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Chinese-made autos are coming to the U.S., but recent quality concerns could make buyers choose safe cars over cheap ones
Chrysler announced on July 5 that it will sell a small, inexpensive car built by Chinese automaker Chery Automobile in South and Central America as early as next year and in the U.S. by 2009. The car is expected to cost about $10,000. But shortly after the Chinese government approved the deal between the two companies, Chery's president contradicted Chrysler, saying the car would sell for about $7,000 and go on sale in the U.S. by next year. Such is life in the Chinese auto industry.
There is no question that Chinese automakers are going to be part of the U.S. auto scene. The question is when, and to what degree American consumers will accept cars made in China.
A recent spate of recalls and tainted products from China has dealt a serious setback to the image of goods made in China, according to some analysts. Tainted pet food, fake pharmaceuticals, and substandard tires have all made headlines in the U.S. And China's own General Administration of Quality Supervision just reported that 19.1% of the products China manufactured for domestic consumption in the first half of 2007 were found to be substandard. "We can't turn the clock back on importing goods from China, but if the negative headlines persist, it will make it tough for every Chinese brand, and that especially goes for cars," says independent marketing consultant Dennis Keene.
Some in the business of importing Chinese-made and Chinese-branded goods into the U.S. don't disagree. "No question what we are seeing now in the almost weekly headlines is going to make consumer acceptance tougher," says Malcolm Bricklin, founder of Visionary Vehicles. Bricklin is best known for co-founding Subaru of America and importing Yugos to the U.S. He has had a deal with Chery to bring the carmaker's vehicles to the U.S. But that deal is in tatters and the two sides are litigating.
Already on the Road in Europe
Meantime, Bricklin is looking for a new Chinese partner to supply Chinese-built hybrid vehicles to his company for sale in the U.S. "That seems like the best market opportunity right now," says Bricklin, who calls doing business with the Chinese automakers "a fascinating but sometimes frustrating experience" (see BusinessWeek.com, 4/12/07, "Bricklin Is Back—with a Plug-In").
Even before Chery has a chance to sell cars through Chrysler, Scottsdale (Ariz.) distributor China Motor is expected to showcase its plans in Detroit this month to sell vehicles built by Chinese automaker Brilliance China Automotive (CBA) as early as the fall of 2008. The company has been certifying Brilliance vehicles in suburban Detroit for U.S. safety and emission standards. China Motor chief David Shelburg says the company has been "flying under the radar," but is about to make its plans clear.
Last May, Shelburg's company made a presentation to dealers and members of the media in New York, and made an impression. "They really had their act together and look readier than anyone from China to start up in America," says Peter DeLorenzo, editor of Autoextremist.com, who attended the conference put on by auto dealer advisory and financing firm BelAir Partners. Brilliance has already launched its cars in Europe.
Korea Is Making Strides in Quality
China Motor is expected to launch with a sedan priced around $20,000. That price, though, could be too high to gain consumer acceptance. TNS Automotive of Marlborough, Mass., recently surveyed 2,500 American consumers on attitudes about Chinese cars and what points should be emphasized in marketing. According to the survey, one approach that stands out as a no-no is emphasizing anything about Chinese heritage or origin. Fifty-four percent said "do not emphasize" Chinese heritage, while 29% said "emphasize only a little."
"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.