Automotive Globalization: The New China Syndrome

There are numerous videos floating around the web showing Chinese cars failing miserably, and frighteningly, in western-type crash tests.

Cars built in China are depicted folding like an aluminum soda can. Yikes! No Chinese vehicles are currently recommended here.

But many video viewers, and a majority of professional analysts, are belittling China's efforts. They say that safety and quality concerns with Chinese cars will prevent their acceptance in the USA. They point to the quality fiasco of the 1980's - Yugo - as an example of what happens to trashy tin can cars hastily exported as price leaders to the world's toughest car market.

Yes, the Chinese have exported toxic toothpaste, poison pet food, dangerous lead-contaminated toys, and defective tires.

Truckers have learned the hard way about the safety of cost-leader products from Asia:

"Mash that big moter, Driver, them chinatires won't blow fer least 'nother hunerd mahles."

And yes, the mainland shamelessly reverse-engineers knock-off products and violates intellectual property rights.

And, they say, the car business is capital intensive, low labor costs alone will not propel China to world leadership.

But will it be a decade before Americans routinely buy cars made in China?

I remember the first Japanese imported cars. With 600cc motorcycle engines, they were scoffed at. "Made in Japan" was a joke in Detroit. Toy-ota who?

A common gag when I was in high school (1963-66) was to manually pick up these 1600 pound cars and relocate them. 1200cc Volkswagens could only be slid laterally, by three stout lads, a foot at a time. Beetles were easy to move into restricted parking areas or expired meters.

But the offensive line or wrestling team could walk the early Honda (S600) a good distance, and take them to someplace silly, like on the grass in front of the flagpole.

Or maybe slide the tiny car between two concrete barriers so the owner couldn't drive away.

Hey, we invented "Dude, Where's My Car?" years ago.

It took the Japanese 30 years to penetrate the US car market by developing products with superior quality/price ratios. Starting with junk, the South Koreans copycatted that example, starting in South America and gaining 5 percent of the US market in less than 20 years.

Enter the Dragon

As if Godzilla (Toyota) and The Little Engine That Could (Honda) weren't scary enough, now The Magic Dragon (China) is preparing to enter the global car market. After the Hyundai quality miracle, nobody in Detroit is laughing this time.

Yes, these cheap early Chinese products are unacceptable, just like the Korean cars were.

China's hundreds of start-ups lack engineering talent, supply chain management, and proper quality control. But resources are rushing to China from every corner of the globe. Critical mass is converging: these problems will be solved in record time.

Images of Chinas past, of the bicycle and rickshaw, do not do justice to the Chinese boom evolving today. Globalization has transformed an enormous nation: widespread use of English, in a culture which has resisted outside influences for centuries, is the most obvious evidence.

Well yes, there is a culture and language gap, as reading the English version of most China-based websites will demonstrate.

There is no precedent in world history for the upward social mobility, capital infusion, and economic growth in 21st century China.

And yes, bust will follow boom in today's China.

China's Car Ownership Boom

Private car ownership has exploded, as large numbers of people suddenly find themselves changed from peasants to middle class, and park their bicycles in front of a car dealership.

China is the fastest growing motor vehicle producer and automotive market ever (20% year over year).

While the shift to passenger cars is just beginning, there is already a superhighway network 1/3 the size of America's.

I remember the first US Interstate Highways. That was in the 1950's, during the Dwight David Eisenhower administration. I was 8 years old when my mother insisted the whole family walk five miles into the country to view the new construction. Our heap, a 1939 Chevy six, had a blown engine.

All the highway that was completed was a dual overpass with no road anywhere near it. I couldn't visualize what it was doing way up there.

Our highway network took fifty years to build and is still unfinished.

When they said "My way or the highway" I always took the highway.

I hitchhiked the country back when there were substantial unfinished interstate sections, which reverted back to two lanes.

Yes I liked Ike, but after 2,000,000 highway miles over 50 years I believe the US made a giant strategic error.

Stacking huge blocks of concrete in the sky is so Sphinx-and-Pyramid era. The worst thing about our system is its fundamental lack of expandability: it has already used up all the available two dimensional space and has to be shut down for additions or repairs. What part of inherently self-limiting isn't intuitively obvious?

So the copycat Chinese are building new highways just as fast as they can.

During the communist period, only top party officials were allowed cars.

Just a few years ago, personal car ownership was rare in China, the people rode bikes. Mopeds were a status symbol. Today there is gridlocked traffic and total car ownership is expected to exceed the USA by the year 2025.

Over three quarters of new car buyers are first time owners.

China's strategy is to make the local car industry and 1950's style highway system the centerpiece of its new economy.

I think they have made a monumental blunder, with long term connotations which are very negative for the world, and especially for the US car business.

A significant fraction of 1.2 billion people are supposedly going to drive private cars when they have already have to ration traffic? And India is close behind. Double yikes!

I guess my opinion won't stop China from becoming the second-largest vehicle market in the world sometime around 2010.

Bigger is Better

The automotive gold rush has brought China a nightmare of environmental problems, financial house-of-cards vulnerability, and oil import geopolitical risk. They have copycatted more than American patents and other intellectual property: they duplicated our worst stupid mistake. They are investing the entire farm in an infrastructure designed to burn scarce oil that requires war to obtain.

Congested cities have rationed driving the way our western states ration lawn watering. Even numbered license plates drive only on even numbered days.

Auto license plates are restricted by quotas and sold for up to $6K at auction.

But for the country's thousands of new millionaires, this is no problem. Biggest is unanimously considered best.

Recently, a group of coal industry entrepreneurs from a northern province came to Beijing, bought HUMMERS for $170,000 each, and went home as a convoy.

How do you say "Thassa a big ten-four Rubba Duck" in Chinese?

America's peculiar sport-utility marketing fad has not gained traction in China. SUVs, associated with the rural peasant past, hold a market share of only 2%.

The irony is that these Asian nouveau riches love big sedans with obedient chauffeurs to open doors. Roads are dotted with Buicks, Accords, and Passats.

This means many models for the US and Chinese markets will be nearly identical.

Overbuilt Industry an Invitation to Disaster

The wild construction and transportation boom has produced hundreds of hopeless startups, not unlike the early US vehicle industry. This fragmentation will inevitably produce a shakeout. Merger and joint venture announcements are already common.

But there won't be time for the Chinese equivalent of Alfred P. Sloan to consolidate the industry into a Chinese General Motors. This vast new production capacity will push the overbuilt world car industry to the brink, undercutting prices everywhere.

To fulfill the government plan, China needs to export vehicles in volume. This requires the 100+ car companies to consolidate into two or three and reach out into the developing world.

Perhaps leading automakers, like Chery Automobile, Geely Automobile Holdings Ltd., and Great Wall Motor Co. Ltd., could provide nuclei for these bigger companies.

Those who succeed will be catapulted to the world stage, with economies of scale to fix the tin-can quality issues and supply chain fragmentation presently emphasized by detractors.

Each year 12 million new workers are ready to join the labor pool. While labor costs are only a part of the cost of production, Chinese auto assembly workers earn a fraction of what others are paid. No one is paid not to work.

America, England, and Germany are high cost auto assemblers.

The current level of economic growth is unsustainable, and a coming economic slowdown will flatten vehicle demand and prices. When the local industry hits a plateau, China will be forced to become a big exporter. They will move sub-assembled kits to partnered plants in foreign countries, surrounding the US/Euro markets with low cost cars.

Chinese vehicle exports are rising fast, the majority shipping to South America, Southeast Asia and Eastern Europe.

Thin profit margins on tiny B- and small C-segment cars prevent their production in the United States. This small car segment, where young buyers purchase their first new vehicle and establish brand loyalty, will lead the exodus.

Joint Ventures Speed Exports

The car business is one place where size does matter - economies of scale fuel the rush toward global standardization. Platform and component sharing must be done on an increasing scale to retain profitability.

Marginal players are racing to form joint ventures with European, Japanese, and American producers.

The Chinese government plans to subsidize its own automotive industry and is not allowing the foreign auto makers full freedom. If I owned the hottest car market on the planet, I'd try to maximize gains too.

The foreign companies are not allowed to have majority ownership of joint venture projects building finished vehicles.

Rapid technology and capital transfer, without surrender of control, is the Chinese government's goal.

But that isn't deterring major car companies from getting in. BMW sold several thousand cars, made in a joint venture in China, this year.

General Motors has jumped in big time, and through a partnership with Shanghai Automotive Industry, makes 1.2 million cars a year.

This has been a smart move for GM, now the market leader, as profits from China have boosted GM's bottom line while Ford and Chrysler languished.

Sales of Buick and Chevrolet offerings, including Buick Excelle and Chevy Lova compact, are strong on the mainland.

The Buick Excelle will be built at a new plant in Shenyang.

Toyota will start production of globe trotting Camry sedan in 2007. Godzilla is a bit late to the party, with just 4% market share going to its other models; Vios, Reiz, Corolla, and Crown.

Ford's locally-built Focus sedan is selling well.

Volkswagen now sells more vehicles in China than back home in Germany.

These outsiders will provide expertise and capital, and assist in the export of locally developed Chinese vehicles worldwide. Joint export ventures to the US with world players Hyundai, Volkswagen, Honda, Ford, and Toyota may complete the consolidation back in Asia.

Honda has announced plans to export small vehicles from China to Europe, and production of Fit (Jazz) models has begun.

Chery Automobile might be the first Chinese company to break into the U.S. auto market.

Chrysler will sell Cherys in South and Central American test markets in 2008, with agreements and plans for the US as early as '09.

When Cerberus Capital Management bought Chrysler, I said "What are they thinking?"

Now we know.

With Chrysler's expertise, Chery can accelerate safety and emissions compliance and build a US brand presence quickly. Chrysler's established and long abused dealer network is celebrating the liberation from Mercedes domination. These guys would love a new product to lure first time buyers back to the showrooms. Any success will snowball the consolidation process back in China, where the shakeout will lower asset prices for new owner Cerberus to build a Chrysler beachhead on the mainland.

Chrysler gets a small car product to fill a gaping hole in its SUV/pickup-heavy product line, plus a better shot at a global presence.

Chaotic Chinese supply chain networks will also be consolidated quickly when the crunch comes. Component production runs will grow bigger. This will finally make China the low cost parts producer.

Economies of scale will also kick in for finished vehicle shipload logistics.

So the crisis in the overbuilt car business has established producers racing to hand over their technology and distribution networks to the Chinese.

Crash Test Dummies: Safety

Auto safety standards in China are clearly lacking, and there is no tort trial lawyer profession to pursue personal injury lawsuits.

China's auto fatality rates have been the world's highest, over 100K, in spite of the nation's relatively small fleet size.

Most cars successfully marketed in the USA score at least four out of five stars for front and side impact safety in National Highway Traffic Safety Administration tests.

Giving current China cars one star is generous.

But these cars already meet Mexican safety and environmental standards, and much will be learned there. Malquiladora manufacturing plants along the U.S. border can follow.

The still-communist leadership is ready to get serious about export product safety.

Dead serious.

The recent unusally quick execution of Zheng Xiaoyu, former head of the State Food and Drug Administration, is designed to motivate Chinese exporters and show the world Chinas new hard line on safety. Mr. Xiaoyu was convicted of taking $850K in bribes to approve untested medicines.

As I write, a second executive has been sentenced.

In the wake of the Mattel toy recall debacle, an entrepreneur in the toy-making industry committed suicide after his business was terminated.

In America, failed executives get $200 million golden parachutes and become CEO's of struggling carmakers.

I'm pretty sure China's policy will show faster results.

The Commerce Ministry blacklisted 429 exporters for trade rule infractions - corporate death penalties.

Product safety/quality is new to China, and few qualified, experienced qc engineers exist.

But here is where the joint venture formula will shine. Global corporations importing from the orient have been caught up in these scandals. For example, Mattel came under media fire for not supervising its imports.

We are talking about 40% of everything sold in the USA, and 80% of all toys distributed globally, being made-in-guesswhere.

American trial lawyers are casting greedy eyes at profits made on defective imported goods, class actions have begun.

I think the threat of a consumer backlash will accelerate the safety engineering of these cars beyond anything previously accomplished on a schedule. Transcontinental railroad, Panama Canal, North American P-51 Mustang, Manhattan Project, Marshall Plan, Moon Landing....Chinese Car Quality Initiative.

Oops, Did I accidentally leave out US Interstate Highway Build-out?

So let's see what the "New Chrysler" (again?) can do with the Chery crash test ratings by 2009. New CEO Bob Nardelli has egg on his face from Home Depot, but he won't fumble this one.

Quality Will Follow

Chinese build quality, and supply chain standards, while borderline acceptable in the southern hemisphere, do not meet western expectations.

Three quarters of all cars made in China have serious quality issues within the first 6 months of ownership.

Chinese consumers, perhaps the most naive middle class on the planet, have begun wising up. Local market car quality complaints have increased recently.

To paraphrase an old Ford marketing slogan,

"Quality is job Two"

Once the safety debacle is behind them, Chinese auto makers will use the snowballing economies of scale, foreign corporate expertise, and shining Hyundai example to improve quality.

China is closing the quality gap, and they don't need to match Lexus. Daewoo, Kia, Mitsubishi, and Izusu will do nicely.

Hyundai's quality miracle involved massive improvement, not the attainment of perfection. Engulfed in corruption and scandal, they are potentially vulnerable to knock-off competitors.

Honda reports that, in their engineer's in-house quality tests, the China-made Accord beats the Ohio-made version. Ouch.

Coming to America: cars from China

China's exports have lowered prices and helped control inflation for a decade.

It is the steadfast position of texas-cars-and-dealerships that American vehicles are vastly overpriced. Chasing top margins in big and upscale products with trashy Lincolns, Caddys, and SUVs is how US companies lost the farm.

The USA needs good cars under $10K, where Western carmakers cannot make money, and great cars in the low $20K's for the middle class. These cars need to get outstanding fuel economy as well.

The battle is with Accord, Camry, and Sonata for the middle ground, duh.

To be fair, the 2008 Chevy Malibu looks like it might have a chance in that middle market.

This is not about saving the whales: America is built around the false premise of cheap transport. Without this improvement, America's economic slide will continue.

I believe cheaper, more efficient cars are the only way America's overleveraged consumers will be able to continue buying new vehicles. As I write, in August 2007, Dr. Bernarke at the Fed has posted an emergency rate cut to stabilize falling financial markets.

Call me a pessimist, but I believe a repeat of the 1970's is coming to America. Has everyone forgotten how we couldn't buy anything, especially new cars, with double digit interest on consumer loans?

If this scenario is even partly accurate, we will again line up to pay additional dealer markups for small foreign cars. Right about then China will be desperate to dump excess capacity.

China's biggest hurdle is not the crash tests or quality, it's building a brand in a market flooded with nameplates. But again, the first target is not Honda/Toyota/BMW, it's Kia/Isuzu/Mitsubishi/Mercury/Pontiac.

China will follow the Korean model for a US market beachead.

China's production will enter North America as badge-engineered sub-compact domestics: Dodges and Chevies. As is presently the case, a majority of buyers won't know they are not American made.

On this morning's jogging attempt, I passed a remarkably nice looking brand-new Chevrolet Aveo. My first response was "no rear disc brakes, and the wheels are too small." Only later came "rebadged Daewoo." If a guy who does cars all day forgets to notice, how are average car buyers going to spot pretenders?

Korean cars gave Detroit real problems by focusing on the subcompact price/quality ratio, and then moving up market. One easy way to do this is to market and then build the vehicles in Mexico, where standards are lower. From there, the jump will be easier.

Will the then US President and his globalist cronies, who have worked so hard to prepare for the coming North American Union, announce tariffs on cars imported through Mexico?

Several Chinese upstarts will probably fail, but this is not Yugoslavia of the 1980's. This thrust has the critical mass of the world's fastest growing consumer market, and many global corporate interests, behind it.

So when can Texans begin buying cars made-in-China?

When Chinese vehicles are crash-test-rated at least 4-stars. This may take 3 to 5 years.

Until then, Buyer Beware Chinese cars.

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