The Chinese Business Forum @ MIT Sloan

Source: Business Week Online

Time: June 6, 2005 Thursday

Title: "Lessons from Car Imports Past"

Authors:  staff

ORIGINAL BODY:

China, the export juggernaut that has become the scourge of manufacturers of everything from bath towels to computer servers, has set its sights on a new export market: cars. In April, a DaimlerChrysler exec said the company was considering exporting small Chinese-built cars to the U.S. The same month, Honda and its Chinese partners began production at an $82 million assembly plant in Guangzhou with plans to export 50,000 subcompacts a year to Europe. And now American auto entrepreneur Malcolm Bricklin is working with China's Chery Automobile Co. to import 250,000 mainland-made cars and sport-utility vehicles annually to the U.S. by 2007.

It would be easy to brush off these deals as either low-volume operations done to curry favor with China's government or overoptimistic stargazing by auto maker wannabes. Indeed, most of China's car exports today head for less demanding markets such as Pakistan. And even plucky Chery only built 80,000 vehicles in all of last year -- less than the number of F-150 trucks Ford Motor Co. makes each month.

But underestimating the eventual clout of China's auto sector would be a big mistake. As the traditional U.S. and European auto makers learned from the arrival of cars first from Japan and later Korea, rivals that appear unassuming can develop at a surprising clip. And this time around Western auto makers will likely have less time to adapt to their new rivals. It took Japan almost four decades to evolve from a maker of cheap econoboxes into a quality powerhouse that today trounces the likes of General Motors Co. and Mercedes in profitable areas like luxury cars and SUVs. In the '80s and '90s, Korea transformed itself from a problem-plagued upstart into a global small car specialist -- in half the time. By 2004, Hyundai Motor Co.'s quality actually topped Toyota Motor Corp.'s.

That metamorphosis is bound to happen even more quickly for China. Beijing desperately wants the jobs and supply-chain expertise that come with an export-oriented car industry. So it's offering sweeteners like tariff breaks on imported parts to get established players -- already eager to sell cars to the potentially huge Chinese domestic market -- to also use China as a manufacturing base for cars destined for the First World. That's certainly behind Honda's export decision, and other big foreign players are sure to follow.

The big Western auto makers are already struggling with hefty labor costs, plant overcapacity, and pricing pressures in their core markets. So the threat of new lower-cost rivals from China seems likely to push more Western car companies to start or increase their own production of small cars in Asia for export. Ford already manufactures in Thailand, while GM's Daewoo affiliate in Korea can produce small cars at good prices. Ditto for Europe's Volkswagen and Citroen, which both have plants in China. But all would likely face labor and political heat at home if they try to aggressively preempt China by shifting lots of production to Asia.

They don't have much time to figure it all out: China could market a credible small car in the West in as little as six years. That's why both U.S. and European carmakers would be wise to keep their eyes on the rearview mirror. The China threat they see in the distance may be closer than it appears.