By on October 11, 2011

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.

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10 Comments on “China: Big But Weak, Attack On The West Postponed For 5 Years...”

  • avatar

    China Car Times had an interesting article calling the use of local brands the wrong policy and seemed to have some people from industry in China agreeing.

  • avatar

    Why were they applauding?
    Is it just good manners, or do many in the Chinese auto industry think it’s a good thing that they are not “wasting” money on longer term R&D?

  • avatar

    This forum is suspiciously devoid of politico-on-corespondent karting.

  • avatar

    How long did it take for the Japanese to lead in the automotive field? The Korean’s to stop playing catchup and start passing the field? It isn’t easy and it’s not cheap but it will happen. On the world scene China is in very early days. I’d say somewhere around 1960 in Japanese years. Maybe 1970 in Korean years. It’s going to take another 10-15 years before they will be at the gates.

    • 0 avatar

      The Chinese economic reforms started in the late ’70s. While significant foreign trade and investment didn’t follow for a few more years, I would say that it’s a lot later than “somewhere around 1960 in Japanese years” – probably the mid 1970s at least.

      At this stage of the game, there should be some indigenous Chinese brands with global reach – but instead they are stuck at the low end of the value chain, making other people’s stuff. When I made this observation before, Bertel replied that the Japanese had a much longer history with branding, and that the Chinese would be able to create their own international brands given time.

      Unfortunately for China, I don’t think they have that much time. Their costs are rising rapidly, and few in the West thinks a “made in China” badge is a positive. As costs increase in China, and logistics costs continue to increase, I suspect that “cost to market” regions near major markets (such as Mexico and Eastern Europe) will get another kick at the can.

      That’s not to say that Chinese growth will stop – it won’t – but I expect it will be driven more by domestic consumption than exports going forward.

      I don’t see Chinese designed, built and branded cars making a big impact in the West in the near future. It took the Koreans a good 25 years to figure out how to design, build, and market a decent car for Western consumption, and with their historical cost advantage disappearing I don’t think the Chinese have that long. To make matters worse, the lucrative markets in North America and the EU are saturated and (if anything) shrinking, so it would be difficult for a new entrant to the market to gain a foothold even if they had a quality offering that was fully up to Western standards.

      If anything, I expect the Chinese will have an easier time continuing to export simple low cost products to emerging markets – like they are doing with their Toyota Hilux knock offs. I think they can probably do alright at this until someone else figures out how to make simple vehicles cheaper than the Chinese…

    • 0 avatar

      Japan became a world power out of its own accord. You know, way back in 1905?

  • avatar

    Look when the majority of the engineers are under 30 does anyone expect them to be be leaders in research etc.

    This takes time, but given the population and sheer numbers of engineers in China. This country will more than likely have at least one major player in automobiles, possibly two.

    I read somewhere that the system in China will help it for the early 21st century but in the end, this century will belong to India because the political system them is better overall it just moves slower.

    So my question is, how long until Tata motors becomes a household name in the USA?

  • avatar

    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.

  • avatar
    Glenn Mercer

    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.

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