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

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.