Guest Commentary: Why the West Need Not Fear China
August 28, 2007

By Richard Feast

The People’s Republic of China has set its auto industry the task of destroying the rest of the world’s automakers.

We know this is true because every newspaper, magazine, TV channel, Web site and blog keeps sounding the alarm these days. “Beware! The Chinese auto industry is coming,” is the dire warning.

Zap – there goes General Motors.

Bang – that’s Toyota finished.

Blam – good-bye, Mercedes.

This is PlayStation stuff, only less plausible.

It is time for a more level-headed assessment of the potential of China’s auto industry beyond the country’s borders.

In reality, China will have little impact on the West any time soon -– if at all.

Challenges: Quality, Consolidation, Brand Recognition

There are three basic reasons why: quality; consolidation; and brand names. There’s a serious lack of any of these commodities in China today.

Of course, no one is oblivious to China’s exceptional economic performance and the business acumen of its exporters. The country is a formidable competitor around the world in sectors as diverse as laptops, toys and textiles.

Now its auto industry has accelerated into the fast lane. China was the second-largest vehicle market in the world after the United States last year. And all but a handful of those vehicles were made in China.

Consumers in the West weaned on cheap-everything from China are excited at the prospect of buying cheap, Chinese-made cars. Dealers salivate at the thought of another financial killing.

It’s not the same for Western automakers and their employees. They shiver at the likely knock-on effect of unfettered Chinese auto imports. For them, it means shuttered local factories. And politicians fret about what it will all mean when election time comes around.
 
They should relax a bit.

China's Auto Foundation Set by Establishment

First, it is important to separate indigenous Chinese brands from the country’s role as a low-cost contract job shop. The foundations of China’s auto industry are joint ventures with big international groups like Volkswagen, General Motors, Toyota, Hyundai and others.

These joint ventures produce local vehicles for local buyers. The next step for them is to ratchet up what until recently were irrelevant exports to soft markets.

Honda now sells the China-made Jazz (Fit) in Europe. Dodge proposes to buy some small cars from Chery, a fledgling local firm that didn’t exist a few years ago. Fiat is going to use engines made in China in European production models.

It won’t end there.

More Chinese-made cars will be sold in export markets by the likes of GM, VW and so on. More Chinese-sourced components will find their way into Western-assembled cars. If a company can cut costs by shopping in China, or India or Vietnam or wherever, it will.

It’s happened before –- but not always with memorable results. How many U.S. consumers still curse the South Korean-made Pontiac Le Mans they bought in the 1980s?

So, Western consumers will find Chinese-made cars first in their local Chevrolet, Toyota or VW dealerships. 

But as for Chinese-branded cars having any impact in the U.S. (or Europe), it won’t happen in my lifetime –- because of those basic reasons.

Vehicle Quality Lacking

Let’s start with product quality. Today, China’s automotive quality standings in the world are the equivalent of all those toxic prawns and toys. People in the mature, developed world will buy a few out of curiosity, but the appeal will soon fail, just as the Yugo’s did a couple of decades ago.

There’s another quality implication as well. To sell in the West means products have to pass a mountain of regulations covering crash and pedestrian safety, exhaust emissions, fuel consumption, noise levels and recycling.

That’s hard enough for established international automakers to meet. It would cost China’s automakers more money and manpower than most of them have.

Which brings us to the second main reason. China’s industry today is like those in the U.S. and Europe a hundred years ago.

Industry Consolidation Inevitable

Following a century of consolidation, each of today’s big vehicle-producing nations is home to between one and three indigenous automaking groups.

China, by contrast, has around 100 vehicle makers. Most of them are too small and ill-equipped to survive. They haven’t the technical know-how, money or knowledge of global markets to be anything other than local enterprises.

Consolidation will have to take place, just as it did everywhere else, to whittle down the numbers. It has to in order to generate the economies of scale required to compete internationally.

And that process will take decades. China may have embraced market economies, but almost all automakers are either directly owned by regional authorities (i.e., local Communist Party politicos) or through other companies that are controlled by regional authorities.

And, rather like in the U.S., there is intense rivalry between the regional authorities and central government. 

Consolidation would take place naturally in a proper market economy. China isn’t one of those because the Communist Party is at the heart of all decision-making. Automakers exist at the whim of central and local governments, not because they are commercially viable.

Brand Recognition: Nonexistent

The third reason, and the one totally overlooked in all the alarmist stories about the "imminent arrival" of all these Chinese automakers, is the one of branding. 

With the questionable exceptions of MG and SsangYong, Chinese companies own no automotive brands that are recognized outside China.

And this is an era of global branding. The world belongs to Coca-Cola and Starbucks, Microsoft and Disney, BMW and Toyota, not to a bunch of diddy regional or national brands.

What on earth is a Geely, Chery, Roewe or Great Wall to anyone outside China? A packet of noodles, an air conditioner or vacuum cleaner? Or perhaps a firm that processes poisonous prawns?

Branding is a giant, emotional element. Western consumers don’t much care who makes commodities like vacuum cleaners. But they sure do care what badges are on the cars they drive.

China Will Overcome Obstacles -- In Time

Given time, all of the obstacles can be overcome, and perhaps will be. China’s automakers are already buying design and technology from the West. Product quality will improve. Consolidation will take place. Brands will become established.

But all this will take decades to achieve. Our great grandchildren might -– just might –- be happy to buy a Chinese brand car, but it will take at least that long for them to be accepted by most Western customers.

My gut feeling is that Chinese brand cars might achieve 1 percent of the U.S. market by around 2040. By that time, energy and emissions issues will have transformed our cars and light trucks.

In other words, China’s automakers have the task of adapting to these new environmental realities at the same time as they improve quality, consolidate and establish their names around the world.

It is possible they will never be able to catch up like Japan and South Korea did before them.

About the author

Born in Cambridgeshire, England, in March 1945, Richard Feast trained with a local newspaper group before joining Autosport, a weekly international motor sport magazine based in London. After a number of short-term assignments, he rejoined Autosport, by then owned by Haymarket Publishing, in 1970 as editor.

In 1973, he was the launch editor of Haymarket’s What Car?, at the time a new concept in consumer journalism. Feast left Haymarket at the end of 1979 to become a freelance writer, specializing in the international automotive industry. Increasing work as European editor of Automotive News led to a four-year assignment at Crain Communications in Detroit where he became international editor of Automotive News and editor for a period of the same publisher’s AutoWeek magazine.

Feast returned to England in 1990 to become a freelance writer once more. Since then, he's worked regularly at different times for Automotive News Europe, Automotive Industries, FT Automotive World, Car, Top Gear, Motor Industry, International Fleet World, Supplier Business, Automobile, New York Times, Wall Street Journal, Daily Telegraph, The Independent and others.

Feast is the author of Kidnap of the Flying Lady (MBI, 2003), an investigation into how Vickers sold Rolls-Royce and Bentley to BMW and Volkswagen respectively, and The DNA of Bentley (MBI, 2004), a history of the Bentley marque.

Feast is now semi-retired.

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