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Not Coming Soon to a Lot Near You: Chinese Cars

24.10.2006

So it is no surprise that as China’s industrial revolution advances, Western automakers and their workers have begun to worry seriously that an invasion of Chinese cars will begin soon.

It turns out it probably will not be so soon after all.

Despite growing anxiety that the Chinese would quickly seek to conquer yet another important industry, it now looks as if it will be at least another several years before Chinese automakers start exporting large numbers of cars they both design and make. They had intended to start selling their own brands in the United States as soon as 2007 but have pushed off their plans by a couple of years.

And now, some Chinese auto executives admit, it could be as late as 2020 before they will be ready to take on the world auto market.

That’s not to say that the Chinese will not follow in the footsteps of Japanese automakers, who first sent over chintzy cars that were roundly criticized, only to set new standards for the industry in later years.

Still, despite China’s manufacturing prowess, it is, for now, proving a lot harder than automakers here anticipated to make cars that appeal to Western tastes.

While Chinese cars are inexpensive and approaching Western levels of reliability, Chinese automakers have not yet brought their styling, safety, emissions and performance standards up to snuff, let alone their skill at marketing home-grown nameplates around the globe.

In one glaring example last year, a German automobile club tested one of 700 vehicles shipped to Europe by a tiny Chinese manufacturer of sport utilities. It came up with a result that humiliated the Chinese officials who oversee the mostly state-owned Chinese car industry: the vehicle, the Landwind New Vision, got the worst crash rating the club had ever awarded in 20 years of testing.

“Most of the Chinese companies that were preparing for exports have turned cautious, because this is a very difficult job,” said Lawrence Ang, a board member who oversees international finance at the Geely Group, a large, publicly traded Chinese automaker.

Chinese subcompact cars from manufacturers like Geely and Lifan have surprisingly ample headroom, but fall short of Western tastes in other areas. The exteriors of Chinese cars tend to have simple curves and straight lines that are easy for factories to stamp out of steel, but look starkly utilitarian by Western standards. Even names like Geely (pronounced JEE-lee) are unfamiliar.

China’s automakers also face rising wages at the same time the country’s currency is gradually appreciating, making Chinese exports more expensive abroad.

“It is a message for us,” said Jiang Lei, the executive vice chairman of the China Association of Automobile Manufacturers, a government agency that guides the industry. “We cannot rely on cost alone. We have to improve our technology and management level.”

Any delay, however, is welcome news to Detroit automakers, which already have been trimming thousands of workers and closing plants as they continue to lose sales to foreign rivals, especially the Japanese. The extra time to prepare for the Chinese onslaught could help American automakers protect their turf.

That could help defuse tensions arising from the growing American trade deficit with China, already running this year at an annual pace of $185 billion, and still rising.

For all the fears expressed at auto shows from Detroit to Paris in recent months, China’s auto industry does not appear to have any magic formula for making cars. Like other industries in China, this one is dominated by foreign joint ventures and subsidiaries of multinationals, which are building cars for sale in the local market first and plan to export later.

Western anxieties were sparked early this year when Geely surprised auto executives by displaying a subcompact at the Detroit auto show that it had designed by itself. Target dates for exporting — as early as next year — were buzzing around. Meanwhile, Chery Automobile, a rival of Geely, announced that it, too, was planning to export a fully Chinese-made car next year to the United States.

But now, said Mr. Ang, the Geely board member, his company has no plans to export cars to the United States until “2009, 2010 or 2011.” Meanwhile, Chery has twice pushed back its target date for exports to the United States, first from 2007 to 2008, and then again to 2009.

Other Chinese automakers are even more cautious. Shanghai Automotive Industry, First Auto Works and Dongfeng Motor — joint venture partners of multinational automakers that are taking steps to produce their own cars — have all taken go-slow approaches to exports in recent months. And they are refusing to set targets for selling to advanced countries.

Chinese automakers still have strong advantages that will help them in the long run — skilled and diligent workers like Ai Biaohui, for instance, a strapping 22-year-old at the sprawling Geely operations here in east-central China, who labor for less than $250 a month. Chinese cars often retail for a quarter or more less than models of similar size in the United States, with domestic subcompacts selling at home for $7,000.

Moreover, the government supports the industry by allocating to automakers the choicest land, near deepwater ports. The site for the Geely factory here in Ningbo, for instance, is just 600 yards from the docks.

And there are other intangibles. Geely, among the more efficient makers, not only does not have to worry about unions, it even hires drill sergeants from the People’s Liberation Army to improve discipline.

In visits across the country to car factories run solely by Chinese companies, it is apparent that most are not ready for global competition.

At a BYD factory in Xian in western China on a recent afternoon, for example, car engines were stacked up like 15-foot walls along both sides of the assembly line because of a delivery mix-up.

Workers in blue jumpsuits worked between the man-made heaps of plastic-wrapped engines. The jumble of cars at the end of the assembly line made it hard for workers to move cars off the production line.

Chery, in Anhui province in east-central China, has delayed exports partly to focus on improving safety. Malcolm Bricklin, who has a distribution agreement with Chery to sell its cars to dealers in the United States, said that Chery had realized that regardless of price, American buyers expected cars to exceed minimum standards for safety and passenger comfort.

If Chery cars were subjected to crash tests now, he said, “they could pass regulations, but they would not be five-star crashes.”

Still, some Chinese automakers have a slight head-start through their joint ventures, which tie some of them to Japanese and Korean manufacturers that have already gone through the long process of developing a manufacturing backbone and figuring out the marketing networks needed to navigate the United States and Europe.

From a joint venture in the southeastern city of Guangzhou, Honda now exports hatchbacks to Belgium. DaimlerChrysler is working out the final details for a joint venture with Chery to build Chrysler-designed Dodge subcompacts in east-central China for export to North America, using a combination of imported and locally made parts.

Nanjing Automobile has bought the MG name and much of the factory equipment from Britain. But three of the first four models planned for the American market will be sedans carried over from British designs. Only one, a coupe, will be designed in China, said Duke Hale, the president and chief executive for North American operations.

The exporter of Landwind New Vision sport utilities, which failed the German testing, will try again, according to Peter Bijvelds, the chief executive of LWMC, the Dutch importer of the vehicles to Europe.

The New Vision had met all safety regulations, he said. But he conceded that the test had hurt. Now, LWMC plans to try importing a completely different model from China next summer.

Japanese and Korean automakers cracked the American car market by climbing up a ladder of larger and costlier models. China, too, will start with low prices.

But the global market has become so integrated and competitive that China will have to move much faster than past companies in building manufacturing capability and technology.

In the case of Japan, automakers had time to experiment with inexpensive subcompacts, like the early Honda Civic, before moving to reliable midsize cars and on to technologically advanced luxury models like the new Lexus GS 450h, a gasoline-electric hybrid sedan.

Yet the bottom rungs of that ladder have largely disappeared since then. The reliability of used cars has increased and financing and warranties for them have become widely available. This has pushed many economy cars out of the market.

The toughest part of building a car comes in making thousands of little tradeoffs: designing one part a little thicker or stronger and a neighboring part a little thinner or lighter.

This is all done with the goal of tuning the ride and handling to Western levels — often more an art than a science. Chinese auto executives concede they are far behind in this process, known as systems integration.

“You’re not talking about something malfunctioning, but the look or the feel is not right,” said John Humphrey, a senior vice president in China at J. D. Power and Associates.

Moreover, much of the current cost advantage enjoyed by Chinese automakers because of their cheap labor will inevitably melt away as they improve quality and buy better catalytic converters and other technology to meet American safety and emissions standards, said Mike Jackson, the chairman and chief executive of AutoNation, the biggest car dealership chain in the United States.

China’s many state-owned automakers and their auto parts suppliers appear to be stumbling as they try to modernize, partly because they are so heavily subsidized by the government.

At the Fast Gear truck transmission factory in Xian, for example, robots with flashing lights carry truck transmissions a couple hundred feet as workers add parts to them. Though a conveyor belt would work just as well — as would cheap unskilled workers pushing trolleys — the factory’s management takes pride in the spanking new robots.

“In this factory you can hardly find any workers,” boasts Qian Qunzhu, a deputy director of the factory.

The more typical Chinese factory, however, resembles the Geely plant here where Mr. Ai works. One of his jobs is to use a hammer and chisel to widen or narrow the brake light aperture and other spaces on unpainted, freshly welded car frames so that the cars will fit together properly when fully assembled.

“The hard part,” he said, standing beside a short row of car frames that needed his attention, “is to get the gaps just right.”

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