Is America Ready for Cheap Chinese Cars?

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"Consumers are expecting Chinese cars to be fuel-efficient and inexpensive," said Lincoln Merrihew, senior vice-president at TNS. "If those key expectations are not met, it will be a big problem."

Chrysler will undoubtedly have a leg up in establishing China as a viable source of automotive hardware. It has been in on the design of the car it plans to launch in Latin America and North America. It is based on its Hornet concept car, which has been shown at auto shows, will carry the Dodge brand, and will be serviced by Dodge dealers. In that respect, it will be no different than General Motors (GM) sourcing its Chevy Aveo subcompact from its GM-Daewoo unit in South Korea. Relatively few Aveo buyers are even aware it is built in South Korea because of the Chevy branding, though the strides that Hyundai Motor and its affiliate Kia have made in quality have elevated the image of "Made in Korea" in recent years for those who actually do know where it's built.

Giving Up on First-Time Car Buyers

"China isn't even here, and I'd say their image is roughly where South Korea's image was when they entered the U.S. market," says consultant Keene.

A big reason that Chrysler, as well as GM and Ford Motor (F), are so interested in China manufacturing is that they have no good answer for the inexpensive cars being sold by Hyundai and Kia in the U.S. Toyota Motor (TM) has recently launched the Yaris lineup. Honda has successfully introduced its Fit subcompact, and Nissan Motor has brought out its Versa subcompact to do battle in the $11,000 to $13,000 segment.

By leaving the sub-$13,000 market to the Koreans and Japanese, Detroit has been giving up a lot of first-time buyers who will establish brand preferences. There was a time when many Detroit executives believed they could combat Koreans best with American used cars, but those days are over.

Dealers Lining Up to Sell Chinese Cars

Labor costs in the U.S. make it impossible for Detroit manufacturers to make small cars that retail for less than $13,000 per vehicle and still make a profit. It used to be that GM, Ford, and Chrysler were willing to make small cars at a per-unit loss, with sales of high profit trucks and sport-utility vehicles making up the difference. But the financial woes of all three companies have left that thinking by the side of the road.

Meantime, there is still more smoke from China in the way of U.S.-bound cars, than fire. Plans to launch are plentiful. Real cars to buy are another matter. Nanjing Automotive Group last year acquired the rights to the MG brand from the British Rover Group and announced plans to build Chinese-engineered MG-branded vehicles in Oklahoma. But that project has been delayed. The U.S. manager of the operation left, and Nanjing managers have said in recent months that the whole scheme is in question. Last month, Hebei Zhongxing Automobile, a relatively minor Chinese automaker, said it hopes to export three vehicles to the U.S. in 2008 and that it plans to build a plant in Mexico.

Launching cars and whole new brands in the U.S. is not as easy as many of the Chinese think, says Sheldon Sandler, founder of BelAir Partners. But many of the schemes have had little trouble attracting dealer investment. Shelburg's China Motor hasn't taken dealer deposits for distribution rights, he says. But more than 100 have shown solid interest. Bricklin has escrowed big deposits from dealers from when he was going forward with Chery, and he is holding them while he looks for a new partner.

Why are dealers so anxious to sell Chinese cars when the image of the country is worsening with American consumers? "They are afraid of missing out on the next Toyota," says Sandler. Talk about a high bar to clear for the Chinese.

Click here to see examples of Chinese cars that could one day be found on U.S. roads.

David Kiley is a senior correspondent in BusinessWeek's Detroit bureau.