The Chinese Automotive Market: A Primer

Frank Williams
by Frank Williams

The Chinese automotive market has over a billion potential customers. Sales growth is well into the double digits. Labor rates are a fraction of those paid in western countries, without any union rules to slow down investment or add legacy costs. An ideal place for American investment? Depends on how you look at it. The Chinese market is controlled by a totalitarian government and regulated by an Automobile Industry Policy that’s more convoluted than a bowl of shahe fen noodles. As China nips at Germany’s heels to become the world’s third-largest auto producing country, let’s take a closer look at the sleeping dragon.

There are nearly 100 automobile manufacturers in China. Ninety-percent of the market belongs to eight state-owned companies. To meet soaring demand for new cars, these companies have partnered with automakers from around the world. These partnerships can appear strange; one Chinese company may have several partners which are competitors in the rest of the world. Here’s the list:

FAW: Toyota/VW/Mazda


SAIC: GM/VW


Changan: Ford/Suzuki


Dongfeng: PSA Peugot Citroën/Honda/Nissan-Renault/Kia


Guangzhou AIC: Toyota/Honda


Beijing AIC: DCX/Hyundai


Nanjing AIC: Fiat


Brilliance: BMW

While Chinese law prohibits any foreign company (or combination of companies) from owning more than 50% of their Chinese partner, these joint ventures have proven lucrative for all the parties involved. The Chinese companies get access to the engineering and design expertise of world-class companies, while the partners gain a quick inroad to what is arguably the hottest new car market in the world.

As the market has grown, a number of independent (i.e. carmakers who aren’t affiliated with a foreign manufacturer) local companies have sprung up. They are usually either motorcycle manufacturers expanding into the auto market, new companies funded by capital from other industries (such as consumer electronics) or parts manufacturers that started assembling their parts into complete cars. The primary independent players are:

Southeast


Chery


Geely


GreatWall


Zhongxin


Jianghuai


Hafei

Of these, government–owned Chery is the best known– thanks to Malcolm Bricklin’s professed intention to import cars built by Chery under his Visionary Vehicles nameplate. While Bricklin keeps pushing back the introduction of his Chinese-built products due to quality, production and safety issues (not to mention a lack of investors), he insists he will revolutionize the American market with his line of low-cost, high value vehicles. Recently, DCX has also been negotiating with Chery to produce a subcompact economy car for Chrysler.

Chery’s other claim to fame isn’t so, well, cheery. They jump-started their production capability by buying the defunct VW factory in Westmoreland, PA and relocating it to China lock, stock, and tool dies. They then procured blueprints from SEAT for a car based on the Jetta and began producing a clone. (Jetta is the biggest selling car in China and the Chinese market generates almost 20% of VW’s pre-tax profits). As you can imagine, VW was furious. They eventually accepted a financial settlement in compensation.

To expand their operation further, Chery began hiring engineers from other companies including Daewoo. Two new models, the “Son of the Orient” and the “QQ” were suspiciously similar to Daewoo’s Magnus and Matiz (sold as the Chevrolet Spark). Chery introduced the QQ six months prior to the planned introduction of the Spark, priced $1500 lower than its automotive homonym.

GM accused Chery of “copying and unauthorized use of GM-Daewoo’s trade secrets.” Chery countered by claiming they had developed the QQ independently and with only “inspiration” from the Matiz. Since this “inspiration” consisted of styling so similar you couldn’t tell them apart from more than 10 feet away and interchangeable body panels, doors and other parts, GM filed suit.

After three years of litigation, GM and Chery finally settled out of court. While the details of the settlement haven’t been released, GM did win one concession: Chery can’t sell cars in the US under its own name due to the similarity between “Chery” and “Chevy.”

The problems with Chery underscore the sword of Damocles hanging over foreign manufacturers operating in the Chinese market. Any time you’re dealing with companies owned by a dictatorial government, you’re at the mercy of the whims of the political leadership. The Chinese government (controlled by the army) provides all of the information used for business planning: economic growth, per capita income, projected sales, etc. They create the rules for the protection of intellectual property. They control the courts that interpret the rules on the protection of intellectual property. They control everything within the supply chain, from labor to raw materials to retail distribution to taxes to traffic laws.

Like China’s so-called citizens, foreign auto companies are completely at the Chinese government’s mercy. If China’s rulers decide to nationalize all automotive production facilities, there’s nothing foreign automakers can do but leave. Meanwhile, they’re making hay while the sun shines, doing whatever they can to make sure their “partners” don’t pull the plug.

Frank Williams
Frank Williams

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  • Trentonl Trentonl on Nov 09, 2006

    CIA World Factbook says the following about China: labor force: 791 MM unemployment: 9% - 20% GDP per capita: $6,800 below poverty: over 150 MM PPP (kinda like per capita income): $5,600 So, to say "The Chinese automotive market has over a billion potential customers" is stretching it. Most people would be happy with some food... but most can't even afford that.

  • Wsn Wsn on Nov 09, 2006

    trentonl: But you don't need the full billion to be successful, right? GM sold about around 9.2 million cars worldwide last year. That's less than 1% of the Chinese population. Not to mention that the Chinese pupolation grows at more than 10M per year and GDP grows at 10% per year. And yeah, the early players (such as VW and Honda) are already at a huge profit, even if the Chinese government seize all their properties today.

  • Kosmo Love it. Can I get one with something other than Subaru's flat four?
  • M B When the NorthStar happened, it was a part of GM's "rebuilding" of the Cadillac brand. Money to finance it was shuffled from Oldsmobile, which resulted in Olds having to only facelift its products, which BEGAN its slide down the mountain. Olds stagnated in product and appearances.First time I looked at the GM Parts illustration of a NorthStar V-8, I was impressed AND immediately saw the many things that were expensive, costly to produce, and could have been done less expensively. I saw it as an expensive disaster getting ready to happen. Way too much over-kill for the typical Cadillac owner of the time.Even so, there were a few areas where cost-cutting seemed to exist. The production gasket/seal between the main bearing plate and the block was not substantial enough to prevent seeps. At the time, about $1500.00 to fix.In many ways, the NS engine was designed to make far more power than it did. I ran across an article on a man who was building kits to put the NS in Chevy S-10 pickups. With his home-built 4bbl intake and a 600cfm Holley 4bbl, suddenly . . . 400 horsepower resulted. Seems the low hood line resulted in manifolding compromises which decreased the production power levels.GM was seeking to out-do its foreign competitors with the NS design and execution. In many ways they did, just that FEW people noticed.
  • Redapple2 Do Hybrids and be done with it.
  • Redapple2 Panamera = road porn.
  • Akear What an absurd strategy. They are basically giving up after all these years. When a company drinks the EV hemlock failure is just around the corner.
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