A Growth Model for China Automakers

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If they can't make an acquisition work, what makes us think that a Chinese automaker—most likely founded less than 10 years ago—can do any better?

The answer, most likely, is that it can't.

The problem is it is extremely difficult—nearly impossible, in fact—for one manufacturer to take over another car company and make it work. Companies' cultures, processes, people, and personalities are just too different. They have different histories, different values, and a different world view. To get the two cultures to work together in a constructive manner is often a Sisyphean endeavor.

Japanese Model for Growth

Yes, a successful acquisition can be achieved, as is the case with Renault's (RENA.PA) turnaround of a debt-ridden and moribund Nissan (NSANY). But this is the exception, rather than the rule. It required the steady hand of Carlos Ghosn—himself a force of nature—to steer Nissan out of trouble.

Instead of acquisition, Chinese automakers might be better served to follow the Japanese model for growth. While Western automakers were busy buying up various companies in the last 20 years, how many major acquisitions did Japan's Big Three—Toyota (TM), Nissan, and Honda (HMC)—make? The answer is zero. None. (Toyota did buy 5% and 10% stakes in Subaru (7270.T) and Isuzu (7202.T)—from GM—in 2005 and 2006. But each investment was only about $350 million.) Instead of trying to leapfrog the competition, Japanese automakers rolled up their sleeves, and did the heavy lifting of developing their own products, manufacturing facilities, supply bases, distribution networks, dealer networks, etc.

Results Speak for Themselves

Successful Japanese automakers initially concentrated on two or three core products, making sure that their quality, durability, and ease of use were market-leading. For its core offerings, Toyota launched with Corolla and Camry; Honda launched with Civic and Accord; and Nissan went to market with the Sentra and Maxima (and later added the Altima). These products are still their core today, and among the leaders in their segments. Later they began to add complementary vehicles, like SUVs, minivans, pickups and crossover vehicles. And when Japanese automakers wanted to move upscale, they didn't buy another brand. They developed Lexus, Acura, and Infiniti.

This approach is not particularly awe-inspiring, and is not necessarily quick. But the results—in the China market and globally—speak for themselves. If the experience of Western automakers serves as any indication, the best choice for Chinese automakers may be the slow and steady path.

Timothy Dunne is director of Asia-Pacific market intelligence at J.D. Power & Associates in Westlake Village, Calif. (J.D. Power, like BusinessWeek, is owned by The McGraw-Hill Companies.) Dunne has 18 years of experience in the global automotive industry, and worked in China and Southeast Asia from 1994 to 2006.