Just read a great article on China’s auto industry, titled, “Chinese OEMs and the U.S. Market – Fact vs. Fiction.”  The article is by Bill Peng, John Jullens, and Bill Russo. Grossly summarized, the article throws cold water on the idea that Chinese car manufacturers will be ready to invade the United States auto market by 2020. Before I discuss more about this article, I will first refer back to two earlier posts where I discussed China auto readiness.

In my first post, way back in 2006, I took issue with a speaker who predicted Chinese cars would be hitting the U.S. in two years.

My second post dealt with a meeting I had just had with Bill Russo in Beijing who had reinforced my view that China’s car industry had a long long way to go before it would be able to make any sort of mark in the U.S. market:

There are those who state confidently that China will own the worldwide car market within a few years (these people have been saying this for years — check out this post from three years ago where I rightly said NO WAY) and there are those who state it will never get there. My only qualifications are that I come from Michigan and I have represented a few auto and truck manufacturers and a whole slew of auto parts manufacturers, including many in or going into China. But like just about everyone else, I have a view, and mine is that China eventually will do well selling low end cars worldwide, but that it is not yet close to selling good cars in the United States. I spent seven hours in my car yesterday (driving back and forth to Wenatchee, WA) and there is no way I would have chosen a Chinese car for that trip. And it’s not just me.

I landed in Beijing last month with my wife and daughter. The first taxi in line was a very old VW. The VW driver started putting our luggage into his trunk when a Chinese woman came over and asked us in pretty good English whether we wouldn’t please take the taxi behind us (a much newer, but Chinese model) because she was going on a long trip with her family. My wife asked her why she wanted the one cab and not the other and the Chinese woman gave an embarrassed look, but said nothing. I explained to my wife that this woman did not want to go on a trip with her family in a Chinese car, but she was too embarrassed/nationalistic to say so. Since we were merely going to our hotel, it was no big deal and so we allowed the switch.

On that Beijing trip, I met with Bill Russo, a former Chrysler VP in China, now head of Synergistics Limited and, most importantly, a true expert on China’s auto market. One of the things Bill told me during our meeting was that the Chinese would rather buy non-Chinese cars but buy Chinese cars based on price. That has always been my sense, but since I mostly hang out with Chinese attorneys who drive Buicks and Toyotas (mostly), I am not going to claim to have a representative sample.

But the big question regarding China autos is when they will make their mark outside China and Bill Russo just came out with an extremely thorough and thoughtful piece on his blog that says, “not yet.” The post is titled, “The Path to Globalization of China’s Automotive Industry,” and it says that China auto must achieve various intermediary benchmarks before it is ready for the world stage. If you have an interest in China’s auto industry, this post is not to be missed.

A few weeks ago, I read a blog post from a Canada-US designer, Caroline Di Deigo, who traveled to China to, among other things, see the houses at The Commune at the Great Wall. She had been very excited to see these houses after having admired them in books, but upon seeing them up close, she was disappointed by their construction:

For several years I had been excited by images in architectural books of the houses at The Commune at the Great Wall, so this trip I made a detour from our group to see it for myself. The Commune at the Great Wall was developed by Zhang Xin between 1998 and 2002, when she commissioned 11 Asian designers each to design a house, situated in a rugged hilly location within view of the Great Wall. These houses, while privately owned, now function as a resort. In my opinion however, it is really a monument, or series of monuments, to design. At first glance it’s very impressive, with unique expressions of ‘house’, ‘home’, ‘dwelling’. On closer inspection though, I found them somewhat disappointing. Possibly due to their ultimate function, they lack much of a ‘residence’ feel, and seem a bit barren, very much like ‘public spaces’, vaguely ‘museum-like’. And to get really nit-picky, the quality of construction is unfortunately lacking, and from what one reads, certain of the designers were in fact quite disappointed with the implementation of their visions, as indeed I might have been.

Chinese cars are in many ways the same.

Well apparently, Chinese cars are still in many ways the same and Russo’s new article explains why China’s auto industry is not yet close to being ready for the United States market and also why its capabilities are so often overestimated:

The actual performance and capabilities of the leading Chinese vehicle manufacturers—as well as their readiness to compete in developed markets such as the U.S.—is overestimated, for several reasons. First, the size and scale of these companies is fairly small, especially separating the sales volumes of their Western joint-venture partners. In most cases, the joint venture itself far overshadows the relatively young Chinese brand. In addition, the domestic market in China is geared to first-time buyers in hyper-competitive entry-level segments, where margins are difficult to sustain, so their overall profitability is typically quite low. That reduces the resources these companies have to expand overseas.

Furthermore, none of the leading Chinese manufacturers have yet achieved a major product or process breakthrough that could give it a significant competitive advantage. This is in sharp contrast to companies like Toyota, which built its initial position in the U.S. through its famed Toyota Production System, a new and—at the time—vastly superior operating model relative to Detroit’s approaches at the time of its introduction.

The article goes on to note that the Chinese auto manufacturers understand their shortcomings and are focusing their international sales on developing countries, not the United States. The article then speaks to what China’s auto manufacturers must do to “crack global markets”:

Chinese automakers must develop world class global supply chains and supplier partnerships, offer competitive financing products, and deploy the talents of a global human resources pool. That won’t happen overnight. It will also take some time for Chinese carmakers to learn to compete in markets where they don’t have the benefit of a low-paid labor force, management team, and supplier base, as well as favorable subsidy policies from the central and local Chinese government. It will also be essential for these companies to build a retail network and brand in the U.S., which is a substantial investment.

This all makes sense to me and I think it applies with equal force to most China businesses, both manufacturing and otherwise.

What do you think?

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.