A Great Leap Forward

China offers plenty of growth potential for the Big Three, but to gain further traction, the automakers must stay ahead of consumer tastes, expand into rural markets, and hope that government protectionists don’t squeeze them out.
4820
Like all foreign automakers, Ford made inroads into China via a joint partnership. Photograph by Lie Jin/Getty Images

BEIJING — “Remake General Motors?” economist Kevin Murphy asked during a recent debate in Chicago. “Of all the things that government can’t do,” he declared, “that’s got to be near the top of the list … it just makes no sense.”

But in the end, according to people like Jimmy Lu, the free market had every right to help GM prosper — even if it was 12,500 miles away, in Beijing. After surpassing the United States in July, China will likely be the world’s largest auto market for decades to come. Last year, Chinese buyers bought 13.6 million vehicles, up from 9.8 million units in 2008. By comparison, U.S. vehicle sales totaled 11.4 million last year.

More growth in China is expected. Steve D’Arcy a partner in PricewaterhouseCoopers’ global automotive practice in Detroit, predicts China’s auto market will grow 10 percent in 2010. And by 2020, annual sales could grow to 30 million units. “Keeping up with demand in China will be hard to maintain,” D’Arcy says. “That’s why I don’t see China being a big exporter (of autos) to the U.S.”

Part of the spectacular growth in China can be attributed to tax cuts and subsidies, as the government has encouraged consumers to buy fuel-efficient vehicles. Stimulus funds also went to infrastructure and construction, which kept people working. By contrast, most of the stimulus funds in the United States were given to individuals in the form of tax cuts and also helped to strengthen the social safety net.

“I’m really happy with this car,” says Lu, a Beijing marketing executive showing off his dark gray Buick Excelle in the San Li Tun district. “It’s a great value — and people notice how cool it is.”

After seeking government bailouts followed by bankruptcy, GM and Chrysler have a long road ahead when it comes to redefining themselves as carmakers of the 21st century. Ford avoided a government bailout by mortgaging its assets before the financial markets tightened in 2008, but it still needs to generate profits over the long haul to meet its debt obligations.

If anything, China offers the Big Three not only potential, but also a way to admonish skeptical critics. “This has been a year of records for GM in China,” says Kevin Wale, president and general manager of General Motors China. He had announced that, for the first time, GM enjoyed unprecedented sales of 1.8 million units in China last year, up from 1.3 million vehicles in 2008. GM also sold nearly 190,000 vehicles in December — almost twice the monthly sales rate in China from a year earlier.

There’s a bittersweet irony in much of this, given that the global economy has, in many fundamental ways, exerted downward pressure on Detroit. Nonetheless, Big Three executives see room for movement overseas. “Asia-Pacific is a very important market for us,” Ford CEO Alan Mulally said while in India, introducing the new Figo four-door hatchback. It’s a region in which Ford plans to “accelerate” its presence.

As if to underscore its desire to race ahead, Ford recently announced plans to relocate its Asia headquarters from Bangkok to Shanghai, home to a $250-million corporate research center. The decision is a reflection of Ford’s desire to build its brand in China while keeping a sharp eye on Beijing, which is anxious to establish Shanghai as a newer and  slicker version of Detroit.

The numbers leave plenty of room for optimism. Indeed, according to China’s National Bureau of Statistics, there are more than 65 million vehicles registered on the country’s roads. And there’s plenty of growth on the horizon: Private car ownership in China equates to about 20 cars per 1,000 people — an unheard-of opportunity for any car manufacturer, foreign or domestic.

In fact, the bigger, heavier cars more associated with Detroit’s downfall are finding parking space here, too. Last October, GM announced the sale of its Hummer brand to Sichuan Heavy Industrial Machinery Company Ltd., a machinery concern in western China. Although the deal has yet to be officially approved by Chinese and U.S. regulators, finalization is expected soon. Prior to the final tentative approval, however, Chinese government regulatory officials questioned whether Sichuan possessed the managerial, industrial, and technical ability to properly run a U.S. company.

“This [could] be difficult,” says senior planning official Chen Bin. “Chinese buyers would need to learn to deal with different management techniques, unions — and whole new ways of thinking.”

Beijing has also voiced concerns about the potential environmental effects of the Hummer’s production (international pressure on Beijing to reduce carbon emissions has a long history, and is now at a fever pitch despite its decidedly mixed reception by some officials, who point to the fact that America’s Industrial Age produced comparable amounts of pollution as China did in 2009).

 

But doing business in the Middle Kingdom — for foreigners and Chinese alike — is often fraught with challenge. The Chinese government has regulatory structures and policies in place that favor local companies. Meanwhile, while many large cities are fairly progressive, there’s a dearth of major retail outlets and products in rural areas. There’s also the varied tastes of the Chinese consumer — and even the very complex nature of the world economy itself.

On the plus side, the Big Three are immersing themselves in a market that’s often wild about American brands. Sweetening the pot is the fact that Chinese auto assembly workers earn as much as $9 per hour, up considerably from years past.

Meanwhile, change continues here. Fast.

And while Detroit’s injection into this equation has hardly spelled a dominant market share, by any means, its participation in the Chinese market — especially at a crucial moment for the Chinese auto industry — could be historic.

China has shown it has the production capacity to meet demand, but it still lags far behind the United States and other industrial nations in the arena of automotive technology. It is in this way that foreign carmakers from Japan to Germany — and, yes, Detroit — will enjoy the opportunity to alter the course of automotive development in the world’s third-largest economy. Indeed, it portends to be a crucial difference.

Chinese officials, of course, are already aware of this. Luo Jun, secretary general of the Asian Manufacturing Association, acknowledges that when it comes to the most basic technologies like engines and circuit boards, China’s auto industry is “20 to 30 years” behind more advanced nations.

Largely for this reason, Beijing officials have insisted that all cars produced in China be done so through joint ventures — both for technical expertise and financial clout. To this end, GM China is making investments in technology, institutions, and R&D, Wale says. In the first half of 2009, he adds, GM and its nine joint ventures had sales of 1,292,549 units — up from 1,094,561 — or 55.6 percent over the same period in 2008.

The 2008 figure, in turn, was a 6.1-percent increase compared with 2007, which represented a new sales record. In all, GM has three big production bases, including one in Shanghai, as well as four assembly plants. GM’s Wuling Automobile plants have two car-production bases.

These statistics reflect the considerable size of GM’s operations, which employ 32,000 workers in China. Activities include the export, production, and sale of 18 models spread among Buick, Cadillac, Chevrolet, Opel, and Wuling (which are more common in China).

Even though Ford didn’t file for bankruptcy like GM and Chrysler, that didn’t shield it from poor sales in North America and Europe. Ford trails GM in China, as well.

But Ford, with its expansion into China, is actively trying to change the sales arena. Last fall, for instance, Mulally announced the opening of a third manufacturing plant through a joint venture with Chongqing Changan Automobile Co. and Japan’s Mazda Motor Corp. The $490-million plant in southern China is expected to produce more than 150,000 vehicles a year — mostly SUVs and high-end sedans.

Altogether, this is expected to increase Ford’s sales volume in China to 600,000 units, up from 447,000 units. It’s worth noting that, for the month of September alone, Ford production was at 21,127 — up 111 percent over the same 30-day period in 2008.

Still, Mulally and Ford have a lot of catching up to do when it comes to establishing a footprint in China and the rest of Asia, which are quickly proving to be Ford’s most important overseas markets. Ford’s market share is 2 percent — and it ranks 12th in terms of sales volume — far behind GM, Volkswagen, and Toyota. Throughout China, Ford has 226 dealer networks, whereas Toyota has more than 500, and GM more than 800.

Of the Big Three, Chrysler comes in last. The main points hindering its further expansion into the Chinese market are the company’s inconsistencies in terms of establishing joint ventures with Chinese carmakers, in addition to its reputation as having imported cars in poor condition. Capital is another factor.

This wasn’t always so. In the late 1990s, Chinese streets witnessed a proliferation of Jeep Cherokees, Chrysler’s biggest brand, sold through Beijing Jeep Co. — its joint venture with Beijing Automotive Manufacturing Co. Ltd.

Nonetheless, because of a variety of factors, such as slow introduction to the local market, inefficient management, and inadequate and — by Chinese standards — unreasonable prices, Chrysler gradually lost its market share. It continued to introduce new models, including the Grand Cherokee and the Mitsubishi Outlander, but remained unable to recover for its past mistakes on the Chinese mainland.

Chrysler followed up with the luxury 300C Class Sedan, but its alien look failed to catch on with Chinese consumers. Worse still, general consumer complaints followed its introduction into the Chinese market.

Chrysler’s market positioning in China has had a history of unevenness, and has lacked truly localized brand-building — something it never came close to achieving, particularly on a cultural level. Its partner organizations — Beijing Automotive, Chery Automobile, and the Great Wall Motor Co. — also failed to deliver. All this, along with huge losses back home, proved a significant setback for Chrysler, which could not redeem itself, profit-wise, against its Detroit rivals.

The complexities persistent in the global economy will most certainly prevail. By late 2008, for instance, Beijing introduced a deep price cut in refined oils that, in turn, bolstered industrial gains and allowed consumer demand to increase, leading to higher auto sales. This benefited shares for all brands in the Chinese market.

Regardless of consumer trends, government price interventions, and international gas prices, Lu — for now — is happy with his Buick. “Yes, it corners great,” he says. “[But] I often worry about getting into an accident here — you know, with the streets and everything.”

There [was] just one problem, and he doesn’t like to think about it. “I’m going to have to sell it, somehow, after I get sent back to Hong Kong.”

Facebook Comments