IMI Magazine

IMI Magazine

Cover Story - The China Syndrome

No one these days is oblivious to China’s phenomenal economic performance and the business acumen of its exporters. The country is a formidable competitor around the world in sectors as diverse as laptops, toys and textiles.

So alarm bells were triggered among car makers in Europe and North America when China’s central planning people turned their attention to the motor industry. Article 2 (of 78) of the government’s Automotive Industry Development Policy of June 2004 boldly states: “Efforts should be made to make China a leading car making country in the world before the year 2010.” The declaration went on: “By 2010, automotive enterprises should have developed a number of famous brands for autos, motorcycles and auto parts.”

So there you have it. China will become a major force in the international motor industry because the central government decrees it. The only defect is that politicians the world over know little of business and industry. Beijing is destined to be disappointed by its big motor industry push, at least in the specified timeframe.

Still, the policy puts some perspective on the decision by Nanjing Automobile to buy the assets of MG Rover and the appearance at the Frankfurt motor show – and for the first time in Europe – of three Chinese vehicle makers, Brilliance, Geely and Jiangling. There is a proposal in the United States to sell cars made by another Chinese firm, Chery. The automotive strategy is gathering momentum.

Joe Eberhardt, former boss of DaimlerChrysler UK and now top marketing banana for Chrysler Corp, says China poses a “daunting” threat to the automotive establishment. “It is undeniable they will have a significant impact,” he maintains.

But the structure of China’s motor industry means the impact won’t be felt for a very long time. The country’s industry is collectively huge but totally fragmented. Inspection of the Chinese models on display in Frankfurt confirms the scale of the technology and design gaps the country’s car makers have to close with established producers in the rest of the world. The technical and financial challenge of meeting European emissions, crash and recycling legislation are tough even for hardened local operators, and nigh impossible for raw newcomers from across the world.

China’s producers can, and do, buy expertise from engineering and design consultants in the West to help them meet these technical and legislative requirements. Even when, or if, they do, other obstacles may be insurmountable.

The timing of the country’s automotive export thrust could not be worse because there is simply no buyer awareness of the marques outside China. And yet these obscure car makers are venturing into the world at a time when global branding was never more vital. This is the era of Coca-Cola and Starbucks, Microsoft and Disney, BMW and Toyota, not a bunch of diddy regional or national brands. Is a Brilliance meant to be an alternative to a Volvo or a Skoda? Is a Geely a Ford or a Volkswagen? Or is it a washing machine?This absence of brand and image is the flaw in China’s great automotive scheme. “Strong brands are the most desirable asset for any company,” says Michael Ganal, who is in charge of sales and marketing at the group that wrote the rule book on automotive branding, BMW.

China’s vehicle makers have two ways to solve the problem. Brands are either bought (MG by Nanjing) or created slowly, carefully and very expensively from nothing over many years. It’s not going to happen over the next five years as the government says it will.

Hyundai is just getting properly established in the UK, but its cars have been sold here for 23 years. Kia, which arrived 14 years ago, is also now making good progress, but Malaysian-made Protons have been around for nearly two decades without buyers really noticing. The Daewoo bubble lasted a decade. Even mighty Toyota found how difficult it is to launch a new brand. Lexus was introduced at the end of the 1980s, but its standing in Europe’s premium sector remains insignificant.

But China is famous for its long term vision; the legend is that Mao Tse-tung declared it was “too soon to tell” whether the American Revolution of 1776 was a success.Suppose a handful of the country’s car makers manage to overcome all these hurdles, though. Fast forward a decade or two. Their models comply with the regulations, they are of an acceptable quality standard, and there is growing understanding of the images the various marques represent.

One further hurdle stands between vehicle makers and the buyers. “A Chinese brand will fail without the right dealers,” maintains Steve Saxty, executive director of marketing solutions at J.D. Power and Associates in New York. He says the old strategy of using secondhand car dealers to start with has failed too many times. While Block Exemption allows franchised new car dealers to sell other brands, cheap, low-margin Chinese brands will not occupy much of the dealer’s share of mind. As a result, dealers will supply cars when customers ask for them rather than actively promote them.“This passive sales approach, rather than aggressive marketing and brand-building at local as well as national level, poses the biggest issue – aside from product – for successful brand building,” says Saxty.

If precedent is any guide, then, Joe Eberhardt’s grandchildren might be the first people in the West to take Chinese car brands seriously enough to buy them.

The biggest unknown industry in the world

China’s vehicle industry is dominated by three firms, First Auto Works, Shanghai Automotive Industry Corp and Dongfeng Motor Corp, which between them produce almost half the country’s vehicles. Each has joint ventures with a number of foreign firms. But only 10 of the one hundred or so firms in China have annual outputs greater than 100,000. Seventy of them produce fewer than 10,000 vehicles a year.

The result is that the industry’s structure today is like it was in this country at the start of the 20th century. There are dozens of small, local enterprises with more ambition than ability. Most lack the skills, technology and finance to survive. They will steadily disappear, just as barely remembered firms like Argyll, Arrol-Johnston, Calcott, Clyno, Deasey, Maudslay, Star and many others did in the UK.

The difference between China now and the UK then is the ownerships of the companies involved. Private enterprise was behind the success or failure of the early pioneers in the UK. There are a few independents in China, but the majority of automotive firms are controlled by state or regional authorities, or indirectly by other firms that are owned by various parts of government.

The People’s Liberation Army and state-owned aircraft and armaments makers control a number of vehicle and component producers. This will inevitably distort any natural consolidation.

Cars were historically not a priority in the People’s Republic of China. Lorries and buses were the main concern in transport terms. China’s first car, the East Wind, was made by the imaginatively named First Auto Works in 1958. Annual car output up to 1991 was never more than 650,000.

But the market reforms pushed through by Deng Xiaoping changed that. Inward investment was encouraged and Volkswagen, Citroen and General Motors established major joint ventures with local firms. Others followed. Vehicle output boomed in the 1990s and continues to do so. The country made 5.07 million vehicles last year – including 2.32 million cars – which is nearly at the level of Germany and considerably larger than that of France.

Those vehicles ended up in the hands of drivers in China, which has a population of over 1.3 billion. While the car ownership rate remains low (around five for every 1,000 people), it is forecast to treble over the next five years. The industry’s main task is to satisfy that domestic demand.

Only 9,000 or so Chinese vehicles were exported in 2004, two-thirds of those to Syria, Algeria and Egypt. But exports will clearly gain in importance over the coming years. Honda this year became the first foreign maker to use China as an export base when it dispatched Jazzes made in Guangzhou to Europe.

The Honda example will probably be copied by other international car makers that have joint ventures in China. They will be unable to resist the reality of the country’s cost base, which allows a locally made Suzuki Alto mini to retail in China for as little as £2,200. A made-in-China VW Jetta sells for £6,600. And these are customer prices, not ex-factory.

Any expansion of China’s automotive exports is therefore more likely to come from established vehicle makers using the country as a low-cost job shop than from the development of indigenous Chinese brands. Many Volkswagens sold in the UK, for example, come from Mexico, Brazil, South Africa and Slovakia. Buyers are happy because they trust the brand, just as they would if VWs came from China.Persuading consumers to embrace doubtful Chinese brands will prove much more difficult. The country is going for Olympic gold only days after learning to walk.

China’s top 10 car makersCompany  2004 productionShanghai-VW 347,531First Auto-VW 287,119Guangzhou-Honda 202,312Shanghai-VW 191,327Beijing-Hyundai 150,158Tianjin-First Auto-Xiali 130,506Changan Auto Group 107,337Dongfeng-PSA 88,034Chery 79,565Dongfeng Motor 64,107Source: Global Auto Systems, Michigan