Chinese Automakers Set to Pump and Dump Western Partners

Frank Williams
by Frank Williams

I once worked for a colonel who'd address all obstacles by saying "you can solve any problem if you throw enough money at it." While our budget officer would have to breathe into a paper bag for a half hour afterwards, the colonel always managed to squeeze whatever was needed to resolve the crisis du jour from the budget– and solve the problem. Automakers native to the People's Republic of China (PRC) must have bugged his office; they've adopted the exact same philosophy.

Successfully implementing the "I'll buy what I need" strategy requires two things: 1) money and 2) knowing where to spend it. The Chinese automakers certainly meet criterion number one. The PRC is now the world's second largest auto market; auto sales are booming. The Chinese law requiring all foreign automakers to buddy-up with a domestic partner has delivered unto them an enormous financial windfall.

Criterion two– locating mission critical knowledge and/or technology– is a no-brainer. While there have been auto factories in the PRC since the mid ‘50s, the Chinese auto industry discovered the technological benefits of the aforementioned joint ventures (JV) since A Flock of Seagulls first flew. For the last thirty years, Western JVs have been flooding the PRC with new automotive designs, products and processes.

Initially, these JV partners used Chinese labor to assemble automobiles already in production elsewhere. The Chinese partners learned how to bolt together a car, but not much more. By the 1990s and early 2000s, the foreign partners had started designing models specifically for Chinese consumption, retooling their plants for full-scale manufacturing.

At this point, several "independent" Chinese auto manufacturers (i.e. companies not enmeshed in joint ventures) began leveraging their newfound carmaking skills to send in the clones: selling exact replicas of other manufacturer's models built for Chinese consumers.

Blinded by golden goosehood, stymied by laughable and unenforced Chinese copyright and trademark laws, GM, VW, Ford and others turned a blind eye to this sincerely flattering fraternal competition. Western automakers wrote it off as the cost of doing business in a military dictatorship. Besides, in China's burgeoning automotive market, there was– and is– plenty of pie for everyone! Of course, Chinese manufacturers had bigger plans…

For the last decade of so, Chinese automakers have started eying foreign markets. As they dipped their entrepreneurial toes into Western climes, they realized they lacked competitive cars, and the engineering expertise to design them. Disastrous European crash testing literally drove the point home.

So Chinese automakers have started throwing money at European and North American automotive companies. Michael Laske, president of Austrian-based AVL China, says "The Chinese fundamentally lack products and knowledge, but they need to get into the market very quickly." And so AVL is banking big bucks, designing an entire engine line from the ground up to pop China's Chery.

Companies selling world class technology in so-called mature markets are falling all over themselves in their rush to cater to China's hunger for the best of the best. The list of successful sellers includes BorgWarner (turbochargers, clutches, transmissions), Sweden's Autoliv (safety systems), Austria's Magna Steyr (marketing strategy, legal requirements), Robert Bosch (diesel technology), Italdesign-Giugiaro and Pininfarina (design assistance) and A.T. Kearney (management consultants).

The joint venture partners are infusing their Chinese partners/competitors with cutting edge technology. GM has an engineering and design center in Shanghai, soon to be joined by a hybrid research center. To provide Chrysler with a small car for the U.S. market, Chrysler's engineers are tweaking every aspect of Chery's operations. So what happens next, once this technology transfer is bang up-to-date?

China's domestic automakers will use their imported expertise to export cars abroad. Chery is already selling cars in Mexico; they've declared their intention to enter the U.S. market in the next two to three years. Chinese automakers will be out in force at this year's North American International Auto Show.

To further the cause of global export, the Chinese government is pushing their domestic auto makers to merge into a "Big Three" and a "Mini Three." Given the government's protectionist views, once the mergers and reorganizations are over, GM, VW, Toyota et al will find themselves out in the cold.

Western manufacturers seem blissfully unaware of their own usurpation. They keep pouring money and engineering talent into China– even as the Chinese manufacturers are taking the first steps toward merging into megacompanies. Once again, western car companies are so blinded by the money they're making that they can't see the dangers lurking beyond the next quarter's bottom line.

But hey, that's the way the fortune cookie crumbles. If we don't do it, someone else will. Make hay while the sun shines. Pump and dump cuts both ways. That kind of thing. But any automaker that doesn't see China as a short term play, that stakes its long term financial future on the PRC, is headed for a rude awakening. Sooner rather than later.

Frank Williams
Frank Williams

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  • NoCarNow NoCarNow on Jan 12, 2008

    Wsn, The Maher Arar story has received a fair amount of coverage here in the US. I have seen at least two major reports in the US, one on CNN and another one on PBS. Unlike in China, we in the US actually have available domestically many news accounts of the unpopular, immoral, illegal and unwise actions of our government. I'm certainly not defending the actions of the US Gov't in this case, but how is that comparable to China, where coverage of an event like this would be strictly forbidden by government censors?

  • NoCarNow NoCarNow on Jan 12, 2008

    B.C., Just for your info: Quanta, Compal and Acer are not Chinese companies, they're Taiwanese. Only Lenovo is Chinese, and their most highly regarded products are holdovers from IBM. Taiwan is known for high quality products and respect for intellectual property. China is not. I don't know if you have traveled to a Western country or not (but I suspect that you have, because your English is excellent), but there is a clear distinction in Western countries between Taiwan and China, due to the vastly different political systems and history. By the way, it's good to have someone from China to give us some perspective from the other side.

  • Socrates77 They're pinching pennies for the investors like always, greed has turned GM into a joke of an old corporate American greed.
  • Analoggrotto looking at this takes me right back to the year when “CD-ROM” first entered public lexicon
  • Alan My comment just went into the cloud.I do believe its up to the workers and I also see some simplistic comments against unionisation. Most of these are driven by fear and insecurity, an atypical conservative trait.The US for a so called modern and wealthy country has poor industrial relation practices with little protection for the worker, so maybe unionisation will advance the US to a genuine modern nation that looks after its workers well being, standard of living, health and education.Determining pay is measured using skill level, training level and risk associated with the job. So, you can have a low skilled job with high risk and receive a good pay, or have a job with lots of training and the pay is so-so.Another issue is viability of a business. If you have a hot dog stall and want $5 a dog and people only want to pay $4 you will go broke. This is why imported vehicles are important so people can buy more affordable appliances to drive to and from work.Setting up a union is easier than setting up work conditions and pay.
  • El scotto I can get the speedometer from dad's 72 Ford truck back. I can't get dad back.
  • El scotto BAH! No dividers in the trunk for bags of onions or hooks for hanging sardines! Hard Pass.