China to Foreign Automakers: Drop Dead

Frank Williams
by Frank Williams

By 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 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.

Frank Williams
Frank Williams

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  • GrayOne GrayOne on Aug 20, 2007

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

  • Ttilley Ttilley on Aug 21, 2007

    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.

  • Akear I am counting the days when Barra retires. She has been one long nightmare for GM. People don't realize the Malibu outsells all GM EVs combined.
  • Redapple2 you say; most car reviewers would place it behind the segment stalwarts from Honda and Toyota,........................... ME: Always so. Every single day since the Accord / Camry introduction.
  • Akear GM sells only 3000 Hummer EVs annually. It is probably the worst selling vehicle in GM history.
  • Amwhalbi I agree, Ajla. This is theory, not reality - hence my comment that Americans don't like hatchbacks. But one of my neighbors bought one of the last Regal hatchbacks that were available for sae, and it is a darn nice car. I still think the idea makes sense, even if history is proving me wrong. And my sister does have a Legacy, which rides a bit higher than my Sonata, and that also is an excellent driver. Even if the general public doesn't concur with me.
  • Hermaphroditolog The tycoons and Nazis hid the IMPLOSION ICEs and propagated the compression ICEs to consumers.GEET engines are more IMPLOSION than compression. Also the ICEs of the Shell-ecomarathon. Classic hot-bulb ICEs are more IMPLOSION than compression - Ford assembly lines do not accept to produce tractors with these simple ICEs.