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China eyeing US auto market

"There is nothing I can do with this bone," mumbles Cao Cao (曹操) in the classic 14th century Chinese novel, Romance of the Three Kingdoms (三國演義), while chewing on a bare bone. "But," he continues, "it would be a waste to throw it away." One could easily draw an analogy here with the Chinese auto industry.

A lot of excitement has stirred up lately about the prospect of Chinese cars being sold in the US. Having witnessed China's rapid emergence as a global manufacturing powerhouse, it is not surprising that many Americans are beginning to wonder how long it will take for China to realize its stated goal of becoming the world's leading automaker by 2010.

China's automotive industry has grown at a phenomenal clip over the past decade. As late as 1990, China produced only 42,000 cars, but by 2004, the number had surpassed 2.3 million. Next year, China is expected to make over 6 million cars and trucks, overtaking Germany to become the third-largest vehicle manufacturer in the world.

Chinese cars, once regarded as being poorly built -- assembled by hand using low-cost labor, and even their steel being poured into molds by hand -- continue to improve. Chinese automakers have been aggressively acquiring advanced technology, mainly through foreign joint-ventures -- a strategic move that has already shortened their learning curve by a quarter-century.

But should the US market be bracing for a sudden wave of unexpected competition like the one from Japan that started 30 years ago? It took Japanese automakers some 20 years to get a strong foothold in the US market. It took the Koreans only 10 years. Can the Chinese do it in less than five as some people expect?

Perhaps not quite that fast. Chinese production costs are still generally too high, and the quality of their cars and trucks below par, compared to other Asian carmakers. And there remains one giant hurdle: Chinese cars simply don't meet up to US emissions and safety requirements.

fragmented industry

In order to gauge how long it might take for Chinese cars to hit American roads, it is helpful to consider some of the problems afflicting China's auto industry.

China's auto industry is structurally fragmented and inefficient. For one, there are far too many car plants doing the same thing. For instance, at least three factories are making the same version of an outdated, 20-year old Toyota van (under different model names), using the same production-line layouts. This makes little economic sense because it counteracts economies of scale.

On the flip side, there is a lack of a common platform. Some Chinese automakers produce sport utility vehicles only, while others make only sedans. Few offer a full line. And many struggle to maintain consistent quality standards. For various cultural and economic reasons, they generally lack the experience and knowledge to put into place effective systems to select, inspect and manage their suppliers.

US regulations on safety and vehicle emissions are the biggest obstacle.

Although many Chinese carmakers are aware of these issues, such concerns are superseded by intense competition and price pressure. Poorly enforced safety regulations are still weakly grasped by a culture that encourages drivers and pedestrians to be more adventurous in nature than their counterparts in the West.

One of China's big car manufacturers recently cited rigorous scrutiny by US regulators as the reason why the company does not intend to export to the US.

Once Chinese automakers improve production, they will have to learn how to market their vehicles in North America. For Chinese companies, marketing abroad has long been a major sticking point.

How many, for instance, can remember LG's former name, Lucky Goldstar? And how many Americans can pronounce the names of many Chinese car factories?

Without being able to build stronger brand awareness and image outside China, obscure-sounding Chinese carmakers will find it difficult to break into foreign auto markets at a time when global branding has never been so vital.

But their troubles won't end there. By the time Chinese automakers figure out how to manufacture more efficiently, attain consistent quality and safety standards and market their cars in America, their current models will be obsolete. At the moment, nearly all newly designed sports utility vehicles in China resemble the BMW X5, but how long will this appeal to consumers?

LAGGING R&D

Lagging research and development is sealing China's automobile sector in a time capsule.

Consolidation in China's auto industry will necessarily occur over time, helping to resolve many of these issues, if properly guided by sound government policies and continued economic liberalization.

In the meantime, US car dealers face a dilemma: Should they spend money now to get involved with the Chinese auto industry, or risk being left along the roadside in a cloud of dust?

Many see little economic rationale for positioning themselves to (one day) ship over boatloads of Chinese-made cars and set up distribution, a long and costly process. They are skeptical of Chinese imports and inclined to toss away what they think is a bare-bone opportunity.

But should they be?

Any shrewd observer who has visited auto plants in China over the past few years, and who recognizes the changes shaping up, might say, with a hint of irony, another Chinese adage: "If you get on the train today, you'll overpay your fare; but if you don't get on today you will be left behind in the dust."

Siva Yam is president and Paul Nash is associate director of the US-China Chamber of Commerce.
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