Next for the West Are Cars “Made in China”

Geoff Dyer James Mackintosh – The Financial Times

Copyright The Financial Times, 1 June 2005
The road to Damascus is a strange place to assess the future of one of the world’s most important industries.Yet the Syrian capital is the focus of an experiment that has the potential to reshape the automotive business.
For the past year or so, several Chinese car companies have been shipping vehicles to countries in the Middle East in a trial run for exports. From there, the Chinese are planning an assault on the car markets of the developed world. Chery, the most ambitious, plans to launch five specially developed models in the US in two years’ time.
These may be early stages but the Syrian experiment could be the start of an unstoppable shift in the global automotive sector. A first sign came when Shanghai Automotive Industry Corporation (SAIC) – which last year bought Ssangyong, a South Korean maker of sports utility vehicles – recently tried to take control of MG Rover.
From T-shirts to televisions, Chinese manufacturers have cut a swath through a number of industries over the past 10 years, as aggressive entrepreneurs harnessed low-cost, hard-working labour. Goods made in China have come to dominate consumer electronics, white goods, furniture and textiles among other sectors.
“Looking at what has happened in other industries: it is clear that the Chinese companies are good at competing on price and cost,” says Sun Jian, a consultant with AT Kearney in Shanghai. “In 10 years, the local carmakers will become strong competitors.”
Those other sectors employ many thousands of people but they pale in comparison with the motor industry, which last year accounted for 4 per cent of US gross domestic product. It is crucial in Germany, where one in seven jobs relies directly or indirectly on the car industry. If Chinese manufacturers can repeat the same low-cost formula that they have used so successfully in consumer electronics, they could prompt the rest of the motor industry to transfer significant parts of its production to China. With popular anxiety about the competitive threat from China on the rise, the prospect of China exporting huge volumes of cheap cars is one to strike fear in many western politicians.
From the start of China’s economic liberalisation in the 1980s, the government has had its eye on creating an indigenous car industry. By forcing multinationals to enter the country through joint ventures, Beijing’s leadership hoped the Chinese companies would quickly learn the necessary skills. However, progress was slow. Although many local companies made a good living through the joint ventures, their partners let them go only so far. They learnt about manufacturing but they were shut out of the design and research needed to create their own brands.
By 2004, the government was getting frustrated. A new policy document made clear that it wanted local companies to take aggressive steps to develop their own technologies and brands. One industry executive says the big Chinese companies were ordered to hurry up.
SAIC, which is controlled by the Shanghai city government, is the Chinese company that has made the biggest effort to acquire development skills. Indeed, it could still end up with some important Rover assets. It believes it has acquired exclusive intellectual property rights to two Rover models, although this is disputed by the administrators of the UK company.
The real prize from the originally proposed deal would have been the engineering teams, car development capabilities and the Rover brand. SAIC has since hired Ricardo, a British engineering consultancy, to conduct research and development. According to people close to the company, Hu Maoyuan, SAIC’s long-standing chairman, begins every internal meeting with a pledge to develop the company’s own brands.
Geely is one company trying out its wares in Syria. Unlike most of its Chinese rivals, Geely is a private company, which some analysts believe might give it an entrepreneurial edge over its state-owned rivals. Founder Li Shufu, a farmer’s son, made his fortune manufacturing motorcycles and has turned his attention to cars. Brilliance China, BMW’s new joint venture partner, meanwhile plans to introduce an up-market model into the German market later this year. Brilliance, based in Liaoning province in north-east China, is controlled by the local authority after Yang Rong, its chairman and biggest shareholder, was accused of unspecified “economic crimes” and fled the country.
The company that is really making a stir, however, is Chery. Founded only eight years ago in the poor eastern province of Anhui, Chery gained notoriety with its $3,500 (£1,900) QQ mini – a car that General Motors claims is so similar to its own Korean-designed Chevrolet Spark that it is taking legal action against the company in China.
Earlier this year, Chery announced a plan to start selling cars in the US in 2007 with a target of 250,000 vehicles in its first year, reaching 1m within five years. Annual sales of 250,000 would give Chery a market share in the US similar to that of Volkswagen or BMW, according to Goldman Sachs, and account for 10 per cent of all car imports into the US.


ft.com

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