From www.cinsky.cz - Business - 2006-11-26
Are Chinese carmakers trying to do too much, too soon?
CHINA's carmakers are feeling smug. As they showed off their latest designs amid the chaos of the Beijing Auto Show this week, crowds swarmed around the stands for the unveiling of each new model. Chinese firms felt confident enough to show off not just their newest low-cost runabouts, but also luxury and sports models, “concept” cars showing possible future designs and even a few hybrid and electric vehicles. Local carmakers in the world's fastest-growing and third-biggest car market would appear to have come of age. But like a teenager trying to behave like an adult too soon, the rush for high-tech street-cred may not be so wise.
Almost every international carmaker in the world has moved into China in the past decade, and they have been surprised to discover that their toughest competitors are the upstart local firms. Until recently many Chinese carmakers built thinly disguised copies of vehicles made by Volkswagen, General Motors and Toyota. But in the past few years things have changed. In preparation for a push overseas, local firms such as Chery, Great Wall and Geely have proved that they can develop their own vehicles too. By buying designs from international specialists and installing fancy robotic production lines, they have been able to launch a wide variety of their own cars. More than 100 new models will be introduced in China this year.
These efforts have brought considerable success. In the first ten months of this year 5.8m cars were sold in China, up 26% over the same period last year—and Chinese carmakers captured 27% of the market. They will also export 75,000 vehicles this year to over 100 countries. But what most worries foreign carmakers is the Chinese firms' ultra-low prices. The latest Shanghai Maple, for example, with leather seats, anti-lock brakes, air conditioning and a two-year warranty, costs a mere $6,500. Foreign firms grumble that they cannot even buy the steel needed to make a car for that price.
How much of this miracle is the result of good business sense—rather than the special treatment granted to local firms—is not entirely clear. A lot of the early technology was borrowed. The government also offered support to fledging firms via direct investments and guaranteed loans. Universities provided technical help, especially in the development of expensive engines. The authorities even considered introducing a law that would mandate a 50% market share for local firms by 2010. Future legislation is likely to force foreign firms to do more research and development in conjunction with Chinese partners, to ensure continued access to cutting-edge engineering skills. So there has been support from the top. Yet this is arguably no different from the sort of support given to Japanese carmakers 40 years ago, or to South Korean firms 20 years later.
What is different in China is the pace of development—and therein lies the concern. Is it possible that China's local carmakers have grown so quickly that they have not developed the necessary depth of skills? In a market where buyers are unashamedly experimental, brands have little value so far, except in the luxury segment. For most buyers cost is more important. But consumers are beginning to discover the consequences. As carmakers have churned out ever more cars, quality has deteriorated.
According to the latest China Automobile Customer Satisfaction Index, the number of faults per 100 cars made in China rose from 246 in 2005 to 338 this year. Four out of five cars now experience a problem in the first six months of ownership. But with average retail prices falling by RMB10,000 ($1,250) a year, producers are racing to cut costs, not improve quality. Intense competition is also forcing them to accelerate development cycles. Carmakers acknowledge that this means they are being forced to use lower quality materials and spend less time on testing. So reliability is likely to deteriorate further.
Stepping on the brake
These problems have already delayed the Chinese carmakers' ambitious plans to build export sales in the developed world. Instead, the Chinese cars exported today mostly go to Africa, south-east Asia and the Middle East, where expectations are lower and price matters more. The big push into the developed markets by Chery and Geely planned for 2007 has now been delayed until 2008 or later, and plans to launch hybrid petrol-electric cars have also been put back.
Many foreign firms have looked at the successes scored by China's carmakers in the past few years and quietly sighed with exasperation. Although foreign firms have enjoyed soaring sales, they feel disadvantaged by the support local firms have received and hobbled by legislation that required them to enter joint ventures with firms that were also their competitors.
Yet the battle for China's car market is not over. Foreign firms should benefit in the coming years as the market matures, buyers begin to value brands and quality, and a second-hand market develops so that residual values can be measured.
Local carmakers in Japan and South Korea gradually came to dominate their domestic markets through a combination of cost competitiveness, nationalistic buying and technological leadership. Today, Japan's Toyota and South Korea's Hyundai make some of the most advanced, reliable, high-quality cars in the world. By pushing too fast, China's domestic carmakers are putting their current market dominance at risk. They have progressed quickly thanks to government support and undemanding, cost-conscious consumers. As buyers begin to pay more attention to the reliability and resale value of their cars, their loyalties are likely to change. Today's success may yet prove costly tomorrow.
Source: The Economist