SAIC also has access to a top-of-theline development centre through its venture with
Volkswagen.
Chery has reportedly purchased premiumquality equipment, software and hardware for its
R&D facility. Meanwhile, Nanjing Automobile has
the support of the Jiangsu provincial government
to develop its R&D centre based on the Rover
production line, with former Rover staff
overseeing training and quality. Nanjing
Automobile's president, Yu Jianwei, says the
company expects to spend Rmb2bn (US$250m) on
a five-year programme to kick-start R&D.
That’s not a whole lot of financing, considering
the design, engineering, testing and tooling of a
prototype costs an average of US$500m. About
80% of a vehicle’s cost is determined in the phases
prior to production, notes John Humphrey,
managing director of the China operations of JD
Power and Associates, a leading US automotive
research company. This may be money that China’s
carmakers are neither prepared nor able to spend
pre-production.
Hence the Landwind affair. Jiangling Motors, a
Jiangxi-based automotive producer tried to export
its SUV model to Europe in 2005, the Landwind, via
a Belgian dealer. German authorities put the
vehicle through a required safety test that it failed
miserably. Herbert Qi, who is based in the
Shanghai office of Altair Engineering, a product
design and engineering consultancy, speculates
that Jiangling may not have been able to finance
© The Economist Intelligence Unit 2006
13
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
the expensive safety test itself, and had hoped
that the vehicle would pass muster. Safety tests
cost hundreds of thousands of dollars, and China’s
carmakers, under no obligation to conduct the
tests at home, may not do so, if only to contain
costs. If they are to develop a vehicle with a quality
acceptable to international consumers, China’s
carmakers need to invest in pre-production, but
this is an issue most have not wanted to face.
Chinese companies own very little technology—
they usually rely on reverse engineering or
“borrowed” intellectual property (IP). Cherry Chu,
vice-president of Jiangyin Venture Interior
Systems, a Shanghai-based designer and producer
of interiors for automobiles, says China’s
carmakers lack attention to detail, have no
concept of intellectual property rights and want to
reverse engineer everything. Still, there are a few
companies that have moved away from reverse
engineering and begun to partner with global
design and engineering consultants. The
intellectual property rights created then become
the property of the Chinese company. In fact,
many China-built cars destined for overseas
Shanghai Maple: going places
It may still be half under construction but
Shanghai Maple’s car plant, about two
hours’ drive from Shanghai, is a hive of
activity. Cars roll off the production line
steadily, while machines grind parts and
trucks deliver steel sheets and tyres.
Part of the independent Geely group, the
company was only formed in 1999. It
launched its first car less than two years ago
and annual sales reached 25,400 cars in
2005, up 143% on the previous year. Maple
plans to more than double that in 2006 and
needs to expand. With three different car
models, a hybrid in the pipeline and a
claimed breakeven point of only 8,000 cars
a year, Maple is already making money, it
says. With such progress, could Maple teach
the mighty Toyota a thing or two about the
economics of carmaking?
Maple’s new Hysoul 305, launched at
the end of 2005, certainly seems
impressive. With air-conditioning, leather
seats, power steering, anti-lock brakes, and
a 1.8-litre Maple-designed petrol engine, it
costs just Rmb70,000 (US$8,750) in China.
It even comes with a two-year warranty.
The company also boasts a research
14
institute with Shanghai Jiaotong University
which is looking into hybrids, and entered
its cars into the Shanghai stage of the
National Rally in 2004, taking first and
second place. The cars drive well and the
well-qualified workforce is highly dedicated
and ambitious, determined to move the
company forward.
Of course, experienced China-watchers
will scent the whiff of counterfeiting in
Maple’s meteoric rise. French carmaker
Citroën is currently suing the company for
infringing the design of its chassis and
when asked where the production line
came from, one senior executive from the
company told us that “it is based on a
French production system”. The new
engine also had to be developed after
Toyota sued the company for intellectual
property rights (IPR) infringements over
the previous one. Toyota has also been in
dispute with Maple’s parent Geely over the
use of its logo.
Maple says that it has put the IPR
problems behind it and that its latest
vehicles are entirely self-developed. As
proof it offers its small but growing export
© The Economist Intelligence Unit 2006
volumes. After all, say the company’s
managers, who would be mad enough to
export vehicles if they encroach on
another firm’s IPR and would invite their
wrath in countries where IPR laws are
stronger? Maple exported 800 cars in
2005, mostly to the Middle East where the
Hysoul sells for just US$6,500. The
company’s export manager says that this is
only the beginning and that it plans to
raise the volume quickly. But he also
points out, sensibly, that Maple wants to
move carefully and learn the ropes, not
rush in and blow its chances. It will take a
few more years before they are ready for
the main markets, he says. These would
presumably include the US and Europe.
The Maple story is not just remarkable
for the pace of development or the
company’s determination to succeed,
however. If it is able to make money with
such small production volumes, sell them
for such low prices and do that overseas
too, Maple appears to be changing the
rules of the game—that a carmaker has to
be big to succeed and that cars can't be
made at such prices.
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
SAIC: in top gear?
Fuelled by ample money, ambition and
government support, Shanghai Automotive Industry Corporation (SAIC), one of
China’s biggest automotive companies, is
striving aggressively to achieve global
competitiveness.
The company is hoping to enter the
international markets by leveraging major
well-known, though ailing, brands. It
wants to start domestic production with,
and later export, major automotive brands.
Towards this end, it has bought a majority
stake in Ssangyong of South Korea and the
rights to the MG Rover car in the UK. Will
SAIC’s strategy succeed?
Certainly both deals have faced
problems right from the start. The
agreement to produce Ssangyong sports
utility vehicles (SUVs) in Shanghai fell
through, although SAIC exports other
vehicles through its shareholding in
Ssangyong.
Moreover, soon after SAIC increased its
shareholding in Ssangyong to 51.33% in
July 2006, the latter’s workers went on
strike for two months to protest at an
arrangement in which SAIC paid only
US$26m to license technology from
Ssangyong. SAIC hired Phil Murtaugh, a
former head of General Motors China, to
lead international development. His brief
included sorting out financial and labour
issues at the SUV manufacturer, along with
driving SAIC’s outward push.
Deal with MG Rover
The deal with MG Rover was also complicated. Although SAIC obtained the design
and property rights for the Rover 25 and
Rover 75 in early 2005, it subsequently
lost out to Chinese carmaker Nanjing
Automobile in a bidding war for the use of
the MG Rover name and production facilities (see case study, Nanjing Automobile:
was buying MG Rover a bold or foolish
move?). SAIC’s plan to buy the Rover
brand name from BMW has come unstuck,
as Ford, which purchased the Land Rover
brand about a decade ago, announced in
September that it would exercise its
option to buy the Rover brand name
instead.
It appears less likely now that SAIC will
be able to use the brand name as this
would require getting permission for use or
licensing from Ford. Nevertheless, each
step brings SAIC closer to rolling its own
brand off the manufacturing lines-SAIC's
Rover 75-based model is expected to hit
the streets in China, and possibly in the
UK, by late 2007 or 2008.
By that yardstick, SAIC seems to be in a
strong position. The company’s joint
ventures with General Motors and
Volkswagen have given its engineers and
managers exposure to international
quality and design capabilities. Additional
exposure comes through a company
started by UK engineering consultancy
Ricardo to work with SAIC to develop
engines and drive trains for the Rover
models.
Nonetheless SAIC faces certain
obstacles. Tang Weiyan, a former SAIC
engineer and current secretary of the
Shanghai Automotive Trade Association
(SATA, a SAIC subsidiary), says the
company's weaknesses include a lack of
research and development skills and
international sales experience. But SAIC is
in no rush, he says: “We want to go to the
international market with a good product
even if it takes longer than companies like
Chery and Geely.”
It is also unclear how much SAIC will
benefit from the Rover brand. The Rover
name may still have some cachet in China,
but the brand’s value has taken a beating
in the UK. Building and reviving the brand
name will require sales and marketing
experience and savvy-areas in which SAIC
is weak.
It also lacked executives with
international experience, although that is
now changing. For example, SAIC has hired
Mr Murtagh and as vice-president Wang
Dazong, a former chief engineer and
designer with General Motors who was
born in China but educated in the US.
Moreover, SAIC’s president, Chen Hong,
speaks fluent English and some German.
Trying hard
But while the joint ventures with General
Motors and Volkswagen have brought
money and exposure to international
manufacturing and management, SAIC has
some way to go. In the short term, Mr Murtaugh’s first task is to help turn around the
Ssangyong brand, rather than assist in the
development and marketing of a SAICbranded automobile. In fact, the company
has yet to decide on a brand-name,
although it did have its own Shanghai
brand before 1949.Asks SATA’s Mr Tang:
“Wouldn't you like to drive a Shanghai
brand car?” It may be some time before EU
and US consumers get the chance to
respond, but it seemingly won't be for
want of trying on the part of SAIC.
© The Economist Intelligence Unit 2006
15
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
Nanjing Automobile: was buying MG Rover a bold or foolish move?
In the UK, Rover is a popular name for a
dog. It is also the name of one of the country’s most famous carmakers, MG Rover. In
2005, after years of strife, the company
finally went bankrupt and many of its
assets were sold to China’s Nanjing Automobile (Group) for £53m or US$93m at
current rates (some reports say the selling
price was £67m).
It was a controversial sale, hampered by
battles over production rights, brands and
property. Despite all this, Rover’s new
owners think they have made a wise
investment. Can Nanjing Automobile finally
turn this old “dog” into a viable business?
Yu Jianwei certainly thinks so. As
president of Nanjing Automobile, he has
convinced his state-owned company’s
shareholders that they should invest in a
state-of-the-art factory on a 300,000square-metre greenfield site in Pukou, on
the outskirts of the city. Production of
cars, using Rover technology, is due to
start in mid-2007 and within a few years
the plant hopes to churn out up to 200,000
vehicles annually, as well as 250,000
engines and 100,000 gearboxes.
Nanjing Automobile will export half, or
more, of these cars while others will be
assembled in the UK in order to retain the
brand’s claim to British-ness (the
prototypes, currently driving around
Nanjing’s streets, still sport the British flag
on a small panel by the rear doors).
Mr Yu’s well-tailored suit, good English
accent and unflinching enthusiasm make it
16
easy to believe that he can make Nanjing
Automobile succeed with Rover, where
Rover itself and BMW (which once owned
the long-struggling business) have failed.
Only Mr Yu’s closely bitten finger nails give
away the perilous nature of his undertaking.
Nanjing Automobile has been in
business since 1947 and is the leading
vehicle producer in China’s Jiangsu
province. With assets of US$1.4bn, it
currently has the capacity to build 180,000
vehicles a year under three brands: Nanjing
Yuejin, Nanjing Iveco and Nanjing Fiat.
Output will be about 130,000 units in 2006
and the product line-up is broad. With more
than 400 models, the company builds
passenger cars, light-duty trucks and
buses, cross-country vehicles, small-sized
passenger/cargo transportation vehicles
and special-purpose vehicles, as well as
various types of chassis. Like every other
foreign vehicle joint venture in China, the
Nanjing Iveco and Nanjing Fiat businesses
are 50:50 operations, which were formed in
1996 and 1999 respectively.
Why Nanjing Automobile bought Rover
The Rover acquisition is therefore a step,
but not too big a step, for the company.
Rover was roughly similar in size and used
technology that was more advanced, but
not much more advanced, than Nanjing
Automobile. It is the plans Nanjing Automobile has for the business that make the
move so bold. By taking over the British
company, Nanjing Automobile’s expects to
© The Economist Intelligence Unit 2006
triple its own sales to more than US$2.5bn
over the next three years by tripling output. Why does it want to bother, though,
in this tough global business, where there
is so much over-capacity and so few companies making money?
Mr Yu is quite clear why. He has been
explaining why in great detail for many
months, to convince his shareholders to
stump up the money. He says it is because,
like everyone else, Nanjing Automobile can
see the size of the market opportunity. It
can see the growth prospects that the car
sector offers in China. Moreover, he thinks
that the growth potential for cars is much
better than the company's main market
today. The bulk of Nanjing Automobile’s
current sales come from small trucks sold
to farmers.
But why not work more closely with Fiat
of Italy, its partner in the car sector for the
last seven years? Surely, that would have
been a lot easier than taking on a bankrupt
British firm? Mr Yu is polite enough not to
point out that, after so long a working
arrangement with Fiat, sales of its cars
have barely reached 45,000 units a year—
in a market with potential for 2.6m. He
explains, instead, the company’s desire to
go it alone. “When you are in a marriage, it
is always necessary to consult your
partner,” he says. Nanjing Automobile
wanted control of its business and with the
purchase of Rover has now got it.
There were other reasons, he explains.
This is a tough business and Nanjing
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
Automobile lacked scale and technology.
There has been pressure from the
authorities in Beijing for the Chinese auto
sector to consolidate. If Nanjing
Automobile had not bought Rover, it might
have had to close. The option was to either
invest or die. Rover was analysed very
carefully, says Mr Yu, and its platforms and
technology looked at. Rover offered
vehicles and technology in several
segments as well as engines. They bought
it, not because it was the only car company
available, but because Rover's capabilities
matched those of Nanjing Automobile.
“Now,” says Mr Yu, “we are big enough to
grow and survive.”
Nanjing Automobile fought hard for
this. Until recently there had been
pressure from the central government for
the company to be consolidated into
Shanghai Automotive Industry Corporation
(SAIC), easily China's strongest
automaker. To avoid this, Nanjing
Automobile’s shareholders were changed,
with the ownership of Nanjing Yuejin
transferred to the Jiangsu provincial
government. This made the widely
anticipated merger “almost impossible”,
according to Jia Xinguang, an analyst with
the China National Automobile Industry
Research Institute.
But it may also have made SAIC more
hostile. Before Nanjing Automobile
acquired Rover, SAIC had bought the rights
and plans to build the Rover 75 model.
When Nanjing acquired the business it
acquired the tooling and production
equipment for the same model. This meant
that both firms would be able to produce
the same car and sell it under different
brands, locally and overseas. This has led
to even greater friction between SAIC and
Nanjing and to the threat of court action.
SAIC has even demanded that Beijing force
Nanjing Automobile to merge with it, to no
avail so far.
Will Rover-based cars sell?
Somewhat bizarrely, neither firm has
acquired the rights to use the Rover brand
itself. This was retained by BMW when it
sold the business to Phoenix, the management buy-out team which first acquired
MG Rover and then sold it to Nanjing Automobile.
Regardless of the brand, will Roverbased cars sell? The MG7 will use
technology that is already almost ten years
old. When it was withdrawn from the UK in
2005, it was viewed as an ageing and
increasingly unremarkable car, with sales
declining as rivals launched contemporary
designs. Yet the build-quality was good,
remarkably for MG Rover, as every other car
it produced lay near the bottom of the
Automobile European league tables.
Still, Nanjing Automobile will need to
invest. It plans to spend Rmb2bn
(US$250m) over the next five years to
upgrade products. It is building a
technology centre where it will develop
new models. It is hiring internationally
and has transferred 20 staff from
Longbridge, the UK, to Nanjing, including
MG Rover’s director of quality. It will also
seek more international co-operation to
access technology and designs, for
example, with Ove Arup of the UK.
Components will come initially from the
original suppliers in the UK as well as inhouse. These will be upgraded steadily,
with parts increasingly sourced from many
of the international OEMs (original
equipment manufacturers) that have
established factories in China.
Risks and opportunities
Will Mr Yu achieve his goals? That is difficult to say. Nanjing Automobile has come
a long way in understanding the complexity of the car industry and the needs of foreign buyers in a very short time. But
doubts remain. The Rover 75 model, by far
the newest in the line-up, is old and no
amount of face-lifts will hide that. The
Rover brand is also badly tarnished. The
dealer network has mostly gone and, given
the company's history, few dealers are
likely to show much enthusiasm to sign up
again.
Before it went bankrupt MG Rover had
achieved an almost comic status in its
home market and had been forgotten
elsewhere, often with a sigh of relief.
Labour problems, financial problems,
antiquated technology, outdated designs
and poor quality had dogged the business
for the best part of 30 years before it went
belly-up.
It is a tough call. Nanjing Automobile
might have found the fast track for success
in its purchase of Rover. But it might also
have bitten off a lot more than it can chew.
© The Economist Intelligence Unit 2006
17
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
markets have been designed by either Pininfarina
or Bertone, with engineering firms like Ricardo
providing support on the engine and powertrain.
So what is being billed as a Chinese car is more
accurately an product of co-operation among
Italian, British and Chinese companies.
Domestic carmakers are not shy about picking up
management and technological skills from their
European, US and Japanese joint-venture partners,
as FAW, SAIC and Dongfeng have done. All three
companies have multiple partnerships with global
companies from different countries that have not
only given them a chance to learn, but have also
exposed them to international automotive-industry
consultants, and to engineering and design firms
like Ricardo, and Pininfarina and Bertone of Italy.
Phil Murtaugh, former chief executive of the GM
China Group, says Chinese companies “have a
tremendous capacity to learn”. Mr Murtaugh
recently took a position with SAIC as executive
president of overseas manufacturing.
In the short term, manufacturers can bring a
vehicle to market in this manner. But in the long
term, the reliance on outside assistance could
delay their own development in design and
engineering. To move into the group of core
countries, China’s manufacturers must develop a
strategy to become fully integrated original
equipment manufacturers (OEMS).
Building or buying a brand
That includes building a brand. In this aspect,
Ms Chu considers SAIC to be “very smart” and to
have “the guts, money and exposure to develop
their own brand”. Tang Weiyan, executive vicechairman of the Shanghai Automotive Trade
Association, an industry lobby group connected to
SAIC, hints that SAIC will maintain a low profile and
observe other companies, even as it develops its
own brand.
Another (quicker) strategy to enter Western
18
© The Economist Intelligence Unit 2006
markets has been to buy existing brands, and use
those as a base to build upon, as Nanjing
Automobile has done with MG Rover of the UK (see
case study, Nanjing Automobile: was buying MG
Rover a bold or foolish move?). Although Nanjing
Automobile has not acquired the rights to the MG
Rover brand (that is still retained by BMW, see case
study) it will be able to use this and other brands.
The products to be re-launched in 2007 will all be
sold with the MG brand initially. The Rover 75 will
be re-born as the MG7, for example. But the
company also has the rights to use the Wolseley,
Austin, Morris, American Austin, Princess and
Sterling brands, as well as Vanden Plas outside the
US and Canada. The company could also use its
own Yuejin and Soyat brands.
As far as Nanjing Automobile is concerned, it
believes it already has access to the MG Rover
market and intends first to target the 150,000
people who bought Rover cars in the year before MG
Rover went bankrupt. “If we don't get [this market]
now, we will lose it,” says Yu Jianwei, Nanjing
Automobile’s president. This market is 90% in the
UK. The question is: how will traditional Rover
buyers—mostly middle-aged, middle-Englanders—
respond to a Rover made in China? Mr Yu points to
the brand’s 100-year history, adding that this is
also the reason behind Nanjing Automobile’s
decision to keep an assembly operation running in
the UK. Even if it is making small numbers of cars
and most of the components come from China, he
believes that this will be enough for the company to
sustain the claim to its British heritage. “Of course,”
he says, “quality and service will need to be more
competitive than before.” But he thinks it is
possible to retain MG’s brand values with the right
level of customer support.
Other plays
The buying of distressed OEM assets (such as MG
Rover) is a trend that is likely to continue, especially
Driven
Are China’s car manufacturers ready to compete in the US and Europe?
Chery on top?
Chery Automobile, China’s largest wholly
domestic carmaker, is believed at home
to be the one most likely to succeed. Certainly of China’s carmakers it has
attracted the most international attention. In June 2006, the buzz in the automotive industry was that George Soros,
the American billionaire investor,
planned to invest US$200m in a joint
venture with Chery to manufacture vehicles in China and distribute them in the
US. At the time of printing, neither Mr
Soros nor Chery had commented on a
report to this effect carried in Automotive
News, a specialist publication.
Mr Soros’s millions, if they are
forthcoming, should give a fillip to
Chery’s much-talked-about proposed
exports to the US. Chery already has a
2005 deal with Visionary Vehicles, an
auto-distribution company led by US
entrepreneur Malcolm Bricklin, to import
250,000 Chery vehicles into the US. The
starting date keeps changing, however.
Initially set at mid-2007, the deadline has
now been reportedly pushed back to
sometime in 2008.
Chery has not commented on the
deadline, but also in June 2006 issued a
statement that it hoped to keep a low
profile on its globalisation strategy. “We
think we are still at a very, very initial stage
of establishing overseas capability. We do
not even know the potential risks on that
road clearly. Therefore Chery management
is not willing to talk publicly,” the
statement said. “The recent reports about
Chery are completely released by our
partners or potential partners in the US,
which are not from our will [sic].” Chery
declined an interview with the Economist
Intelligence Unit on the issue.
How realistic are Chery’s supposed
export ambitions? In a June 2006
interview with New Capital News, a Beijingbased newspaper, Yin Tongyao, Chery’s
general manager based in Anhui province,
said he expected Chery to export about
10% of its overall sales in 2006, or about
20,000 vehicles. It would be a huge leap
for Chery in the next few years to export
250,000 cars to the US (as Mr Bricklin has
claimed) from such a small export base.
Moreover Chery’s annual production
capacity is only 350,000 vehicles. Last
year, the company exported a mere 18,000
units, mainly to Egypt, Malaysia and Syria
(its largest export destination). It appears
unlikely that Chery will rush into more
developed markets before the company
deems itself ready. Mr Yin outlined the
company's growth strategy as focusing
initially on Russia, the Middle East and
Latin America before tackling the US and
Eastern Europe. But he did say plans have
not changed to enter the US market.
It is evident why Mr Bricklin and Mr
Soros (and other investors) could be
attracted by Chery-it has shown meteoric
growth in its home market. But Chery
enjoys a favourable climate in China.
Regulations on emissions and quality are
lax, and price-conscious customers don't
mind a lower quality if they can get a lower
price. Chery would not be unable to
replicate its popularity at home with the
more demanding consumers in the US and
Europe. Keep in mind that for 85% of
China’s car buyers, this is their first
purchase of a car. As such, Chery remains
untested in terms of customer
expectations.
Industry executives in China are keenly
aware of the initial failure of Japanese and
South Korean automakers’ exports to the
US and Europe, and of the spectacular
failure of the Yugo, a much maligned
made-in-Yugoslavia car that Mr Bricklin
imported to the US in the 1980s. China’s
automakers would hardly risk taking any
steps that would relegate their brands to
the same historical heap as the Yugo.
“Chinese companies are well aware of
what's at stake,” says John Humphrey,
managing director of the China operations
of JD Power and Associates, a leading US
automotive research company.
Indeed, despite Chery’s ambitious
plans, it is still developing sales and aftersales service knowledge in the domestic
market, and has not really tackled
international service standards yet. Mr Yin
told New Capital News he expects Chery to
rank seventh in sales in China in 2006 and
third by 2007. It expects to do this by
keeping prices low-the strategy by which it
has increased market share by double digits
over the past three years. However, in
developed markets like the US and Europe,
“price alone will fail,” notes JD Powers' Mr
Humphrey. Customers in those markets
would demand more from their carmakers,
including customer service, warranties,
reliability, safety and gas mileage to name
a few. China’s carmakers are way behind in
such aspects-for example, customer
warranties in China are typically only for
two years, a far cry from the warranties of
five and ten years expected by customers in
the US. Chery has not been required to deal
with these issues yet, but it will have to do
better than a low price to compete in the
developed markets.
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
as several US and European automotive and autoparts companies are looking wobbly. There are a few
possibilities: Fiat in Italy, Ford in the US, Lada in
Russia and Proton in Malaysia. For China’s carmakers,
acquisition would give them access not only to the
target-company's products, but also to its technical
knowledge, technology and customer-base. The
problem is that overtures by China's carmakers to buy
stakes in these (and other) companies could arouse
political ire in their countries of origin.
Where to get the money?
Building a prototype, building a brand, competing
in overseas markets—all these require financing.
Fortunately for China's automakers, most of which
are state-owned, the central government is giving
a strong push to the industry, and is helping with
finance (see section, The push and the pull to go
international). Both SAIC and Nanjing Automobile
(which plans to spend Rmb2bn over the next five
years on product upgrades) received low-interest
loans from the government to buy their shares in
the assets of MG Rover of the UK. The smaller Geely
has also benefited from government sponsorship—
the town of Cixi, in Zhejiang, where Geely is
located, approved a US$2.4m loan for the carmaker
to build a 200,000-units per year plant nearby.
Financing has also come from foreign investors
willing to import Chinese-made cars. There's talk of
American billionaire George Soros' investment in a
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© The Economist Intelligence Unit 2006
joint venture with Chery to produce vehicles in China
and distribute them in the US (see case study, Chery
on top?). Chery already has an agreement with
Visionary Vehicles, owned by Malcolm Bricklin, a
controversial American entrepreneur who is hoping
to lead Chery’s charge into the US. The agreement
between Visionary Vehicles and Chery, rumoured to
involve investment of US$200m, provides for annual
sales of up to 250,000 Chery cars to the US by late
2007 or early 2008.
Besides these avenues, China’s carmakers can
turn to the stockmarket for funding. For example,
SAIC has plans for an overseas listing in late 2006
or early 2007. Its subsidiary, Shanghai Automotive
Company, is already listed on Shanghai's stock
exchange. Getting access to global quality
standards is also an avenue increasingly open to
Chinese carmakers in their efforts to develop, as
global parts companies ramp up production locally.
Global manufacturers report that sourcing
materials and components in China has proved
costlier than expected and so they welcome the
additional volumes that Chinese carmakers offer.
The presence of foreign Tier one and Tier two
suppliers in China provides an opportunity, as they
can leverage the technology and skills of these
suppliers to improve areas in their own production.
Suppliers like Arvin Meritor of the US and Magneti
Marelli of Italy reportedly have also begun to
supply to Chinese automakers including Chery.
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Are China’s car manufacturers ready to compete in the US and Europe?
The push and the pull to go international
A
t first glance, moving forward seems easy
for China’s automakers. Exports are
growing rapidly (although admittedly
from a low base) and production capacity
is estimated to reach 9m vehicles in 2010. The
central government expects the automotive
industry to become a pillar of the economy by
2010, and envisages exports to climb 40%
annually from 2005 onwards. On the low end, that
could mean at least US$1.2bn in export sales.
There’s more—between 2020 and 2035, the
government expects China's share of the global
vehicle trade to swell from the current 1% to 10%.
Push from the government
To propel the automotive industry along, the
government is helping with finance in the form of
subsidies and low-interest loans. Adding hard
policy to hard cash, the Ministry of Commerce in
late June 2006 said it would establish a system by
January 2007 requiring automobile exporters to
apply for licences. Analysts say the export licences
are intended to prevent a price war among China’s
domestic automakers, which are looking to export
their vehicles because of a production glut. The
licences would also permit a check on badly made
exports, which could damage China’s automotive
reputation overseas. An official from the Ministry
of Commerce was recently quoted in a newspaper
as saying that China’s carmakers did not make
adjustments to suit the rules and regulations of
importing countries. The comments were a
reference to the Landwind situation.
The government nonetheless wants its homegrown automakers to make a name abroad.
Towards that end, the Ministry of Commerce plans
to construct an information platform for China’s
automotive exporters and manufacturers that will
detail regulations and requirements of overseas
markets. The ministry’s overseas economic and
commercial offices have been charged with
putting the information together. Such assistance
may seem excessive, but remember the
government is the ultimate shareholder of most
automakers in China.
Pull from foreign dealers
With government support and cash behind them,
it is not surprising that China’s automakers are
aggressive and willing to take risks at home and
overseas. This is made even easier by the foreign
investors also willing to take risks by importing
Chinese-made cars. Mr Soros has not commented
on a report in Automotive News, a specialist
publication, that he will invest in Chery. But he is
known to be a savvy investor, and if he’s putting
his money on a Chinese carmaker, it is likely that
others will follow.
Chery’s February 2006 agreement with
Visionary Vehicles startled many observers, who
were unprepared for a possible onslaught in the
US of made-in-China automobiles. But almost as
soon as the deadline was set, it began to shift. In
June 2006 Chery engineers were quoted in
Automotive News as saying that 2009 would be a
more likely date when their company’s cars could
compete on quality and safety in the US market.
This is probably sound strategy, as the Landwind
fiasco badly hurt not only the image abroad of
Jianglin, but also that of China's automotive
industry.
China’s car manufacturers all know that a flop
by one Chinese-made car will damage the
reputation of the others. As a result, they are not
likely to fall for distributors pushing them too
early into competitive markets where reputations
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
take years to recover. Chinese manufacturers have
learnt from Japanese and South Korean
manufacturers the hazards in launching substandards cars in the US and Europe.
Prolific production
Another reason for Chinese carmakers to go
overseas is prolific production. Their output has
already reached 5% of global production,
according to the National Development and
Reform Commission, and by 2010 is estimated to
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© The Economist Intelligence Unit 2006
reach 9m units. EIU forecasts are more
conservative—at just over 5m new vehicle
registrations in 2010—but even the lower figure is
worrying. China’s automotive industry already
suffers from excessive production capacity,
estimated by the commission at about 2.2m units
in 2005. Over-capacity has already dragged down
the prices of Chinese cars on the China market, and
with the forecast that capacity will stand at almost
4m units in 2010, the economic pressure on
China’s carmakers to export is intense.
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Are China’s car manufacturers ready to compete in the US and Europe?
The road ahead: up and down
S
o when can China’s automakers
realistically begin to compete in the US
and Europe? Graeme Maxton and John
Wormald would argue that Chinese
carmakers are up to 10 years behind their EU and
US counterparts. Phil Murtaugh, now executive
vice-president of SAIC, also believes it will take
only a decade for the catch-up. For his part, JD
Power’s John Humphrey believes that it will take
another generation of vehicles before some of
China’s carmakers can master technology to a
sufficient level. If developing technological and
design skills will take another generation of cars,
and about five models make up a generation, then
a 10-year timeframe seems reasonable to develop
a car that is technologically and aesthetically
acceptable to picky US and European consumers.
The timeframe is based on it taking about three
years to bring a set of models to market, and
another two to three years to get consumer
feedback.
Why would it take China's automakers 10 years
to establish their brands on the US and European
markets, when it took the Japanese and South
Koreans 30 years and 20 years, respectively? Part
of the reason is that China’s automakers are
soaking up skills and technology from their
foreign joint-venture partners and suppliers, or
outsourcing design and engineering to firms like
Ricardo or Pininfarina or Bertone. They are also
largely copying rather than developing models
from the bottom up as carmakers in India are
doing. The first indigenous model was produced by
Chery only in 1999/2000.
Quality and safety concepts
Despite their strengths of access to financing, and
ability to sell at low prices, China’s manufacturers
still have to work out quite a few bugs in their cars
before they can truly be ready for international
markets. For a start, they do not seem to fully
grasp the concepts of quality and safety.
According to the 2005 Initial Quality Study by
JD Power and Associates, Chinese cars are far from
being competitive in the US market in terms of
quality. In the compact-car market, for example,
China's industry average is 454 problems per 100
(PP100) cars. In the US and Europe, buyers of
compact cars would want only 118 problems per
100 cars—the worldwide industry average. (To
their credit, in the JD Power study, two Chinese
cars appeared in the top three in China’s compactcar sector in terms of quality: Chery’s QQ and
Tianjin First Auto Works’ Xiali Charade.)
The 2005 study also found that overall initial
vehicle quality in China averaged 236 PP100, an
11% improvement over the previous year, and a
substantial 50% improvement since 2000. But this
is still a long way from the expectations of US and
European consumers. The Landwind kerfuffle was
just one manifestation of the swirling criticism of
safety and emission standards of Chinese cars,
which trail international norms. For example,
China-made automobiles are required by the
Chinese government to follow Euro II emissions
standards, but the EU has already advanced to Euro
IV standards. China plans to get there only by 2010.
“There needs to be a paradigm shift for [US and
European] export markets to accept Chinese cars.
There also needs to be a shift on the Chinese
[carmakers’] side in terms of quality,” says
Jiangyin Venture Interior’s Cherry Chu. The Chinese
government is making an effort to push things
along. It recently passed a regulation on the size of
an engine relative to the size of a car that will
reduce emissions and increase fuel efficiency. But
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
Top three vehicles per segment in initial quality: J.D. Power Asia Pacific 2005 China Initial Quality Study
Note: Lower score reflects better quality performance
Problems per 100 vehicles
Compact car segment
296
Chevrolet Spark
Chery QQ
Tianjin Xiali
Compact Car Segment
391
424
454
Entry midsize car segment
Toyota Vios
Honda Fit
Volkswagen Polo
Entry Midsize Car Segment
147
153
159
231
Midsize car segment
Toyota Corolla
Nissan Sunny
Volkswagen Bora
Midsize Car Segment
130
134
145
177
Premium midsize car segment
70
Toyota Camry
Mazda 6
109
110
Honda Accord
Premium Midsize Car Segment
141
MPV segment
Honda Odyssey
Buick GL8
Dongfeng Future
MPV Segment
106
151
183
298
Note: No official rankings are published for the premium compact car, entry luxury car, luxury car and SUV segments due to an insufficient number of models in the sample.
Source: JD Power Asia Pacific 2005 China Initial Quality Study, JD Power Asia Pacific
How does the China compact segment compare with the US market compact segment?
Top 10 atrributes (China)
Top 10 attributes (US)
Overall rating of transmission
Overall rating of transmission
How quickly the air-conditioner can cool the interior
Engine performance during rapid acceleration
Ability of the air-conditioner to keep the interior cool
Engine smoothness during hard acceleration
Passing power at highway speeds
Sound of engine while idling
Engine smoothness during hard acceleration
Driving range between fuel stops
Exterior color choices available
Rating of vehicle’s overall fuel economy
Front end styling (headlight/grill area)
Vehicle ground clearance
Sound of the engine while idling
Stability when driving fast on winding roads
Engine performance during rapid acceleration
How easily you can open/close side door
Appearance of exterior paint
Appearance of the wheels/rims
Source: JD Power and Associates
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© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
emission and quality requirements in China are still
a long way behind those in the US and Europe.
Safety standards, too, lag in China. The country
recorded 517,889 automotive accidents in 2004, of
which 107,077 resulted in fatalities. This is the
highest per-population accident rate in the world,
according to an industry insider, who declined to
be named. China only began requiring front-impact
crash tests in 2004, which resulted in a number of
domestic made mini-vans being taken off the
market. Side and rear-impact standards and crash
tests came into effect from July 1st 2006. It’s likely
that more domestic cars will be forced to retire with
these new standards. By contrast, EU and US safety
regulations are stringent, and in future would even
include limits on the number of airbags permitted
in a vehicle. The Chinese government expects to
improve safety standards only by 2010. Until then,
it seemingly will be difficult to convince EU and US
consumers to buy from China.
Brand and intellectual property
They are also likely to be put off by copycat
behaviour from Chinese carmakers, several of
whom have been accused of violating the
intellectual property rights of international
companies. If they take cars or parts which have
infringed copyright to the US or Europe they are
likely to be sued by local rivals—which will create
endless bad press. There certainly may be a case to
answer. GM sued Chery in 2004 for allegedly
copying the Chevrolet Spark to create Chery’s bestselling QQ. The Chinese government advised GM to
seek mediation and the two companies eventually
settled out of court. There are many other
examples. Nissan has taken Great Wall to court;
Toyota and PSA are doing the same to Shanghai
Maple. Volkswagen also settled out of court with
Chery over mass production of a car using one of
Volkswagen’s own plants.
© The Economist Intelligence Unit 2006
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Are China’s car manufacturers ready to compete in the US and Europe?
Conclusion
C
hina’s carmakers are beginning to get
noticed. Whether they become bigger
stars will depend on the strategies they
adopt to grow and to overcome
weaknesses. It is expected that the initiatives will
be varied, from the slow, calculated moves of SAIC
to the versatile aggression of Chery. The threats
facing them are likely to apply to all. Among them
is the possibility of a political backlash in the US or
Europe, or rivalry from a low-cost competitor like
India. The latter could be challenged through
savvy marketing and branding, but Chinese
automakers are weak in those areas. Indeed, it
appears that China carmaker’s intrinsic
weaknesses pose more of a threat to their
development than outside threats. According to
the industry experts, consultants and car
companies we interviewed for this report, China’s
carmakers suffer from the following:
• Lack of brand recognition in overseas markets
• Low quality (perceived or real)
• Low expenditure on research and development
• Little intellectual property
• Shortage of technological and engineering
skills
• Weak international-level management skills
• Lack of attention to safety standards
• Stiff competition to sell low-priced cars
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© The Economist Intelligence Unit 2006
But China’s carmakers also have certain
strengths, not least government support and
financing. They also have few management legacy
issues, and are able to sell cars cheap. How quickly
they leverage these strengths to overcome their
weaknesses will ultimately determine whether
they are able to crack the developed markets of the
US and Europe in 10-15 years’ time.
Meanwhile, they can ease domestic
overproduction by selling their low-cost vehicles
to developing countries in South-east Asia, the
Middle East and Africa. They can also form
alliances in transitional markets in Eastern Europe
and South America. Going for the unexpected,
Chinese automakers could attempt to enter the
more developed markets with niche products such
as SUVs, hybrid cars or a quirky design. With
“traditional” cars, China’s automakers do not have
a big advantage in the developed markets against
other low-cost producers like the Japanese and
South Koreans, who have established brands there
with a reputation of value for money.
The global automotive landscape 10-15 years
from now is hardly clear. Changes in US and
European manufacturers’ fortunes may open up
opportunities for Chinese carmakers in those
markets. In mid-2006 the mature, staid markets in
the West look tough nuts for a new entrant to crack.