China's Car Makers Ready to Go Global?

SHANGHAI Apr 16, 2005 Ben Blanchard writing for Reuters reported that after decades of riding global car makers' coat-tails and churning out clunky cars few wanted, upstart Chinese firms are flexing their muscles, designing sedans that threaten to engulf world markets.

Now, the likes of General Motors Corp. and Toyota Motor Corp. are getting increasingly nervous about the country's vaunted export might, afraid that automotive history -- a la Japan and South Korea -- might repeat itself.

Analysts and industry executives call for calm.

The Chinese must first deal with poor-quality perceptions -- as even Nissan Motor Co. once had to -- the higher cost of making cars there, endemic intellectual property theft and a serious lack of design savvy, they say.

"I'm not sure whether it will take 10, 20 or 30 years, but it's entirely possible that in future we will see Chinese-badged cars being driven on the streets of Japan," said Katsumi Nakamura, president of Nissan's Chinese venture.

"They are very ambitious."

Indeed, executives convening at next week's Shanghai auto show can expect to be greeted by a flurry of activity from China's car makers: unveiling plans to make own-branded products, pushing cars onto a saturated world market, marketing blitzes.

Mainland car makers and foreign partners such as market leader Volkswagen AG have unveiled plans to spend more than $15 billion tripling capacity to over 7 million cars by 2008, sparking fears of a glut.

If China fails to become the world's second-biggest car market by 2010, as McKinsey & Co. predicts, the country could suddenly find itself saddled with millions of unsold cars.

The idea of Geely or Shanghai Automotive Industry Corp, China's top car maker, mimicking Toyota's or Hyundai Motor Co.'s success is keeping industry chiefs up at night.

"If you have all this capacity, you'll have to consider going abroad," said Yale Zhang at consultancy CSM. "This is the route all Chinese companies are going to take, and car makers are no exception. Eventually the market will become saturated

FUELING FEARS

A market downturn is fueling fears. After nearly doubling in 2003, car sales growth braked to just 15 percent in 2004 and should grow at an even slower pace in 2005.

At the forefront of the burgeoning export push are two companies -- Geely, based in the eastern private enterprise hotbed of Zhejiang, and Chery Automobile Co., accused by GM of copying one of its cars -- a charge it denied.

Li Shufu, Geely's ever-ebullient chairman, wants to sell two-thirds of output overseas, though he is coy on when that could happen. Geely hopes to produce 650,000 cars a year by 2007.

"We must make cars like people from Wenzhou make lighters," Li told a forum in Beijing last month, referring to the city where a quarter of the world's lighters are made.

"But developing a car industry is like growing one tree slowly to cover a whole forest."

China is a sapling where cars are concerned: the world's seventh-largest economy exported fewer than 50,000 cars in 2004, mainly to the Middle East and Africa. Now the focus is shifting to the United States, the world's largest auto market.

Malcolm Bricklin, the entrepreneur who introduced the Yugo to Americans in the 1980s, plans to sell 250,000 Chery vehicles in the first year starting 2007, undercutting by 30 percent the prices of competing U.S.-made models.

And Dutch rally driver and car dealer Peter Bijvelds wants to sell about 2,000 of the first Chinese cars in Europe this year -- Landwind SUVs made by a unit of Jiangling Motors, itself a partner of Ford Motor Co. -- at almost half the price of their nearest comparable competitor.

Far-fetched? Perhaps not.

Toyota, now the world's second-largest car maker, got off to a troubled start in the United States in the 1960s, and the Koreans' offerings were widely ridiculed in the 1980s.

"If 10 years ago you asked whether Toyota was going to be as successful in the U.S. as it is today, many people would have been skeptical," said Clive Saunderson, an Ernst & Young partner. "U.S. car companies are today under threat in their own backyards from the likes of Toyota. Why shouldn't Chinese car companies be able to do the same thing?"

LEAP OF FAITH

Others point out a lack of research and development skills.

"What they can copy is the appearance. They cannot copy the inside technology, like the engine and transmission," said Chuan Tang, an analyst at KGI Securities.

Poor logistics and the expense of using imported parts also raises the cost of car making in China. It costs some $10,000 more to buy a Chinese-made Buick Regal compared to the United States.

Finally, persuading Europeans and Americans to buy cars made in China, a country known more for shoes, textiles and cheap electronics that have flooded Western markets in recent years, could require a leap of faith.

"Passenger vehicles are not like PCs in that design, brand and other value-added factors weigh heavily in a buyer's purchasing decision," said Nissan's Nakamura.

"If we're just talking about whether (the Chinese) will be able to build vehicles that can transport people, they'll go a long way. But when it comes to building up a brand, it's going to take a long time."

(Additional reporting by Chang-Ran Kim of Reuters in Tokyo)