China: Big But Weak, Attack On The West Postponed For 5 Years

Bertel Schmitt
by Bertel Schmitt

The Global Automotive Forum is an annual confab of Chinese politicos, functionaries, industry leaders and wonks of the world. This year, it is in Chengdu, and the motto is “From volume leader to innovation leader.” The subhead could very well be: “What now?”

Speaker after speaker bemoans the fact that China is winning by sheer numbers, but is falling behind in the innovation race. The fractionalized Chinese car industry simply does not have the wherewithal to keep up with the big multinationals. No longer are the multinationals afraid of being frozen out. The power shift towards the multinationals is so pronounced that Jay Kunkel, China chief of German systems supplier Continental, can smugly remark: “Strategies are one thing, but the secret is in the doing.”

Continental had nearly been taken down after a not so friendly takeover by Schaeffler Group in 2008 – definitely the wrong time for such a maneuver. Now, Continental’s Chinese CEO can dispense haughty advice, and the audience applauds.

Speaker after speaker says that the ICE will likely be around for a while, and that incremental improvements in efficiency, weight, rolling resistance etc. are beyond the grasp of Chinese companies. Functionaries of Chinese ministries openly remark that the Chinese car industry is “big but weak” – no lightning strikes from the sky, and nobody drags them off to a slave labor camp. Instead, the audience applauds.

The Chinese car industry is being out-researched, out-developed, and out-engineered by the big industry behemoths. Most of all, China is being outspent. The big companies usually spend 5 percent of sales for R&D, we hear today. Chinese makers spend maybe 2 percent of their much smaller sales, and that “mostly on application research and rarely on future technologies, “ as one panelist remarks. (Applause.)

Even the wages aren’t as low as they used to be. One panelist comments that an engineer hour in Shanghai now costs the same as in Rüsselsheim. Another says that German carmakers don’t have to go all the way to China for low wages. They get the same in Slovakia, 8 truck hours from Frankfurt. None of the Chinese registers a veto. Someone adds: “Yes, and most of those Chinese engineers are under 25.” The Chinese industrial giant looks a bit pale around the nose today in Chengdu.

As far as the feared Chinese exports go, they simply aren’t happening. Last year, China exported less than 3 percent of its car production. This year will be about the same. China imports more cars than it exports. The big joint ventures say they don’t need exports, China is a big enough market. Smaller makers like Chery must export to round out the small domestic volume. They focus on markets like South America and Russia, while admitting that their sales and service networks there are weak. Lu Jian Hui, Deputy General Manager of Chery says any push into Europe or America has to wait “until after the end of the 12th Five Year Plan.” That ends in 2015.

One thing is utterly perplexing: Functionary after functionary demands more local brands, both from the independents and from the joint ventures. China is awash in car brands. There are small carmakers that have more brands than GM in the bad old days. We are in a land where the exact number of car makers remains a mystery (the guesstimate used to be somewhere above 100, today, it grows to 150 without anybody complaining). We are at a meeting where frequent mentions of “consolidation” elicit round after round of applause. Nevertheless, they demand more brands. Privately, Western wonks say that establishing a car brand takes many decades and untold sums of money and patience. They snicker that Western makers shed brands instead of adding them. Publicly, nobody questions the sanity of the avalanche of Chinese brands. Except for one speaker, who coyly shows a slide that has Saturn on it, as an example that new brands don’t have assured success. Too subtle. Applause from the audience.

PS: On Thursday, yours truly will host a roundtable with members of the Chinese and foreign press. We’ll discuss how the foreign media sees the Chinese auto industry – if it sees it at all.

Bertel Schmitt
Bertel Schmitt

Bertel Schmitt comes back to journalism after taking a 35 year break in advertising and marketing. He ran and owned advertising agencies in Duesseldorf, Germany, and New York City. Volkswagen A.G. was Bertel's most important corporate account. Schmitt's advertising and marketing career touched many corners of the industry with a special focus on automotive products and services. Since 2004, he lives in Japan and China with his wife <a href="http://www.tomokoandbertel.com"> Tomoko </a>. Bertel Schmitt is a founding board member of the <a href="http://www.offshoresuperseries.com"> Offshore Super Series </a>, an American offshore powerboat racing organization. He is co-owner of the racing team Typhoon.

More by Bertel Schmitt

Comments
Join the conversation
2 of 10 comments
  • Tstag Tstag on Oct 12, 2011

    To date the only Chinese cars I've seen on UK roads all eminate from SAIC's MG. Even MG is off to a stuttering start, but at least it's a start I guess.

  • Glenn Mercer Glenn Mercer on Oct 13, 2011

    I agree. To flesh out further one point you made, I think a big difference between China-today and Japan-1970s and Korea-1990s (or whatever decade one wants to designate as the start of a big export push) is that the Chinese domestic market is very large and growing rapidly and profitable. I don't think all three conditions applied to either Japan or Korea when they began the export assault. So, to some extent Japanese and Korean OEMs felt that they had to export to gain scale, grow rapidly, and make money. A Chinese OEM can, with luck, do all three without leaving home. So why throw oneself onto the competitive battlefield that is the USA? (Where one can argue only a minority of import OEMs ave ever succeeded... Daewoo beat a retreat; Suzuki/Mitsubishi/Isuzu/Daihatsu have never made it work; and basically every mass-market European except VW threw in the towel, and even VW has trouble making money in the USA.) Essentially, why spend the bucks to go OUT of China when every other country is trying to get IN? (grin) The Chinese might not only not be able to make a big export push right now-- they may just not want to.

  • ToolGuy I wouldn't buy any old Chinese brand of vehicle, but the right EV at the right price, maybe possibly yes. If you told me this would alarm Ford and torque off FreedMike, all the better. 😉P.S. I would *definitely* consider an EV made in Taiwan. Take that, paramount leader!P.P.S. China batteries/components to convert one of my ICE vehicles to EV? Yes.
  • Wolfwagen I expect Renault to be less popular than Fiat
  • ToolGuy Helium-3, baby!
  • Roman Our 1999 Pontiac Sunfire Gt is still running without any issues. 25 years and counting.
  • 28-Cars-Later I thought today's young people weren't even getting licenses to drive, so which is it?
Next