Great Wall's Descent A Sign Local Industry Not Ready For Primetime

Once the darling of investors amid ambitions of taking on foreign automakers such as Jeep with its line of SUVs, Great Wall Motors’ recent fall from grace on the back of the upscale Haval H8 may be a sign Chinese automakers are not yet ready to move from production of cheap transportation.

Bloomberg reports production of the 200,000 yuan ($32,100 USD) SUV, aimed at the likes of the Volkswagen Tiguan and Ford Kuga, was suspended indefinitely earlier this month amid quality concerns regarding “knocking noises” from the six-speed automatic transmission at high speeds. The second delay of the H8 — the first occurring earlier this year after local press panned the SUV in test drives — sent Great Wall’s stock price down 17 percent, while seven analysts cut their ratings of the automaker due to perceived weaknesses in the overall local industry from the suspension. Oriental Patron Financial Group analyst Vivien Chen, one of the seven, explains:

We believe the event indicates domestic automakers haven’t met requirements to upgrade to be a high-end vehicle maker. The event definitely hurt customers’ perception of H8, and hurt company image.

The suspension is the latest stumbling block for Great Wall, having faced a recall with Chery of 23,000 units from Australia in 2012 when banned asbestos parts were found in some models. In addition, 2013 exports fell 22 percent to nearly 75,000 units due to currency challenges in Japan and South Korea. Locally, the automaker is faring better, having moved almost 112,000 SUVs over its competitors so far in 2014, though the market overall fell 2.5 percent in April to 37.1 percent for local automakers, the eight consecutive month this has occurred.

Despite the setbacks, Macquarie Group analyst Janet Lewis believes Great Wall and the rest of the Chinese automakers may be able to learn from the experience as they move forward toward selling their wares to developed markets such as the United States, though they all still have a long road ahead of them, as Sanford C. Bernstein analyst Max Warburton points out with Great Wall:

The company faces monumental challenges in trying to move up a league in the automotive world, and the problems faced by the H8 confirm Great Wall is struggling with technology. Serious questions will now be asked about Great Wall’s growth potential.