China targets Detroit

Driven by domestic overproduction, China is starting to look to overseas markets for its cars - it's been a remarkable journey.

by Chunli Lee, World Business magazine
Last Updated: 23 Jul 2013

Japan is relieved. An accounting error made by the Chinese Association of Automotive Manufacturers (CAAM) was discovered in mid-January. It turns out that the real domestic car sales volume in China in 2005 was only 5.72 million units rather than 5.92 million units.

Why does the (relatively) small matter of 200,000 cars matter so much?

Because the Japanese output figure was 5.85 million units and - for a short, tense period - there were fears Japan had lost its long-cherished second place in terms of the world's biggest sales volume behind the US.

Even so, the relief looks premature. Japan may have been holding on to second place since 1965, but it seems certain to relinquish it to China over the next 12 months. Chinese domestic sales are projected to reach 6.4 million units this year, exceeding the Japanese estimate by almost half a million.

China's car production surged ahead of the UK, France and Italy in 2002, and 12 months later it had exceeded that of Germany. Assuming China overtakes Japan in 2006 and Toyota overtakes GM (whose reign as the top auto company in the world has lasted for 70 years), the synchronism will symbolise the structural change of the world automobile industry.

More importantly perhaps, the balance of Chinese car imports and exports has also shifted. Imported car volume in 2005 was about 160,000, versus exported units of 173,000 - the first time that exports have exceeded imports.

Export, however, is centred on trucks and commercial vehicles; currently, passenger cars account for less than 20% of exports, and these tend to be exported to developing countries in the Middle East, North Africa, South East Asia, South America and Russia. Imported cars are mainly luxury passenger cars and sports-utility vehicles (SUVs) from Japan, Germany and the US, which account for 90% of imports.

According to statistics from China's Ministry of Commerce, in October 2005 exported cars were predominantly low-priced vehicles with an average price of $8,336 (EUR6,982); in contrast, the average price of imported cars was $29,180.

The table (see over page) illustrates the competitive nature of the Chinese car market and each company's core models. While GM, Volkswagen, Hyundai, Honda, Nissan and Toyota may top the list, year-on-year sales and market share show that domestic manufacturers, such as Geely, Chery, Chang'an, Harbin Aircraft and Great Wall, have grown rapidly. Moreover, the home-grown carmakers are listed as major export players. Only Honda of the foreign car makers has much of an export record and that's because 3,500 Jazz cars were transported from its Guangzhou plant for exclusive export to Germany.

Geely has been making waves in Europe and the US since last autumn. The company showed its branded small cars at the International Motor Show in Frankfurt and the North American International Auto Show in Detroit last year for the first time. In addition, Li Shufu, chairman of Geely, announced an export plan to the US, to start in 2008, and exhibited the CK, a small sedan (Chinese name: Freedom Ship) that will be launched at Detroit.

Li also announced that he aims to jump-start sales of this model, which will be priced below $10,000, by offering mega-deals in the US. The Freedom Ship was launched into the Chinese market in April 2005 and retails at about $7,500-$8,700. When it starts selling in the US, assuming the plan goes ahead, the model will be one of the cheapest cars on the market.

Li, now 43, was born in Zhejiang Province, often referred to as the 'cradle of capitalism' in China. He started his first refrigerator company in 1986, launching into the manufacture of interior materials in 1989, motorcycles in 1994 and then passenger cars in 1997. He first came to public attention with the start-up of the first private car manufacturer in China. Currently, Geely has four car assembly plants in Zhejiang province and Shanghai, with a production capacity of 250,000 units per year.

The company ethos is to "create good cars that the average Chinese person can afford". It seems to be working - the market price of a flagship model Haoqing (1,300cc) is about $3,600 and is one of the cheapest cars in China (see table).

However, not only Geely has designs on the US market. In January 2005, Chery announced plans for selling five-passenger models from 2007 through the US imported-car dealer, Visionary Vehicles in New York. Malcolm Bricklin, Visionary Vehicles' CEO, often referred to as a 'maverick' in the industry, has experience of this kind of challenge. He handled import and sales for the low-priced Yugoslavia-made Yugo from the latter half of the 1980s to the early 1990s, and also imported Subaru cars from Japan in 1968.

Chery was established, in 1997, under the umbrella of the Anhui province government. The business started out by purchasing Ford's used engine lines in the UK and Volkswagen's Spanish subsidiary SEAT's used car-assembly lines. Yin Tongyao, chairman and president, worked with Volkswagen in its joint venture with First Automotive Works Corp (FAW) in Changchun. Tongyao recruited Xu Min - who had studied in the US and was an experienced development engineer at GM and Ford - to be the head of the R&D centre.

Currently, Chery has a production capacity of 350,000 units per year.

The doubling of sales in 2005 has promoted the company to seventh-largest passenger-car manufacturer in the Chinese market - some achievement considering it is in a market where the world automotive giants compete against each other (see table, left).

Chery exports both cars and complete knocked-down kits (CKDs - car components exported as a kit in order to avoid high import taxes and/or to receive tax preferences for providing local employment). For example, in 2005 Chery announced plans to produce the Tiggo, the A21 and a new SUV locally with the knocked-down method in both Russia and Ukraine.

However, Chery's journey hasn't always been smooth: in December 2004, GM Daewoo filed an intellectual property lawsuit in Shanghai, claiming Chery's best-selling QQ model was an imitation of GM Daewoo's Matiz. Moreover, GM also claimed in May 2005 that the trademark 'Chery' resembles the GM Chevrolet's nickname Chevy. But, in November 2005, GM and Chery announced that they had agreed a settlement, under which Chery will produce cars in the US under a different name. This was not the first such incident.

In 2003, Toyota filed an unsuccessful lawsuit against Geely over the validity of its logo.

But why are Chinese car makers trying to advance overseas when the domestic market has been skyrocketing and foreign automotive giants are making huge investments in it? The answer lies in the domestic competition structure in China. At present, more than 120 passenger car models are produced in China from about 30 manufacturers.

In terms of pricing, the segment spanning Yn100,000 (US$12,000) and below is the world of local car-makers. The range from Yn100,000-Yn200,000 is the domain of Japanese and Korean car manufacturers, with some European manufacturers making inroads. The Yn200,000-Yn300,000 segment becomes the exclusive province of Japanese cars, and the Yn400,000 and over segment is the world of premium cars, where German cars enjoy the lion's share of the market.

The bottom end of the market is a battleground. Manufacturers and more than 50 models compete fiercely with each other, resulting in worsening profitability. In addition, an excess production capacity of 2 million units only exacerbates such a situation. The congestion of the domestic market and the diminishing profitability has forced manufacturers to explore the overseas market in order to survive.

Most exported Chinese cars come from this end of the market. The secret of the average price of $8,300 per exported car is embedded in this domestic structure - the over-competition and excess production capacity are seeking an outlet in the overseas market. In the past, Japanese companies, for example, ventured overseas only after strengthening the foundations of their domestic market, but Chinese companies appear to want to expand overseas while still establishing their domestic base.

Car manufacturers have drawn on the successful experiences of consumer-electronics manufacturers, and the entry into the World Trade Organisation in 2001 also prepared the conditions that has helped develop global markets for Chinese companies.

Political factors also play a part. In recent years, the Chinese government has encouraged companies to advance overseas as another step in foreign capital inducement - a policy that's been running since the 1980s (it is known as the 'Go Global' strategy). According to statistics from China's Ministry of Commerce, at the end of 2003, direct overseas investment amounted to $33.2 billion and had increased to $50 billion by the end of 2005. The Development Policy for the Automobile Industry, issued by the Chinese government in 2004, also set a goal for upgrading the industry and improving its international competitiveness.

However, Chinese public opinion has called for the 'Latin Americanisation' of the automobile industry, which means seeking the perfect open market for the introduction of foreign technology, a so-called 'barter-exchange strategy of market and technology', as Brazil and Mexico do. There is also support for something similar to Japanese and Korean industrial policies, which focus on fostering a wholly domestic capital industry. The current situation, however, does not allow for adhering to a way that shuts out foreign capital, because the process of globalisation has already started.

As a result, China has been searching for a third way where foreign capital is introduced on a restricted basis (companies learn technologies through joint ventures with foreign partners, for example), and wholly domestic capital companies are fostered while establishing their own brands. Such a catching-up strategy has worked well in the consumer electronics and IT industries, but it will be some time before the results come through that show whether the automobile industry is also able to follow suit.

But we need to keep watching China - it keeps defying our expectations.

CAR SALES BY MANUFACTURER IN CHINA ('000) Manufacturer Major models 2004 2005 Yr-on-yr 2005 mkt rate share (%) (%) Shanghai GM Excelle, Buick Regal, 252 325 29.0 8.2 Chevrolet Sail Shanghai VW Santana, Polo, Gol 355 287 -19.2 7.2 FAW-VW Jetta, Bora, Audi A6 300 277 -7.7 7.0 Beijing Hyundai Elantra, Sonata, Tucson 144 233 61.8 5.9 Guangzhou Honda Accord, Fit (Jazz), 202 230 13.9 5.8 Odyssey Tianjin FAW Charade, Platz/Vela, 127 200 57.5 5.0 Charade Vitz (Yaris) Chery Auto QQ, Fulwin, Easter 86.5 185 113.9 4.7 Dongfeng Nissan Sunny, Tiida, Teana 60.7 157.5 159 4.0 Tianjin Toyota Corolla, Vios, Crown 81.8 155 89.5 3.9 Dongfeng Citroen ZX, Elysee, Picasso 89 140 57.3 3.5 Geely Haoqing, Merrie, 95.5 140 46.6 3.5 Freedom Ship Changan Suzuki Alto, Cultus, Swift 110 90 -18.2 2.3 Notes: The market share does not include imported cars Source: Major models are cited from Fourin's Monthly Report on the Chinese Automotive Industry, August 2005 (No 113). Other data from Nihon Keizai Shimbun (Japan Economic Journal), 14 January 2006 DOMESTIC CAR SALES ('000) Country 2005 2006 (projected) China 5,720 6,400 Japan 5,850 5,930 US 17,500 17,100 Source: Fourin's Monthly Report on the World, Automotive Industry, January 2006 (No 245)

A SHORT HISTORY OF THE CHINESE CAR INDUSTRY

In 1953, First Automotive Works (FAW) was established with financial and technical assistances from the former Soviet Union. In 1956, the first Chinese-made vehicle, the Jiefang truck, was rolled out. In 1958, FAW developed the first passenger car, the Red Flag. Shanghai VW and FAW-VW were founded in 1984 and 1990 respectively, and the so-called 'Big Three, Small Three and Mini Two' system, which aimed to confine passenger-car production to eight manufacturers, was formed.

GM, Honda, Toyota, Nissan and Hyundai entered the market from 1997 onwards, and domestic carmakers, such as Geely and Chery, were also established. The entry into the WTO in 2001 led the industry into the global competitive age.

Chunli Lee, professor of economics at Aichi University, Japan

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