Global Economics

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. But then again, it all comes down to how the system is implemented."

While Chinese carmakers appear to be able to generate headlines at will by reeling off US and European export targets, they are actually quite cautious planners. For the time being, the developing markets of the Middle East, Eastern Europe, Latin America, Africa and Southeast Asia will remain the primary focus, in addition to the domestic market.

Carmakers have already set up production and distribution centers in these regions and more are likely to follow.

"It's going to go in stages," said Michael Dunne, vice president for Asia-Pacific at auto consultancy JD Power & Associates. "Right now, it's almost exclusively to developing markets. We have not seen any penetration of developed markets like the US and Europe - the quality and reliability just isn't there yet. In four years time, the cars might be ready."

Of all the domestic manufacturers, Chery has drawn the most attention to its export plans. Initially, this was largely due to the involvement of Malcolm Bricklin, a man with a track record of bringing low-cost cars to the US, having introduced Subaru to American drivers in the 1960s and the Yugo, from what was then Yugoslavia, in the 1980s.

Bricklin's Visionary Vehicles was to provide the dealer network and Chery the vehicles themselves, with cars hitting the streets by early this year. There was talk of selling one million units per year in the US within six years.

However, joint venture talks broke down last November amid claims that Chery was dragging its feet as well as holding export negotiations with other automakers.

But according to Wendi Friedman Tush, a spokesperson for New York-based Visionary, there are darker reasons for the fall-out and these are likely to have legal consequences.

"It's not so much that Chery chose to do business with someone else as what they took from Malcolm in terms of designs and people," she said. "It will all come out in due course in the courts."

Chery declined to be interviewed for this article.

STILL LOOKING

Bricklin is still keen on sourcing cars from China but now his focus has switched to electric hybrid vehicles. The company has made contact with potential partners but intends to wait until the prototype is perfected before making any agreements.

"Malcolm always wanted to do an electric hybrid," said Tush. "This was going to be the sixth car we produced with Chery as they weren't ready to do it right away. Now we are free of Chery, Malcolm can move back to where his real interest lies."

"I suppose there is a silver lining to getting royally screwed."

She added that the business model will be structured so that Visionary owns the battery technology used in the cars, something the company has "learned it is part of doing business in China".

One of the prospective partners that Chery was talking to as the Bricklin deal went into meltdown was German-US manufacturer DaimlerChrysler. This resulted in a landmark deal, signed at the end of last year, that will see Chery build compact cars for sale in the US and Europe under Chrysler's Dodge brand.

Production of the vehicles, which will be the first wholly Chinese-made cars to be exported to the US, is expected to start no earlier than 2008. They will have to compete with compact cars built by the likes of Chevrolet, Honda and Toyota.

WAL-MART PHENOMENON

The deal is seen in some quarters as the "Wal-Mart-ization" of the auto industry, the first step in what will become an exodus of car companies from the West as they pursue lower-cost options in Asia, following a pattern that has become familiar in manufacturing as a whole.

"We are already seeing a lot of production shifting to Asia - they are building better cars at lower cost," said Dunne.

"DaimlerChrysler has never developed a competitive small car and this has hurt its business in China and in the US. Chery said, ‘We are your solution.' We will see more initiatives like this, just as we have seen in other industries."

Others are more skeptical, though.

Citigroup's Cheung points to the small size of the deal, suggesting that it will be difficult for either party to turn a profit. There are also unsubstantiated rumors that Chrysler's primary motive was to up the stakes in its dispute with United Auto Workers, the US trade union. By doing business with Chery, Chrysler was effectively telling its workers: accept lower wages or we'll pack up and go to China.

"This arrangement might suit Chery but it wouldn't suit us," was the verdict of Geely's Ang. "If a car company phoned up tomorrow and said they wanted to do a joint venture, I would go right over.

"But one of the major difficulties is that we must use our own brand whereas most foreign car companies just want to utilize our manufacturing capacity."


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