Chinese cars make gains in emerging markets

For more than a decade, automakers around the world have been nervously awaiting the day when China would start exporting sizable numbers of cars to the West.
Now it seems they were worried about the wrong threat.

China is shipping just a few thousand cars a year to the European Union and virtually none to the United States. But China’s exports to emerging markets are surging as its own auto market slows and its automakers keep pouring billions into new factories.
Roads in countries like Algeria, Brazil, Iran, Russia, Saudi Arabia and South Africa are increasingly dotted with cars from manufacturers like Geely, Great Wall Motors and Chery.

Less affluent buyers from Santiago to Baghdad are starting to buy cheap Chinese cars as alternatives to used cars, motorcycles and low-end models sold by multinationals. Chinese car exports were up 21 per cent in the first five months of this year, and up 43 per cent in May from a year ago.

The buyers are men and women like Jessica Gonzalez, a 43-year-old agronomist in Santiago, Chile. After owning several used cars, she wanted her next car to be new, but the more established models from Japanese, European and United States companies were out of her price range. Although her mechanic criticised the quality of Chinese cars, she ended up choosing a Chery S21 because it was roomy and well-equipped.

“The price factor is fairly decisive,” Gonzalez said. “I paid $5,500 new and full. Toyota with similar features costs around $12,000.”

Chinese automakers said they were preparing for further expansion in exports to developing countries.

“They’re easy for us to operate in,” said Steven Wang, the deputy general manager for exports at Great Wall Motors Company. “In Europe, they have lots of laws for new entrants, and in Europe and the United States, customers like to keep familiar brands.”

The Chinese companies pose a potential challenge for the overseas divisions of companies like General Motors, Ford, Toyota, Volkswagen and Fiat, all of which are looking to emerging markets for growth and watching the Chinese contenders with varying levels of concern.

Annual auto sales in developing countries other than China have risen by 45 per cent since 2005, to 21.3 million cars and light trucks last year, according to LMC Automotive, a global data company. Including China, emerging markets passed industrialised countries in 2010 for the first time in the number of cars and light trucks sold. Since 2005, auto sales in industrialised countries have fallen 17.4 per cent, to 36.2 million cars and light trucks last year. The market in industrialised countries was still worth more than emerging markets, however, because sticker prices tend to be considerably higher. But with so much growth in developing countries, “you have to be incredibly aware of the domestic brands” emerging in China, said Michael Manley, the head of Chrysler’s international operations.

Western automakers have been buying a wide range of Chinese cars and then having engineers dismantle them to study the quality and likely cost of major components.

“We have a very thorough benchmarking process” to assess Chinese competitors, said Kumar Galhotra, Ford’s Vice-President for product development in Asia, the Pacific region and Africa. So far, the quality of the best Chinese cars has been well short of their Western counterparts, leaving even many Chinese customers dissatisfied. When J D Power & Associates, the consulting company, surveyed new-car buyers in China last year, it found that they reported 232 quality problems for every 100 Chinese-brand cars purchased. For cars carrying international brands, 131 defects were reported for every 100 cars.

Jacob N George, the managing director of J D Power’s China division, said that Chinese automakers had been steadily closing the gap with their overseas rivals since his company began doing annual surveys in 2000. If trends continue, he predicted Chinese manufacturers would catch up in quality by 2018.

The shortcomings of Chinese cars tend to lie in basic designs. Chinese automakers spend an unusually low share of revenue on design, focusing on ruthless cost-cutting instead. J D Power also surveys buyers in China on how appealing they find their cars after three months of use. Chinese brands consistently score worse than international ones, particularly in categories like engine noise, driving dynamics and seating comfort, George said. In the area of safety, Western consumers increasingly demand top ratings that Chinese automakers have had scant success in producing so far. But safety is less important to buyers in emerging markets.

Ford’s market research found that as recently as 2006, safety ranked last among the nine most important attributes for Chinese car buyers. Chinese regulators are putting pressure on Chinese automakers to strengthen their designs. They have begun issuing star ratings for safety to cars sold in China, after copying the test methods from the National Highway Traffic Safety Administration in the United States.

But the fact remains that consumers in China and other emerging markets generally focus more on price. And Chinese automakers are low-price leaders around the globe, selling new cars for as little as half the price of Western rivals. Emerging markets tend to have relatively few late-model used cars competing with new subcompact cars, unlike in the West, making cheap Chinese cars even more salable.

Chile, though a small market, offers a window into the potential of Chinese brands. While Chinese companies barely registered there six years ago, today they claim 10 per cent of all passenger vehicle sales and 19 per cent of all commercial truck sales. This unparalleled growth was bolstered by a lack of local manufacturers and a near absence of trade barriers, said Francisco Errandonea, head of equity research at Santander GBM in Santiago.

In Brazil, the rapid growth in Chinese car sales led the government to announce that it was raising import tariffs on cars by 30 percentage points, to as much as 55 per cent, to protect local subsidiaries of multinationals. Brazil went from being one of the top three export markets for Chinese cars last year to not ranking in the top 10 so far this year.
Over all, China exported 850,000 vehicles last year. That was dwarfed by Japan, which exported 4.4 million cars and trucks last year, and South Korea, which exported 3.2 million. But China is starting to catch up, with exports up 50 per cent from 2010.

Despite the extensive presence of Western brands and factories in China, top executives at multinationals said they had no plans to export significant numbers of their Chinese-made cars. “I’m not saying we could not export, but there is no need to export,” said Carlos Ghosn, the chairman and chief executive of Nissan and its corporate sibling, Renault.

Indeed, as Chinese buyers become more prosperous and demanding, Chinese brands are finding that their own country is one of their most challenging markets. Chinese automakers held 28.7 per cent of their home market for passenger cars in the first five months of this year, down from 32 per cent of the market during the same period last year.

A few of China’s biggest cities, including Beijing in December 2010 and Guangzhou last weekend, have imposed stringent limits on the registration of new cars, cutting local sales in half almost overnight.

Buyers who can obtain scarce license plates are more likely to put them on higher-priced cars, and these tend to be made by multinationals, not Chinese automakers. Chinese auto executives said that while they were intensely interested in other emerging markets, their top priority was the emerging market in their own backyard.