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 For instance, at least three factories are making the same version of an outdated, 20-year old Toyota van (under different model names), using the same production-line layouts.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.