China's not geared up for auto
exports By Michael Mackey
SHANGHAI - Conventional wisdom has it that
China will soon do what the Japanese and Koreans
did 30 years ago: join North America and western
Europe as places where quality, affordable cars
are built and exported to the world. After all,
China is already dubbed the workshop of the globe,
and is rapidly moving up the value chain in every
conceivable manufacturing industry, so why should
vehicles be an exception?
Warnings to this
effect are coming from all quarters. The most
high-profile of these came from Rudiger Grube,
DaimlerChrysler's China chief, who earlier this
year sent tremors throughout the entire automotive
industry when he said the German-US giant might
build, for export, entire new lines in China. But this
statement was quickly
qualified to the point of dismissal. "Currently,
there are no plans to build any vehicles of
DaimlerChrysler for export out of China," said a
company spokesperson in response to e-mailed
questions from ATol. "Dr Grube discussed that as a
possible option, but not at all as a final
decision. As already mentioned, currently there
are no plans to build any vehicles."
It
turns out that, when one looks closely at the
actual state of China's auto industry, it is
DaimlerChrysler's backpedaling, rather than
Grube's speculative comments, which reflect the
true plausibility of Chinese auto exports, at
least in the near term. In essence, the large
global players are holding off; the automakers
that do have export plans are mostly Chinese
domestic players, which have large question marks
hanging over their efforts.
This is not to
say that there is not major engagement between the
world's car manufacturers and China. Even as
DaimlerChrysler denied export plans, it talked up
its joint venture in Fuzhou, where it will produce
the Sprinter/Viano/Vito family of vans, saying,
"[the Fuzhou JV is] moving forward. We expect to
be operational by 2006."
Both Honda and
Toyota recently announced significant new
investments. Honda will put US$80 million into an
auto parts factory in the southern province of Guangdong which will
supply components to its three factories in China.
Toyota meanwhile has agreed with its joint venture
partner, the Guangzhou Automobile Group, to spend
$234.5 million expanding production capacity.
Even those companies not expanding are
restructuring themselves for the long haul.
Volkswagen has announced it will suspend expansion
and start major cost-cutting exercises as it
battles to maintain market share in an
increasingly competitive local market. VW's annual
capacity in China currently stands at 450,000
units. "Today we are in a transitional phase,
where we are laying foundations preparing
ourselves for a more sustainable development of
our company in China," Winfried Vahland, president
and chief executive officer of Volkswagen Group
China and the company's global vice president,
told the local press.
In general, for the
large foreign companies at least, tapping the
export market doesn't seem to be a priority.
Toyota acknowledges the products from its factory
are both for use domestically and for export to
Japan; China, it should not be forgotten, is
seeing increasingly high levels of car ownership.
The industrialization of Japan and Korea saw the
creation of large domestic auto markets, and in
China, whose domestic market is potentially vastly
larger than either of these, much of the
production capacity is intended to build vehicles
for Chinese rather than foreign owners.
"[We have] no plans for export yet," said
Trevor Hill, executive director of Audi China in
response to e-mailed questions over the summer.
"Our local production in Changchun is dedicated
just for the Chinese market." This production,
incidentally, showed the scale of China's emerging
new wealthy as it sold 59,000 units of Audi's A4
and A6 luxury sedans.
That being said,
there are some companies - not, it should be
noted, major players - who have signaled an
intention to tackle foreign sales. One such
company is ambitious local manufacturer Geely,
which has said it will soon assign a contractor to
assemble its cars in Malaysia for sale in the
Southeast Asian market, and famously announced
plans to build sedans in Hong Kong. In the short
term, Geely's ambitions are local: according to
executive director Lawrence Ang, it plans "no
capital investment [in Malaysia] ... but we will
sell the parts and transfer technology to
contracted manufacturers", and build only roughly
20,000 cars a year. Geely's foreign ventures face
many potential hurdles; for example, it is unclear
how Geely, a Chinese brand, will tackle the Asian
auto buyer's love of famous global names. Neither
has the company offered a convincing strategy for
contending with Malaysia's national car, the
Proton, which gets some support from Kuala Lumpur.
One of the biggest China-auto-export
skeptics is Philip F Murtaugh, chairman of GM
China, who has said, "I don't see China becoming a
major car exporter in the foreseeable future.
There is no economic rationale." Murtaugh cites
high production costs and quality issues at
Chinese car plants, as well as just-in-time (JIT)
delivery needs in the West.
Recent
Volkswagen statements have confirmed that cost is
an issue. The German manufacturer plans to reduce
costs by up to 40% by increasing local
procurement, although with China's
industrialization ramping up the cost of raw
materials such as oil and steel - something other
manufacturers admit is an increasing pressure
point - doing so at this time is a bit of a
paradox. "This strategic move will bring down
material costs to [an internationally] competitive
price level," VW said in a statement.
Numerous issues have combined to make
Chinese cars non-competitive in spite of the
country's low labor costs. "A car produced in
China costs as much as elsewhere. In the short
term, [the Chinese] are not in a position to sell
significantly into world markets," said one
source, reporting what he claimed was a common
industry view, before citing issues such as
substandard quality and meager overseas servicing
and marketing capabilities.
Another
difficulty lies in the way things are done in
China. Volkswagen has not just one presence in the
Chinese market, but two, as do most foreign
manufacturers. One is a joint venture with
Shanghai Automobile Industrial Corporation; the
other is a different JV with First Automobile
Works in north China. The result of this
arrangement is that VW is effectively competing
against itself, as are most foreign automakers
operating in the country. The resulting
inefficencies are magnified in the supply chain
that both ventures have to deal with, and which
rule out economies-of-scale benefits.
"The
main reason is protectionism in the market, and no
synergies ... between car manufacturers and
suppliers," says Michael Proll, managing director
of consultancy Comchina. Proll points out that the
established Chinese partners tend to give business
such as logistics and parts supply to their own
in-house operations, and not necessarily the
lowest-cost or best-quality suppliers. In
addition, the duplication caused by cases like
Volkswagen's forces companies to run two
independent spare parts networks when one would be
enough.
The inefficiency of many suppliers
also plays a part in making the industry more
costly than it should be. With a large percentage
of car parts outsourced to subcontractors,
manufacturers end up dealing with a fragmented
supplier base. "The suppliers are sub-scale and
[therefore] don't have economies-of-scale. They
need to consolidate," said Paul Gao, who runs
McKinsey's Automotive and Assembly practice -
suggesting some big internal tasks remain before
Chinese-made cars start taking to the world stage.
Michael Mackey is a
Shanghai-based freelance writer.
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