By on August 16, 2007

car.jpgBy law, foreign automakers seeking a foothold in China must form joint ventures (JVs) with domestic "partners." As we've outlined before , there's an immediate downside: China's scant regard for intellectual property rights (IPR). For example, GM found itself suing Chinese automaker Chery (whose name middle-finger salutes Chevy) over the QQ, a blatant copy of the Daewoo Matiz. The case was settled out of court, but the issue of IPR remains unresolved. And now that Chinese automakers are consolidating and striking out on their own, what's going to happen their foreign partners and their IPR? What do you think?

China's three largest automakers are Shanghai Automotive Industry Corporation (SAIC), First Automobile Works (FAW) and Dongfeng. SAIC currently partners with General Motors and VW. FAW is hooked-up with Toyota, VW and Mazda. And Dongfeng works with PSA Peugot Citroën, Honda, Nissan-Renault and Kia.

China's Big Three own almost 50 percent of the domestic auto market. All three have announced plans to develop "house" brands with independent intellectual property rights. As Chinadaily.com puts it, "After churning out Buicks, Passats and other foreign models in tie-ups with global auto giants for years, many home-grown players are setting their sights on an own-brand strategy, hoping to wean themselves off reliance on foreign technology."

To that end, SAIC has budgeted $3.56b over the next five years for designing engines and complete sedans, and building a technical center. The automaker's also announced a massive bond initiative to fund development of their new cars. SAIC is looking to build factories capable of churning out a quarter million vehicles per year.

FAW is set to invest $1.7b in new product development, production facilities and "229 key technologies" over the next eight years. And Dongfeng is spending $1.01b to develop their own brand of cars and a new assembly plant. 

SAIC has a head start on its domestic competitors. They already own the IPR for the Rover 25 and 75 models, purchased from the now-defunct British brand at the end of days. SAIC has used the technology to launch the Roewe 750 based on the (BMW developed) Rover 75. So far they've sold 8k 750s.

SAIC is also considering a merger with smaller Nanjing Auto, owner of the MG brand. Nanjing has started production at MG's former plant in the U.K.; they're setting-up a similar facility back in The People's Republic. It wouldn't be hard to use the car as an anchor for a full line up.

And it won't take long for the other Chinese automakers to catch up. Dongfeng has plans to market a self-branded sedan that "imitates" the Elysee (currently manufactured by Dongfeng Peugeot Citroen Co Ltd.), starting this September. FAW is ready to begin mass production of their first independently designed sedan engine. Entire cars will follow.

Clearly, Chinese automobile manufacturers are cashing in on their crash course in auto manufacturing. They've spent the past 20 or so years studying their partners' design and engineering processes and production techniques, and establishing their own relationships with suppliers. They've also learned marketing, dealing with export and import regulations, and all the rest of the finer points of selling their products internationally.

China's automakers aren't going to want to keep sharing a large chunk of what is now the world's second largest auto market. Over the next five years China's Big Three will flex their muscle to retain their 50 percent market share. Those automakers who've entered these joint ventures will have to pay the price.

It won't be hard for the home-grown tigers to ease their partners out of the picture. Some of the models produced by the JVs are a generation removed than the same model in other markets; they need updating. Without modernization, their sales will start to drop "as core models become increasingly obsolete," warns Goldman Sachs. If the Chinese partners won't allow the foreign partners to update their designs, sales will dwindle, opening the door for the Chinese partners to introduce newer, self-branded models.  

Since Chinese law prohibits foreign auto companies from operating without a Chinese partner, this "planned obsolescence" scenario would effectively shut out the foreign automakers. Even if China's Big Three don't starve their JVs of new product, there is no doubt that the government of China will do whatever it takes to bias the domestic market in favor of home-grown automakers, including (but not limited to) punitive taxes.

Although GM and others rely on the Chinese market to help keep them afloat, there's not a lot they could do about any moves to diminish their profits. We're talking about a country run by a military dictatorship; as the current legal laxity over IPR indicates, there's no chance of legal redress.   

Meanwhile, the Chinese automobile market is expanding. The foreign players are making hay while the sun shines, even as the storm clouds gather above them.

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32 Comments on “China to Foreign Automakers: Drop Dead...”


  • avatar

    So will Cebrus-Chrysler still import Cherry vehicles and sell them as Dodge brand?

  • avatar
    OverheadCam9000

    To quote the current Hyundai marketing blitz:

    DUH!

  • avatar
    GS650G

    You could buy a brand new 1986 Jeep cherokee in China a few years ago. Audis made in the PRC were everywhere. 20 years from now most cars we buy will be imported from China, just like everything else we buy. It’s inevitable.

  • avatar
    Zarba

    Let’s see, you do bidness with a repressive totalitarian dictatorship with no rule of law, a completely non-transparent financial market, and a business sector run by a quasi-governmental kleptocracy, and you’re surprised by what, exactly?

    And we’re funding them by these joint parterships. There’s been plenty of history of this over the past decade or two. Unfortunately, everyone is so goggle-eyed over the prospect of 1 billion consumers that they’re willing to overlook little “details” like this.

  • avatar
    RyanK02

    Will Wal-Mart import the Chinese cars? It will match all of the other Chinese crap they put on their shelves.

  • avatar

    So they’re eventually going to get pushed out of the market. I don’t doubt that such considerations were figured on back when they started.

    At present, the JV partners are making money hand over fist, and no market lasts forever. So you make money while you can, cut your losses once profitability is no longer possible.

  • avatar
    Redbarchetta

    The only thing that surprises me about this is that it’s happening sooner then I expected.
    They have essentially given away there intellectual property for short term profits while helping the competition become stronger so they can come back and crush you in your own market. Stupid thinking IMO.

  • avatar
    CeeDragon

    Probably one of the reasons the US companies are in joint ventures is that they’ll learn from their Chinese counterparts and devise strategies on how to enter (and stay) in emerging markets.

    If the past is any indication, the US companies will fail miserably. Short-term profits will bask in the sunlight; long-term planning will scurry to a dark corner.

  • avatar
    Steve_K

    You really have to spend time in China to understand the people’s way of thinking when it comes to business. Basically there are no ethics involved. The objective of any transaction is to screw the buyer out of as much as possible, be it for a pair of socks or a roll of film, and I believe this prevails all the way up through the major corporations. A scam artist is shrewd business person in China, and the buyer is just a dummy. It’s living exhibit of human nature from the dark ages.

  • avatar
    Megan Benoit

    They’ve also learned marketing, dealing with export and import regulations, and all the rest of the finer points of selling their products internationally.

    Except for safety regulations. But I suppose they’ll eventually catch up there too, and actually be able to sell their cars in the US and Europe. Until then, they’ll have the #2 market for cars, and that’s it.

  • avatar
    drifter

    If UAW won’t lead GM to Chapter 11, loss of chineese JV will. Keep those golden parachutes well oiled.

  • avatar
    rashakor

    For the last or so I followed only one buying rule:
    - Uniterally boycott everything made in China, or PRC.
    Taiwan is fine.
    This has 2 benefits; first you don’t spend money on crap (hence you have more money and space at home at the end of the year), two you don’t sustain the barbarians that are already knocking on our gates!!!

  • avatar
    glenn126

    Sounds like a good plan to me, rashakor.

    Thing is, this means about 80% of the stuff out there is off-limits.

    My mode of dress is going to take a bit of a hit…

    I agree, and have already (for several years) attempted to find alternatives to “Made in China” with limited success.

    Little items, for example toasters, made in Mexico last about as long as those made in China (a couple of years if you are lucky).

    My parents had a toaster they got for their wedding in 1952, for about 10-15 years and it worked (and it was only replaced because the old style “door” toaster was antique by then, replaced by pop-up toasters). When I grew up, I can recall my parents using the same (newer) pop-up toaster all through my youth and teen years. Things lasted.

  • avatar
    BerettaGTZ

    One fact that is conveniently forgotten here is that 50% of profits of a joint venture go to the Chinese local company. How do you think SAIC came up with the 3.5 billion to fund their own brand? From the Buicks and VW’s that they sell through their JV’s. Those JV’s will be around for a long time. SAIC and other companies like it will be perfectly happy making money selling Rowes, Buicks, Chevys, Cadillacs, VWs, Audis, and Skodas. If one brand falters, other brands can pick up the slack, just like having a diversified investment portfolio.

    As image and brand-conscious Chinese continue to prosper and buy cars, Toyota, Honda, VW, Buick and others will always be around in China.

  • avatar
    Brendan

    Why wouldn’t large car companies favor partnerships with Indian companies?

    Maybe we could see a follow-up article on India?

  • avatar
    Redbarchetta

    As image and brand-conscious Chinese continue to prosper and buy cars, Toyota, Honda, VW, Buick and others will always be around in China.

    They may be around but not selling much if the government wants to support the domestics and get the transplants out, something sounds familiar in a backward opposite kind of way.

  • avatar
    KatiePuckrik

    This is big trouble for the established brands.

    Firstly, the established companies (particularly GM) are looking to China as a source of profits and expansion. When their “partners” start attacking them, their profits can only go one way (Hint: not up).
    Secondly, as Mr Williams points out, China aren’t exactly sticklers for rules when it comes to intellectual property and copyright. Which means, China won’t be short of designs to wow their marketplace.
    Thirdly, these Chinese companies also have a secret weapon in the shape of the government. These are still partly nationalised companies and the government will always give them money*.

    So let’s recap, the Chinese will copy and steal other people’s designs, have deep pockets and know the market better than the foreigners.

    However, it’s not all bleak. The one disadvantage the Chinese have is their lack of technology. Depsite the rise of the Red dragon, their technological infrastructure is still in its infancy (their army is woefully equipped and the UK has 50% more nuclear bombs that them. Even France has more than China! But France will never use them, they’ll be too busy running in the opposite direction!). But this disadvantage won’t last long as China have got MG and are now eyeing up Jaguar, Land Rover and Volvo. Then, China will have established, well thought of brands to exploit in China. Then, the others will be in even deeper trouble!

    * = This might sounds like an unfair practice, but lest we forget, Renault is still 15% owned by the French government and they have pumped money into Renault many times, too.

  • avatar

    glenn126:

    “My parents had a toaster they got for their wedding in 1952, for about 10-15 years and it worked (and it was only replaced because the old style “door” toaster was antique by then, replaced by pop-up toasters). When I grew up, I can recall my parents using the same (newer) pop-up toaster all through my youth and teen years. Things lasted.”

    You can still buy durable, quality appliances:

    http://tinyurl.com/yrxfrg

    You get what you pay for; and a lot of people want to pay next-to-nothing. What’s the cost of a cheap toaster? 1/2 an hours salary? 1 hour?

    That Dualit probably costs a similar amount in real terms to your parents 1952 model.

    We can’t blame the Chinese for cheap toasters – they’re just making what people want. I’m sure they’d love to sell you a long-lasting $170 DuaFengLit – if only you would buy it :-)

    cheers

    Malcolm

  • avatar
    daro31

    Steve-K you are so right about the Chinese business ethic. A few years ago I was hired by a fellow from China to go the "Big I" aftermarket trade show in Chicago. He thought because I had worked a few years for the big 3 and was Canadian I would be helpful. He told me he needed someone who had been around the North American auto market and spoke english better than him that I would be helpful. He said he was looking for new products that he could get the rights to sell in Canada. On our trip we stayed in nice downtown hotel, ate well he obviuosly had cash to throw around. The night before the show he came to my door to leave some adds for some eqipment he wanted to look at particularily. At 10 PM he was all dressed up in a nice suit, white shirt and tie. I asked him if he was going out to party, he said no, he was going to bed. Sure enough next mornoing I met him in the lobby, there he stood slept in suit, pink plastic attache case, hair a mess. I asked him what was up, he said you don't get, Americans thnk I just poor stupid Chinaman. That story repeated itself 3 mornings. He ended up buying a tire balancing machine for cash that we took back to Canada with us. Turns out he liked the product, it had some neat ideas, so he bought the show sample as the man at the booth would not talk to him about licensing. Turns out that he tore that machine down, put it in 4 boxes shipped on different days to avoid one of his countryman intercepting it in China and copying it and bringing it to the flea markets here before him. It turns out that he was the guy who looked for good products in the USA to send back to his family who ran a huge tool making company. When I finally clued in to what he was doing he said don't you get it, he no sell to me, he had his chance; so I steel.

  • avatar
    Lumbergh21

    China’s scant regard for intellectual property rights (IPR).

    Yes, no regard is pretty scant. The Chinese don’t recognize any such thing as intellectual property rights. Communism remember, the state-I mean the people-own everything; there is no private property (in theory). They may soften their stance in the interest of luring silly flies-I mean foreign partners-into their web only to suck them dry, but don’t think for one minute that there is any pardigm shift in their philosophy or means of governance.

    there is no doubt that the government of China will do whatever it takes to bias the domestic market in favor of home-grown automakers, including (but not limited to) punitive taxes.

    Or, just outright siezure. Once again, communism means no private property rights or even lip service to them in China. It is literally and figuratively a foreign concept to them.

    It seems to me that foreign automakers, both European and American are once again taking an extremely short-term view. They don’t seem to care what the long-term consequences may be; they are forming these “partnerships” for the short-term profits they bring. It makes all these automobile manufacturers look desperate, stupid, or both.

  • avatar
    jkross22

    Isn’t the answer here to stop buying so much unneeded crap in the first place? Seems like we’re so locked into hyperconsumption that the mere thought of not buying is a painful proposition.

  • avatar
    pete

    Time to conveniently forget about the free market?

    Perhaps the Democrats are looking more appealing after all. We can erect tariff barriers and then bitch about it all for a decade through a corrupt WTO.

  • avatar
    d996

    Over the course of almost 3000 years all progress has moved west from the middle east. China is catching up rapidly with it’s form of government sponsored capitalism. Rights, whether they be human or property are almost impossible for them to comprehend because they have never had them. Once the population knows that the real power resides in them and their earning/purchasing ability the next Tiananmen square will change the country closer to a democracy. The auto companies strategy of accepting joint ventures now is sensible as China’s economic future is too hard to predict.

  • avatar
    Hippo

    Quasi-government kleptocracy meets corporate kleptocracy. Film at 11. All the sheep get stepped on.

  • avatar
    Cicero

    Just what GM needs. One more knife at its throat.

  • avatar
    hal

    It seems to me that China is on the same track as Japan, Taiwan and South Korea. Neither Taiwan or South Korea were democracies 20 years ago and they all copied western products shamelessly until they could afford their own R&D, then they started to take IP seriously.
    In the long run China wants access to Western markets and the West wants access to Chinese markets – thats why countries join clubs like the WTO. Unfortunately Americans don’t make anything – other than aircraft – that the Chinese want to buy (and they will be making their own planes soon). Whose fault is that?

  • avatar
    rtz

    In the past, when GM closed a plant; what did it do with the assembly line that was inside?

  • avatar
    cheezeweggie

    If their cars are anything like their contaminated seafood, lead laced toys, or antifreeze toothpaste, Detroit need not worry.

  • avatar
    unleashed

    If their cars are anything like their contaminated seafood, lead laced toys, or antifreeze toothpaste,

    That is not a fact, that is a shortsighted stereotype.

  • avatar
    michaelfrankie

    Terrifying Crash test video of the BS6.

    http://www.autoblog.com/2007/06/22/brilliance-bs6s-adac-crash-test-is-anything-but/

  • avatar
    GrayOne

    Couldn’t western automakers somehow use the WTO to protect their IP?

  • avatar
    ttilley

    I like traditional canteens while backpacking. A US-made canteen (from WI) can be purchased for about $17. Most stores sell a Chinese-made version for $5. I’ve had the Wisconsin version last for almost 10 years. The Chinese model lasted about 3 years until it leaked water on a very dry hike through chaparral. The bloody thing was designed with sharp metal edges pointed towards the water bladder!

    On a dollar-return-basis the two seem about equal.

    On a “I really want to live” basis…anybody who manufactures a water container that leaks water can count on never seeing my repeat business.

    I think my story has some relevance to the subject matter of this post.

    Tom.


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