DETROIT – The typical Western view of China’s automotive market is that with intense foreign competition, Chinese car manufacturers will be lucky to hold onto 15 percent of their home market within the next five years. The Japanese and Korean manufacturers will take 50 percent of the market while the American and European car brands hold onto the premium top 35 percent.
The Chinese auto companies, on the other hand, take a radically different view, said Michael J. Dunne, vice president of international operations and managing director of China for J.D. Power Asia Pacific. Chinese manufacturers believe that they’ll grow their market share from 30 percent today to 50 percent within five years. The Japanese and Koreans might get 40 percent, and the American and Europeans will scrape by with 10 percent, according to this countering view.
Dunne was one of the speakers at J.D. Power and Associates first conference dedicated to looking at the automotive industry in China. Held at The posh Townsend Hotel in the Detroit suburb of Birmingham, the meeting brought together a number of analysts, and representatives from auto suppliers and the Detroit auto companies -- General Motors, Ford, and Chrysler.
“I will make a prediction,” Dunne said, relating how he had asked his friend, Phil Murtaugh, Chrysler’s chief executive officer of Asia operations, why the Chinese auto companies succeed so much. “He said, ‘Because they never give up.’
“And I think we are not looking at technology but pure ambition and drive and a willingness to do anything to succeed and prevail. This is a long-term of what’s going to happen in China. And the implications for us in the western world is once they come to dominate their own home market, we will certainly see them on the streets of America and Europe as well.”
Dunne’s segment of the conference was an insiders look at the top 10 Chinese automakers – also called OEMs or original equipment manufacturers. He divided them into four groups – the leading company, Chery Automobile Co.; the “crushers,” which are OEMs that compete on price and crush all of the profit margins out of their suppliers; the “truckers,” firms that began by producing trucks and sport utility vehicles and are now moving into building passenger cars; and the “leapers,” those companies that are vying for the mid- to upper-range of the Chinese car market in an effort to become profitable right away.
There are several things to keep in mind about the Chinese auto companies, according to Dunne. First, although China’s civilization is old and cars were introduced to the country decades ago, the essence of Chinese manufacturers is that they are young and they are small.
To put things in perspective, the gap between Hyundai’s and Chery’s 2007 sales is six times. The top Korean automaker will sell about 2.3 million units globally, while Chery will sell nearly 419,000 units – mostly in China but also some for export.
“The majority of Chinese brands make less than 100,000 cars a year,” Dunne said, but he also quoted from the late Chinese communist leader Mao Zedong, “‘Who is big and who is small is unimportant. What really counts is who is getting bigger and who is getting smaller.’
“Mao used this phrase when China was trying to catch up with the West with the ‘Great Leap Forward’… that catches the spirit of where China’s automakers are today.”
The leaders of China’s auto industry are audacious, like “the guy in high school who gets knocked down 15 times on the playground and still gets up. They don’t know anything other than they will succeed, they will prevail, and nothing will stop them,” Dunne said.
For example, Dunne looked at Geely, which was the first Chinese auto company to showcase vehicles at the 2006 North American International Auto Show in Detroit. Geely will produce about 200,000 cars for 2007, but its founder, Li Shufu, recently said that “in the near future we will be producing two million cars and half of them will be for export.”
“He says this without blushing,” Dunne observed.
BYD is the largest manufacturer of cell phone batteries in the world. It’s led by the highly educated Wang Chauanfu who claims that by 2015, his nascent car company will be number one in China. Then there is the leader of a truck manufacturer, Great Wall, who is a woman, Wang Fengying. Originating from a town just south of Beijing, Wang started in the industry by building tractors, but Great Wall has branched out into producing pickup trucks and SUVs.
“She says, ‘Wait until we get into cars, then you will see something,’” Dunne added.
Given the way the Chinese industry is at this moment, the leading company is Chery. “They are number one in the domestic market, number one in terms of exports, number one in terms of management at the highest levels, number one in terms of facilities – with advanced tooling from Germany and the United states,” Dunne said. “They are a very impressive, very young company.”
Cherry is based in the city of Wuhu, in Anhui Province. Its sales have climbed from 50,000 units in 2002 to about 419,000 this year. Its exports to the Middle East and Eastern and Central Europe and Russia are expected to hit about 100,000 units for 2007. Its cars include the Chery QQ, priced at $3,970 U.S. equivalent, and the Chery Tiggo at $11,850.
Chery initially partnered with Malcolm Bricklin, the entrepreneur known for bringing the Yugo to the United States, but that alliance dissolved. During the past year, Chery has been negotiating with Chrysler to produce Chrysler-badged compact cars in China, which may become some of the first Chinese-made vehicles to come to the United States.
The so-called “crushers” are those companies that crush their suppliers on price, so there is barely any profit left. (All prices given below are in the equitant U.S. dollar amount.)
• Tianjin FAW Xiali Motor Co., located in the Tianjin province, started production in the late-1980s under contract from the Japanese automaker Daihatsu to make the Charade. A subsidiary of the First Auto Works Group, Tianjin FAW continued making its own version of the Charade, renamed as the Xiali, after the Daihatsu licensing agreement expired. Its sales hit 196,8167 units in 2006, but they dipped in 2007 to approximately 175,000 due to its cars’ dated looks and quality issues. Its vehicles are priced between $4,500-$8,500.
• Geely Holding Group’s best selling models are copies of the Xiali and are priced from $4,300 to $6,640. A privately-owned firm, it evolved from manufacturing refrigerator parts to motorcycles and then cars. Located in the city of Taizhou, Zhejiang Province, its sales hit 204,431 units last year but have flattened and dipped slightly due to Chinese consumer demand for more reliable cars.
• BYD Auto Co. manufactures its cars out of an old military factory in the city of Xian, in China’s north-central region. It has better and fresher designs than Tianjin and Geely and its founder has the vision of applying cell phone battery technology to power cars. Its sales have climbed 50 percent from last year to 93,000 units. Dunne noted that this is a company to watch “if leadership counts for anything.”
• ChangAn Auto Co. is based in the province of Sichuan in the west of China where the former Chinese leader Deng Xiaoping grew up. The Sichuanese are known as a very fiery, scrappy people. Its company’s philosophy is to make very reliable vehicles at decent prices. Its most recent product is the Benben and is prices at $5,300. With better looks than the Xiali or the Geely, the car’s sales jumped from 17,000 last year to 66,000 this year.
The truckers include:
• Zhongxing Automobile Co. of Baoding, Hebei Province. Zhongxing Landmark known as the “Wuxian” or “Unlimited” in Chinese. Its management has hired American “Big Three” engineers to lift its product quality. Its executives talk of creating a production base in Mexico to export vehicles to the U.S. even though its production volume is only 10,900 units a year. “It’s difficult for me to fathom how successful they will be outside of China,” Dunne noted. “However, the principals within the company have a different take on things. They say that throughout history – including the story of Jesus – you have to leave your hometown or home country to be respected. Go overseas and win the market and then you can come back home and people will start to listen to you.”
• Great Wall’s sales have been growing at 50 percent clip within China. As an exporter, its sales are second only to Chery in penetrating foreign markets, primarily to Russia, Eastern Europe, the Middle East, and Africa. Its chairman, Wang, says that the company makes more money on its overseas sales than in China. The company has applied for permission from the Chinese central government to manufacture its first car.
Making an analogy to Mao’s “Great Leap Forward,” Dunne said the so-called leapers are car companies lead by managers who don’t want to compete on price and make thin profit margins. They want to make a profit immediately by producing higher priced vehicles. The leapers include:
• SAIC (Shanghai Automotive Industry Corp.), which is the parent in the joint ventures with Volkswagen and General Motors. Two years ago, the company bought rights to produce the Rover 75 and Rover 25, but they did not acquire the Rover brand name. Its primary vehicle is the $30,000 Rowe 750, which is very similar to the old Rover 75. SAIC has found it tough to compete against the Toyota Camry, the Honda Accord, and the Volkswagen Passat with a remanufactured older product. The company has been the butt of jokes with its car’s name sounding like the English phrase “Wrong Way,” Dunne noted.
• Nanjing MG Auto Co. is located in Nanjin, which is about a two-hour drive northwest from Shanghai. At the same time that SAIC bought the rights to produce the Rover 75, Nanjing bought the tooling and the engine line from Rover. It’s vehicle is the $22,800 MG 7, which is very similar the Rover 75 and Roewe 750. Dunne noted that the company might be acquired by SAIC.
• FAW Car Co. is another subsidiary of the FAW Group and has joint ventures with Toyota and Volkswagen/Audi. Its vehicles include the Besturn and Red Flag, which are derived from older Audi platforms. Retailing around $20,000, the carmakers’ volumes have tripled from last year to 35,200, but it faces tough competition from Mazda, Honda, Toyota, and Buick.
• Finally, there is Brillance Jinbei Automotive Co. Since being established in 1992, the company has a “rich history of political and commercial dramas,” including the deposing of its former chairman Yang Rong after a Chinese government investigation and disastrous crash test results of its vehicles in Europe. Its vehicles include the Junjie, priced at $11,400, and the $14,100 Zunci. Its sales have climbed from 15,057 in 2005, to 73,000 units in 2006 to nearly 136,000. The company has worked closely with BMW and has improved its product quality. In J.D. Power quality surveys of Chinese consumers, Brilliance outperforms just about every other Chinese manufacturer.
The Chinese OEMs have remained competitive according to Dunne because, “they have home field advantage.” Many of these companies are owned by local or central government and are able to secure loans at favorable rates that are not available to everyone.
The Chinese OEMs also can acquire land for expansion fairly easily; have a strong ability to negotiate supplier prices down; and have not spent much money on research and development. Rather, many Chinese companies have used reverse engineering when it comes to designing and building their cars, Dunne said.
As Toyota celebrates its 75th anniversary and General Motors gets ready for its 100th it’s clear these global behemoths need to keep an eye in the rear view mirror because there’s a scrappy new kid on the block that’s hungry to compete.
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