China Car Industry's Export Ambitions

Beijing sees exports as a key part of its auto strategy, but the rush to sell low-cost cars overseas brings quality and profit concerns

Geely Automobile's debut at the Detroit auto show in 2006 made headlines. It was the first time a Chinese car had appeared at the event in the heart of US car country and, as spectators gathered around the silver CK sedan, the talk was all about cut-price Chinese carmakers taking the world by storm.

With big export plans in the pipeline, Geely had realized its goal of pulling off a US publicity coup. Or had it?

"They got quite a bit of attention with people saying the ‘Chinese have arrived'," recalled Charles Cheung, head of regional autos for Citigroup. "But the interesting thing was that it wasn't done so much as to promote Geely in the US as to promote it back in China. The Chinese media reported the strong reception Geely received in the US."

This story reflects the conflict between publicity and reality that habitually emerges when Chinese carmakers start talking exports.

AIMING HIGH
Beijing has identified exports as a key part of its auto strategy. At present, China's exports of auto and auto parts make up just 0.7% of the global total. The government wants to push this to 10% over the next decade. Domestic manufacturers have responded by unveiling a set of ambitious overseas sales plans.

Brilliance China Automotive Holdings said in late 2006 that it hopes to sell 158,000 vehicles to Europe over the next three years. Great Wall Auto, the domestic market leader for pickups and sport-utility vehicles (SUVs), wants exports to account for half of total sales by 2008, up from around 28%. Changfeng and ZX Auto are targeting the US with SUVs and sedans, respectively.

Chery saw exports surge 178% in 2006 to reach 50,000 as total vehicle sales rose 61% to over 305,000. It has talked of more than matching this figure in exports alone come 2008. Rival Geely plans to export 33,000 cars this year, up from 12,000 in 2006, and have a foothold in the US and European markets by 2009.

These export ambitions are often put down to overcapacity in the domestic market. According to the National Development and Reform Commission, demand came to just 71.5% of capacity last year. Investment control measures were announced in December that ban the building of new plants if the carmaker in question failed to sell at least 80% of the previous year's output.

The manufacturers, though, are not unduly concerned.

"People look at capacity and compare it to actual sales and see it is bigger than the actual sales," said Lawrence Ang, executive director of Hong Kong-listed Geely Automobile Holdings. "But the auto industry saw 35% growth last year. If you have spare capacity in this market then it's an even bigger problem - and you should fire the management."

He sees exporting as common sense.

"There were 40 million passenger cars sold in the world last year and only three million of them were sold in China. There is no room for a car company that only focuses on one country. We have to be an international player."

China's total auto exports came to 340,000 units in 2006, nearly twice the 2005 figure of 173,000. Exports of passenger cars alone tripled to 90,000.

However, this rush to sell low-cost vehicles overseas has raised concerns about quality control. According to state media, 1,025 enterprises in China were involved in vehicle exports in 2005. More than 600 of them exported less than 10 cars in the entire year while 160 only sold one vehicle overseas.

ONLY THE BEST
Last August, eight cities were designated auto export hubs, which means firms in these areas can get special loans and tax breaks. This was followed by the introduction of an export licensing system on April 1, under which manufacturers that don't meet a certain export quota are prohibited from selling vehicles overseas.

Most if not all of the major players have already received their licenses; smaller manufacturers have not.

"When Korea started exporting to developed markets it inevitably made some mistakes - notably in the quality and the after-sales service," said Cheung. "If you don't stop these second and third-tier assemblers from flooding the market they may well ruin things for the industry.