April, 18 2008
Since the early 2000s many have been predicting or waiting for independent Chinese auto manufacturers to begin importing vehicles into Western Europe and the United States. Chinese auto companies and/or bold entrepreneurs have been stating their intentions of establishing a presence in these markets just as the Japanese and Korean manufacturers have done in the past 30 years. Industry analysts and pundits have been speculating such as this Detroit News recent article titled “Get Read for the Foreign Car Invasion”, the Chinese are coming. I do not think will any time soon as they lack the technical capability or it is not in their best interest given it might be best to continue to focus on the home market.
First let us take a look at the size of the Chinese manufacturers that have publicly stated their intention to enter the US market. By western standards these automakers are small. Also, here is a list of manufacturers with a product presence at the 2008 Detroit North American International Auto Show. The show featured: Changfeng Motor Group, BYD Auto Co., Geely International Corporation, China America Cooperative Automotive (CHAMCO) and Li Shi Guang Ming Auto Design Co. It should be noted none of the vehicle displayed were available for sale to the public.
Source: Automotive News 2008 Guide to China's Auto Market
Geely has publically stated their intentions to sell imported vehicles into the US in 2008. The company planned to sell 5,000 small cars at a $7,500 sticker price as its entry vehicle into the US market. In 2005, the company turned over 12 cars for US testing. Geely planned to start by selling cars in Puerto Rico in 2006. As far as I am aware, sales have not commenced in Puerto Rico and certainly not in the US.
CHAMCO also plans to enter the U.S. market in 2008 with fully homologated lineup of vehicles, with world-class quality, and unequalled value. About twelve months after the SUVs and pickups are to arrive in the U.S., and as a result of ZX AUTO's joint venture with the city of Changchun. This will be follow up with fully loaded sedans and crossovers vehicle. In addition, negotiations are currently underway with several Chinese automobile manufactures for additional vehicles types to complete our entry-level product line. However, CHAMCO has had some recent problems. According to the press release CHAMCO shareholders discovered that a dissident group of officers and directors conspired to defraud CHAMCO and ZX Auto NA. I suspect, this news will alter CHAMCO’s plans.
This brings me to Malcolm Bricklin, famous for establishing Subaru in the US and even more infamous for trying to sell Yugos, and his attempt to launch a brand of Chinese made vehicles in the US through Visionary Vehicle. Subsequent to the Chery agreement with Chrysler, the deal collapsed in 2006. However, Visionary and Chery’s initial plan was to work with Italy's Bertone SpA and Pininfarina SpA to design the models and Austria's AVL List to provide engines. Important to this discussion, was the use of outside technical resources by Visionary and Chery to design the vehicles for the US market. This is a clear indication Chery did not have the technical expertise to develop vehicles to meet strict governmental safety and emissions regulations. It is also understood that Chrysler will be highly involved in the small car they will eventually be importing from Chery.
Shanghai Automotive Industry Group (SAIC) has the most potential in the near term in Europe only because of it purchase of Nanjing Automotive Corp. in December 2007. Nanjing acquired the assets of the now defunct Rover Group in 2005 and will give SAIC a production base in Europe. With some exception most of the growth for Chinese imports into Europe will be in the East, in particular Russia. However, outside technical resources such as Ricardo was needed in developing SAIC’s engine program.
Prior to the merger with SAIC, Nanjing planned to build a factory in Oklahoma to build MG cars. The MG brand, was planned to be re-launched in the UK in 2007 and would hit US showrooms in May or June of 2008, according to company officials in 2006. I am unsure if they broke ground on the new plant but I have not found any recent news indicating they have.
This leads me to the expected market conditions in the western markets compared to China. The forecast for production growth from 2003 to 2011 in the North America and Europe are estimated to increase 4% and 22% respectively. Much of the increase in Europe is expected from old Warsaw Pact countries and Russia. However, much of Western Europe like the United States should remain relatively flat. I also suspect these forecasts have not accounted for the stagnation in the US economy or the possibility of an economic contraction in Europe. Therefore the potential production in the mature western markets could be further overestimated given present economic conditions.
The growth in China continues to be impressive. From 2003 to 2007, China has had an almost 200% increase in production. Production is estimated to increase almost 300% by 2011 when compared to 2003. With rare exception, China consumes what they manufacture and sales growth continues to be strong.
Data Source: The Automotive News 2007 Global Market Data Book
I expect the Chinese penetration into Western Europe and the US to be limited if at all. In the US and in the European Union, I believe the expectations for Chinese penetration have been unreasonably optimistic or misunderstood the Chinese automotive infrastructure. Given the anticipated growth in the Chinese market, I expect the independent Chinese manufacturers will focus on that market. The mature US and European Union market cannot support additional manufactures. These markets are already crowded and manufacturers are financially struggling to maintain profitably because of competition.
Going forward I do foresee more Chinese made vehicles exported to mature markets. However, the vehicles imported will most likely be from joint ventures with western manufacturers and designed by the same auto makers. Chrysler is the first manufacturer that has publically stated it will import a complete vehicle into the US built by the Chinese manufacturer Chery. Vehicle components are already coming from China but GM is the first to import complete engines from its Chinese subsidiaryShanghai General Motors, a joint venture between GM and Shanghai Automotive Industry for installation in its Chevrolet Equinox and Pontiac Torrent vehicles.
It is hoped this puts the Chinese auto manufacturers’ technical capabilities into perspective. For the most part, the Chinese industry is at it infancy and would have remained so if not for the establish automakers transplanting their knowledge into the Chinese market through joint ventures. It should be understood and appreciated that it has taken Daimler, Ford, GM, Toyota, etc, decades to reach their current capabilities. The Chinese auto industry will not be able to reach that level in a decade or two without help.
The book Beijing Jeep by Jim Mann written in the late 1980s cover the history of American Motors establishing the first American joint venture in China. The book details the cultural differences as well as the technical difficulties of one of the first attempts at modernizing the Chinese auto industry and the limited supply base. The Western-Chinese joint ventures have come a long way, but the product expectations in the Western world have increased exponentially since that time and the technical capabilities are still with the established auto companies.
The independent Chinese companies can manufacture to what their local market needs but they are limited in their technical sophistication to meet the quality western markets expect and what western governments require. As western governments impose stricter emissions and fuel economy standards, I believe it will become more difficult for the same Chinese manufacturers to sell product in the western markets.
I do however expect in the not to distant future as western manufacturers balance their global resources, more products from China will be heading to the Western world. But, they will be branded Buick, Volkswagen, or Toyotas and manufactured by joint ventures and will be select niche vehicles or overflow production to meet increased demand in western markets. However, transporting vehicles from China to the US or Europe is logistically expensive and when demand reaches a certain point I fully expect the manufacturers to realign production with demand in the respective market and build locally.
Designing, manufacturing and selling cars and truck requires a level of sophistication the independent Chinese manufacturers just do not have right now. In the foreseeable future I anticipate local Chinese manufacturers to focus on the Chinese domestic market to meet the growing demand or face consolidation by the western joint ventures. In the end I see China as just another source of production for western manufacturers to use for possible export when there is a business case. Much like General Motors is currently using its Australian Holden operation to export a limited number of it rear wheel drive Commodores into the US as a Pontiac G8 or the Korean built Chevrolet Aveo or as Honda exports its UK built Accord into the US as an Acura.
For another perspective: Not Coming Soon to a Lot Near You: Chinese Car, NY Times, October 18, 2006
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