opinion STEVE D'ARCY
East Meets West
WITH CHINA POISED TO BECOME THE WORLD'S BIGGEST EXPORTER, HOW LONG BEFORE THEIR CARS FILL OUR GARAGES?
At every major auto show in the world, Chinese car manufacturers have begun to showcase their wares. For more than 20 years now, Chinese leaders, focused on economic development, have sought to develop a significant auto export industry. Close at hand were the tremendous successes of Japan and Korea, which became automotive export powerhouses by establishing strong global brands (while reaping large financial benefits for their flagship companies).
So is the moment now at hand -- the moment when Chinese cars surge into the rest of the world?
To help us answer this question, we need to consider two things: First is the nature of China's export industries. The other is the way in which the Chinese passenger-car industry has developed in the last decade. They are related, and they are informative.
In the fourth quarter of 2007, China surpassed Germany as the largest exporting nation in the world on a monthly basis, and in 2008, China will become the world's biggest exporter. But in sharp contrast to its export volumes, China lacks brand equity. That means the overwhelming bulk of Chinese merchandise exports is designed, supervised, distributed, and sold under non-Chinese brands. There's a distinct pattern in China's export development that's relevant to the prospect of auto exports. The first stage, which drives volume and revenue, is accelerated mastery of technologies and highly competitive lean processes of assembly. The second stage is building upstream supplier capability, which captures more of the total product value onshore.
What's lagging is building competence for new product design and development, and downstream expansion into global distribution channels and brand development. In some industries -- mobile phones, laptops, large-screen televisions, for example -- the strategy was to build a foundation of competence through outsource manufacturing and foreign-branded joint ventures, then break out into global markets with Chinese-designed, Chinese-branded products. So far, with the exception of a few homegrown brands like Huawei and Haier, and bought-in brands like ThinkPad, this has not yet worked. The rapid expansion of outsource manufacturing may, in fact, retard the development of Chinese-branded products.
Officials planning and overseeing the development of China's auto industry had such a pattern in mind when the strict JV regulations were formed, starting in the mid-1980s. Within a few years of the formation of Shanghai Volkswagen and Beijing Jeep, for example, China required that many components be produced locally. By the early 1990s, foreign companies entering China had to bring along design capability and resources.
This brings us to my second point -- how the Chinese auto industry has developed up until now. Regulations, tariffs, and the product strategies of large SOE (state-owned enterprise) automakers were all tailored to build a foundation for the export of highly competitive, Chinese-designed, and Chinese-branded automobiles. Some parts of this were well-directed; some were not.
Focusing product licenses on mid-tier cars and promoting local content from the late 1980s successfully stimulated a strong, international component base in China that has recently begun to export. In the early 1990s, as the auto export goals took shape, leaders undertook wide consultations and were persuaded to build component export capability first before they embarked on an export vehicle. The key to this was attracting MNC component-makers for the initial phase.
Originally, global component-makers were reluctant to follow major assemblers into China, as there were no economies of scale. But margins were generous -- the combined result of high tariffs and local content requirements for assemblers. As a result, from the late 1990s and especially post-2003, Chinese markets were often the most profitable for global componentmakers. In contrast to India, for example, models were mid-tier, prices were high, and margins were protected. In the last five years, significant diffusion of knowhow into purely domestic componentmakers has created a high-potential, high-capacity, and highly competitive component supply chain in China.
On the assembly side, the original focus of the international JVs was midtier luxury models, ostensibly to replace imports as the car of choice for officials and executives. The concept was that domestic makers would develop and build the Chinese "family car," where the massive volumes would ultimately be. As it turned out, the JVs pushed themselves into the small car space, through various means. But contrary to the expectations of many, Chinese buyers supported larger cars. In fact, within days of the introduction of the Tata Nano, the $2,500 wonder car that recently caught everyone's fancy, Chinese industry sources published articles noting that its buyers were losing interest in small cars. Sub one-liter engine sales declined by 24 percent in 2007, while the overall passenger-car market surged by 24 percent to reach 7.88 million vehicles.
So is the moment at hand when Chinese automotive exports will surge into mature global markets? Looking at the development history of major export categories, the answer is "not so fast."
Lagging capacity on the part of Chinese enterprises to develop the soft side of business, channels to market, brands, customer relationships, and after-sales systems constitutes a major challenge. The first meaningful exports will likely be under the management -- and potentially the brands -- of global JVs, modeled on Honda's successful exportassembly operation in Guangdong.
This kind of program is of limited interest to China's industry planners, but they'll watch and act carefully to make certain its development doesn't interfere with the ability to get genuine Chinese cars into world markets. In particular, China will be careful not to let its most promising automakers, big and small, be acquired or otherwise gobbled up by multinational corporations.
Looking at the developments of the Chinese auto industry in particular, however, the answer is also "not so fast," but for sure, eventually. The strong growth of China's supply chain is poised to support the development of competitive, attractive vehicles with distinct Chinese characteristics and potentially distinct technologies.
The early exporters will certainly learn some hard lessons, but their experiences in tackling Europe, in particular, will feed back into the industry at large. Over time, perhaps within seven to 10 years, Chinese autos bearing Chinese brands may well find a place among the most successful mass-market vehicles in the world.
OTHER OPINIONS
DEVIN SCILLIAN: The Business Vote
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