Chinese OEMs and the U.S. Market – Fact vs. Fiction

May 23, 2012


extract from article titled “Optimism Returns to the American Automobile Industry” published in Strategy & Business by Booz & Company:

http://www.strategy-business.com/article/00115?gko=531e5

by Bill Peng, John Jullens, and Bill Russo

One question facing the U.S. auto industry right now is the potential entry of Chinese car manufacturers into the American market. Over 50 percent of respondents to our [recent Booz & Company] survey said they expect China to own more than 5 percent of the American automobile market by 2020, just two product cycles from now. Under this thinking, China would replicate the strategy of Japanese carmakers 30 years ago and Korean manufacturers a decade ago: establish a foothold with low prices, and then improve quality and brand perceptions. The only difference, according to this view, is that Chinese companies could accomplish this faster and more easily, based on the scope of their domestic market.

Is this level of market penetration likely? Maybe, but not by 2020. The actual performance and capabilities of the leading Chinese vehicle manufacturers—as well as their readiness to compete in developed markets such as the U.S.—is overestimated, for several reasons. First, the size and scale of these companies is fairly small, especially separating the sales volumes of their Western joint-venture partners. In most cases, the joint venture itself far overshadows the relatively young Chinese brand. In addition, the domestic market in China is geared to first-time buyers in hyper-competitive entry-level segments, where margins are difficult to sustain, so their overall profitability is typically quite low. That reduces the resources these companies have to expand overseas.

Furthermore, none of the leading Chinese manufacturers have yet achieved a major product or process breakthrough that could give it a significant competitive advantage. This is in sharp contrast to companies like Toyota, which built its initial position in the U.S. through its famed Toyota Production System, a new and—at the time—vastly superior operating model relative to Detroit’s approaches at the time of its introduction

All of this is certainly not lost on the leading Chinese manufacturers, such as Chery, Geely, Great Wall, and SAIC. These companies have all set aggressive international expansion targets of more than 500,00 units by 2015, but almost entirely in developing countries, instead of in the more mature North American and European markets. It will probably take several more years before they can consistently meet competitive product reliability and durability standards, along with U.S. homologation requirements and product specifications. In fact, many Chinese manufacturers fear the potential product liability and other lawsuits in the hyper-litigious U.S. business environment. For these reasons, even among developed markets, Europe may be a bigger priority than the U.S.

To crack global markets, Chinese automakers must develop world class global supply chains and supplier partnerships, offer competitive financing products, and deploy the talents of a global human resources pool. That won’t happen overnight. It will also take some time for Chinese carmakers to learn to compete in markets where they don’t have the benefit of a low-paid labor force, management team, and supplier base, as well as favorable subsidy policies from the central and local Chinese government. It will also be essential for these companies to build a retail network and brand in the U.S., which is a substantial investment.

Nevertheless, many Chinese automotive executives aspire to capture a meaningful share of the US market. Some have started to evaluate potential entry strategies. For example, Great Wall, China’s leading producer of SUVs, is in discussions with several companies to establish a dealer network in U.S., while BYD is testing its alternative energy models, including the all-electric e6 Premier. SAIC, China’s largest automaker, has bought a majority share in Visteon’s global interiors business with the objective of developing its supplier capability in the US.

Eventually, the U.S. market will see more new competitors emerging from China, who will likely offer well-equipped models at very low prices, putting significant pressure on incumbent players. For suppliers, that outcome may present opportunities. Chinese manufacturers will have to rely on existing U.S. suppliers, due to their capability advantage over the less competitive Chinese suppliers. To capture those business opportunities, Tier 1 suppliers should begin to build up close partnerships with leading vehicle brands in China, through joint ventures or by developing simultaneous engineering initiatives.