By on September 3, 2012

If you want to make cars in China, you need a joint venture partner. The Chinese joint venture partners have done well. 98 percent of last year’s sales of central government-owned Dongfeng came from joint ventures with Nissan, Honda, and Peugeot. Largest Chinese automaker SAIC derives 60 percent of its sales from made-in-China GM and Volkswagen cars.

That policy “is like opium. Once you’ve had it you will get addicted forever,”  said former machinery and industry minister, He Guangyuan.

The influential ex-minister and former Standing Committee member gave an interview to the Chinese versions of Yahoo Auto , with an excerpt provided by Fang Yan of Reuters:

“From central authorities to local governments, everyone has been trying hard to bring in foreign investment. But so many years have passed and we don’t even has a one brand that can be competitive in the auto world. I feel red-faced.”

Reuters points out that it is extremely rare for current and even former senior government officials to publicly criticize an existing policy. Often, public utterances of former officials are meant to test the waters and could signal a shift. But a shift in which direction? Is the former minister suggesting to open the doors completely to foreign automakers, so that the cold wind of competition will wake up the Chinese industry from its Opium-induced slumber?

Dongfeng-Nissan President Kimiyasu Nakamura watches Yao Bin, Huang Kai Fong, and Ye Lei

China’s failure to create strong indigenous brands has been much discussed in China. China’s own brands lose market share to joint venture brands. A few years ago, the Chinese government started to strongly suggest to all joint ventures that it would be a great idea to launch an independent Chinese brand that is owned by the joint venture. The thinking was that this way, access to foreign technology would become easier.

It did not work out that way. Says Reuters:

“But instead of developing a car from scratch that would allow Chinese partners to claim half the patent rights and obtain know-how from their foreign partners, all the JVs simply took an existing foreign car model and only made a few changes to “create” a new JV car.”

From reading the interview, it sounds like the minister is going to a different direction. He praises Great Wall, one of the few Chinese car companies that start to make a name for themselves abroad.

“One should focus on support for the independent brands,” the former minster suggests.

As long as  China’s state owned enterprises can indulge in being joint venture partners of the large multinationals, as long as the government fleet looks like the parking lot of Audi,  the ex minister’s recommendations will fall on deaf ears.

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39 Comments on “Former Chinese Minster: “Joint Ventures Are Smoking Dope”...”

  • avatar
    schmitt trigger

    Someone must inform this minister that you can’t have the cake and eat it too.

    Is not only vehicles…from blue jeans to perfumes, foreign brands have an allure that Chinese brands simply cannot compete….even when they are knockoffs.

  • avatar

    It’s all about trust. Until either the regulatory bodies crack down or the general population wises up, Chinese sourced products will never gain the foothold the gov’t wants.
    The only “safe” choice right now is the “vetted by outsiders” brands. They have the annoying habit of intensive QC inspections, an unwillingness to allow for substitutions, and an insistance on consistancy that a purely Chinese company and brand seems unwilling to do.

    • 0 avatar

      Are you familiar with a book called Ecocide in the USSR?

      It’s interesting that business enterprises are stepping in and providing standards for quality in China when the Chinese political and economic system could theoretically establish standards by government fiat, the “regulatory bodies” of which you speak.

      • 0 avatar

        I’m not familiar with that book but I did read a book called “Poorly Made In China”, which confirmed my suspicions that in general, Chinese manufacturers care nothing about product quality, consumer welfare, or business ethics in general. Apparently the only way to get decent quality is to have QC people from the “home office” looking over their shoulders. As the Mattel people learned to their expense, a specification such as “lead-free paint” is taken as a suggestion unless you verify for yourself. Is there any product as simple as a sheet of drywall? Yet they can’t even get that right. I will never buy a Chinese car; no matter how cheaply they sell for, there will always be a used car made elsewhere I would buy instead.

  • avatar

    i honestly think that the Chinese product is almost 90% there.

    Chinese branded cars are NCAP 5, Euro 5 and have dynamics close to Korean standards. They are ready for most global markets however you’ll have a hard time getting many people to pay $10,000+ for a Chinese branded car… hell I think you’d have some issues selling a “Honda” made in china… but they are getting there

    • 0 avatar

      I’m not sure how Honda Fit sales are doing since they shifted production of Canadian market Fit’s to China, and it would be hard to draw conclusions from any recent sales numbers that included the effects of the Tsunami and Thai Floods, but I suspect that selling Chinese made cars under established brands would be the easiest way for them to get a foothold here.

      For someone in North America to consider a new Chinese car from an unknown brand, I suspect it would need to be *really* cheap. It would probably be crossshopped with used cars more than other new cars. I doubt the Chinese automakers can afford to sell their cars that cheaply, especially once logistics costs are factored in.

    • 0 avatar

      “you’ll have a hard time getting many people to pay $10,000+ for a Chinese branded car”

      Geely is selling its Volvo brand for quite a bit of money in the US.

      • 0 avatar

        That’s a good point, actually. The reason Geely can get away with it is presumably because the majority of buyers still think Volvo is a Swedish brand and not a Chinese one.

        In a sense, Volvo might be living on borrowed time, using Ford technology in a transitional period, but what happens when it no longer can do so and perhaps needs to use Chinese technology instead?

      • 0 avatar

        My point exactly.

        It will be difficult to launch a Chinese brand in North America, so getting a foothold using an existing well known brand makes sense.

      • 0 avatar

        But Volvo runes an independent shop so to speak. The cars are developed in Sweden and (some) built there.

      • 0 avatar

        Don’t forget, the majority of the know-how, aside from body, engine, and transmission, and to certain degree not even, lies within the supply base, and not the OEM.

  • avatar

    As I’ve mentioned here before, China should be starting to come out with some of their own international brands so they can claw their way further up the value chain. So far I can’t see any evidence of them succeeding here.

    Perhaps the closest they’ve come is Huawei – but I can’t see many people choosing a Hauwei phone over an iPhone. I suspect many people haven’t heard of Huawei, but I would guess that most have heard of Apple.

    Up till now, China has just been a cheap place to build other people’s stuff. Except between local inflation and rising logistics costs, it’s starting to look like they might not be the cheapest much longer…

    • 0 avatar

      Don’t be too smug. Remember that Japanese cars were initially counted out as being crummy junk, until that was no longer the case.

      On the other hand, they are facing awfully strong competition. There are few totally junky cars nowadays. How much money can you save by buying a Chinese-made car, and do you really want your neighbors to see?

      It’s pretty tough to start a new car brand even in the most favorable times, and I think people are likely to be conservative in this economy.

      But … don’t get cocky, or the Chinese will grow up and eat your lunch someday. Not today, but someday …


  • avatar

    If I cannot take the risk to buy “Made in China” tires, then I will never be able to convince myself to buy a car that was developed, engineered and manufactured in China.

    I would rather have an old (used) Daimler or Toyota.

  • avatar

    It is somewhat ironic that this interview was provided to Yahoo, and not a Chinese media outlet.

  • avatar

    They are coming to the US, the question is when…

    • 0 avatar

      I’m not sure the case exists anymore. Many of the components in US market cars are already made in China. The car bodies themselves cannot be built correctly by people, and require robots. The same quality robot is going to cost the same anywhere on earth.

      For a large market like the US the Japanese, Koreans and Germans are using a model of building components either in the home country (where there are already large volume, automated factories), or in China, shipping the components to the US or Mexico, where robots assemble body shells, and then having either Mexican or southern non-union workers put the parts on the bodies, to the extent that cannot be automated.

      I’m not sure that the Chinese will ever be able to compete with that by using components that are also made in China, having the same robots build the body shells, and then having Chinese, instead of Mexican or non-union southern workers, put the parts on the bodies (which will still have to be highly automated to maintain quality). Especially since the Chinese will then have to ship the cars across the Pacific, with a huge amount of empty space due to the interior and the empty space created by the hood and trunk.

      The Chinese, as a point of pride, will try to sell cars in the US. But I honestly question whether they will be able to undercut the established brands enough to establish a foothold. Their real market is the 2 billion people in China, not the 315 million people in the US.

    • 0 avatar

      When they can convince people to pony up cash for dealerships. No dealers = no cars. And not just dealers here and there, the whole country.

    • 0 avatar

      BAIC, Brilliance, Chery, Great Wall, & SAIC have ALL made quiet inquiries into the possibilities of working with major US auto dealer networks for future distribution. 2015 seems to be the target date for SAIC, with the others to follow closely. All these companies are making steady and noticeable improvements in their product lines, and none of them plan to enter developed markets as low cost options. The strategy is coming together.

      • 0 avatar

        “…and none of them plan to enter developed markets as low cost options.”

        Considering their cost advantage seems to be rapidly slipping away, this makes sense. But if they aren’t sold at a lower cost than the established market players what would their value proposition be?

        If anything, developed markets are served by too many brands. Here in North America a number of brands have recently been discontinued (Saab, Mercury, etc.), and I wouldn’t be surprised if some more exit the market soon (e.g., Mitsubishi, Suzuki).

        I don’t doubt that with a bit of practice and discipline, the Chinese could make a product competitive with Toyota, GM, etc. But if the new Chinese brand was the same price as the established brands, why would anyone buy it? Some people may buy a car despite the “made in China” badge, but I can’t imagine many buying one because of it…

  • avatar
    el scotto

    I’ve read too many stories that US companies have to have a company person in the Chinese plant to ensure quality standards are maintained. It is perceived most Chinese designed and produced products are built to a price point and ignore quality.
    Hyundai produced bad cars when they came to US in the 80’s. They learned from their mistakes. The Chinese might learn from Hyundai and have it right when they start exporting cars to the US.

    • 0 avatar

      And did Hyundai have a “joint partner” in the US? No. The market reacted to their poor quality products and they fixed them (because they wanted to stay in business). I’ve always been intrigued by the “joint venture” thing. Was Honda required to have a “joint partner” when they set up business in the US? Toyota? BMW? A US business can’t set up operations in China (or many other countries) without a “joint partner”.

  • avatar

    The good minister misses a key point about the auto business: it’s vanishingly rare that anyone builds a whole truly new car. Virtually all cars are evolutions. The more enduring thing, really, is a brand that has equity with customers. The underlying engineering is purely incidental.

  • avatar

    During the Malaise Era many people avoided Chevys, Buicks, Fords, ect and bought Toyotas, Datsuns and Hondas based mainly on name and perceived quality/value. Chinese “named” cars have the same problem. Until this changes they will be unable to sell large quantities. It will take one of the native manufacturers coming out and saying “OK, we blew it. We sold a poor quality product, but we’ve learned and improved. Trust us now.” Not an easy sell.
    Note on the opium comparison. Remember what happened when China decided to deal with their opium problem before.

  • avatar

    Do you realize how amazingly frank this interview is? You would hardly ever hear an opinion this lucid stated from a Chinese government or industry leader. That’s not to say that they are all mindless automatons as some in the US media would have you believe…. in fact you hear this kind of talk all of the time, people say things like this freely (my uncle was in local government in the south, so I know)… but not in the press.

    Let’s stop and consider the things that you didn’t hear from across the world:

    US: We should do away with the mortgage rate income tax deduction as recommended by virtually all of the economists, both on the left and right.

    Japan: If we are going to reduce nuclear power, that actually means keeping shop doors closed during the summer so that the A/C is wasted.

    UK: LIBOR was seriously broken before the Barclays scandal and everybody knew it.

    etc. etc.

    Fang Yan’s comment is an amazingly refreshing reminder that if things are broken, despite institutional inertia, people are the same everywhere, they see what’s broken.

    • 0 avatar

      Do you realize China is in the midst of a changing of the guard? The process of changing administrations is old hat here, but in China, it’s an elaborate dance involving factions of the government, party and military. nobody knows who all the dancers are, what dance it is, or even the tune being played. What makes this former minister’s comments intriguing is that it’s a tiny pinhole view of what’s going on behind closed doors. Or not.

  • avatar

    This is the same complaints that used to be aired about a lot of the ‘tranplant’ car factories here in the US. Americans were complaining that all the design work, engineering, and even engine assembly sometimes is done in Japan, and only final assembly is done in the US. That was true in the beginning. But as time went by, most of the japanese carmakers established design and engineering firms here in the US and started designing for the US market. I believe the same will happen in China.

    But whether it’s a good idea or not is highly debatable. Personally I think every one of the ‘designed in America for America’ japanese car, have been abject failures (even though most of them have sold very well- another tragedy)

    • 0 avatar

      “Personally I think every one of the ‘designed in America for America’ Japanese car, have been abject failures (even though most of them have sold very well- another tragedy)”


  • avatar

    It does sound as though the minister is not making the same point as Reuters, because Great Wall also “simply took an existing foreign car model and only made a few changes to “create” a new JV car”, or at least in Great Wall’s case they took a combination of different parts from past vehicles, with a little new sheetmetal. I don’t believe they have built a car from scratch.

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