"The biggest issue is still engineering quality"

GRAEME MAXTON, WRITER AND KNOWN EXPERT OF GLOBAL AUTOMOTIVE TRENDS, GIVES HIS COMMENTS ON CHINA'S CAR EXPORTS.

China Focus (CF): After mainly exporting to less developed markets in recent years, Chinese car manufacturers are now starting to export their products to Europe and the US. Why now?

Graeme Maxton (GM): They have actually been trying to export cars to the Western markets for at least the last three years. The intention was specifically written into the government's car industry plan in 1994. The government wants to push Chinese companies to move overseas, provide ways for them to expand and gain economies of scale. Chinese cars have been fairly successful in the developing markets of South America or Eastern Europe but their vehicles are not really ready for the developed markets in my opinion.

CF: Chinese cars are not ready for export yet?

GM: No, not for the big markets in or US. If you look at the latest crash tests that have been done with Chery cars in Russia and in Germany, there are still a lot of safety issues that have to be tackled. Chrysler is holding off on its plans to export cars from China to the US ?due to quality concerns. Compliance with safety standards an emission regulations is taken seriously, particularly in Europe. China is not there yet.

"Chinese companies don't know what they don't know."
Graeme Maxton, Writer and Presenter, The Insight Bureau

CF: Why do they do it then?

GM: The Chinese don't see it that way, they think they are ready now. At the moment, they are serving markets where price is the dominant force, where regulations are less strict and consumer awareness is less developed. These markets are easier to access because the expectations and requirements are lower than in the US or Europe.

CF: What about their sales and branding efforts? Are these up to par?

GM: There are a lot of issues that Chinese car corporations need to learn about. They need to learn about brand development, about advertising, about what European and American consumers want. But the biggest issue is still engineering quality: Chinese companies don't know what they don't know. They are lacking depth in engineering capability, unlike India for example. Indian companies like Tata have built up engineering knowledge, they have experienced a learning curve and now they understand the complexity of putting together such a complicated product. The Chinese haven't quite grasped that yet. Instead, they are taking products which are not ready and pushing them abroad because they feel the pressure to do that.

CF: Don't Chinese car companies automatically benefit from the Joint-Ventures with big Western firms in terms of product development and engineering?

GM: Of course, that is why the Chinese government installed this form of business in the first place. They want domestic car manufacturers to learn about foreign design and engineering. However, two things are remarkable in this respect: Firstly, the companies that are now pushing for export like Chery or Geely don't have foreign partners involved, i.e. they are not in 50/50 Joint-Ventures with big foreign firms like SAIC or First Automobile Works. Secondly, the way that the Chinese manufacturers have learnt so far has been to imitate, to copy what the foreign companies are doing. They are not learning to engineer products from the bottom up.

CF: How do these developments affect the image of Chinese car industry worldwide?

GM: There is a great risk that they will build up an image in the mind of Western consumers that Chinese cars are cheap and dangerous. It is very easy to build up a negative brand image and very difficult to change that afterwards. Instead of waiting for five years until they understand the business properly and then start exporting, they risk damaging their reputation now and setting back their plans by ten to 20 years. Countries like Russia are reluctant to give assembly licenses to Chinese carmakers now.

CF: Most of the current car exports from China are commercial vehicles, i.e. trucks and buses. Wouldn't that be a good strategy for Europe and US too?

GM: What we have seen so far, is that China's car manufacturers are trying to get into the passenger car markets, because it is more glamorous and because the volumes are bigger. But if they are clever, they will target the commercial vehicle sector first.

"China is pushing to go overseas too early and they will be set back for this eagerness."

CF: Why?

GM: Because the technical requirements there are less onerous. The volumes are certainly not as tempting but there is much less public attention and pressure in these segments and the buyers are very price sensitive.

CF: What role does the Western car-industry lobby play?

GM: There is definitely opposition to Chinese exports. So far this issue has been kept behind closed doors. But because they have already had to deal with waves of cars from Japan and South Korea the industry is very protective. At the moment, the focus is on dumping, on under-pricing. I have seen cars being manufactured in China which defy normal industry economics because the companies are simply not spending the same amount on research and development or engineering. There has also been political pressure to stop Chinese car manufacturers from coming in by putting up higher technical barriers. Once we see the Chinese with better products that pressure will grow.

CF: Is the set-up of assembly facilities in a foreign country a recommendable strategy in this context?

GM: At this stage, setting up assembly factories in a foreign country is almost never a sensible idea in terms of the economics. The volumes are too small. It's simply a way of getting around tariff barriers or of softening up governments by saying: "Look, you can't put barriers up against our vehicles, because we are manufacturing locally." Economically it doesn't make a lot of sense but sometimes companies do it for political reasons and market access. In some cases, import tariffs can be so high that it is almost impossible to sell a car competitively without having some sort of local assembly.

CF: Which Chinese car brands have the potential of eventually becoming successful in Western markets?

GM: In terms of scale and ambition, Chery is at the top, followed by Geely. SAIC is taking much more of a step-by-step approach. They want to learn about the local market first and then go overseas. Many of the smaller companies like Great Wall have already tried to push out products without the scale and without the experience. It will be hardest for these companies to successfully export cars.

CF: What is China's car industry going to look like in 20-30 years?

GM: I think we are going to see five to ten big Chinese car manufacturers of which two or three are global majors. And these Chinese companies will control 80-90% of the domestic market. The Chinese have already achieved great things domestically. Domestic car companies now control almost a third of the market ?and these companies didn't even exist ten years ago. To sum it up: China is pushing to go overseas too early and they will probably be set back for this eagerness. in the long term we will see ?like we have seen in so many other industries ?Chinese car companies prevailing. They will dominate the domestic market and play an important role internationally.

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