Chinese carmakers to face hard time moving up-market; need to perfect processes and technology

The Economic Times of India, July 7, 2012

Like many Chinese, Zong Zhaoxiang wishes nothing but the best for the Chinese car industry - yet he won't be buying a Chinese car anytime soon. The 52-year-old chairman of a Shanghai chemical company, Zong said he expects Chinese branded cars to have bright prospects.
However, he loves the comfort, quality and image projected by his black Mercedes-Benz S-class, and he said he may buy another Mercedes-Benz model or a BMW in the future.
"If Chinese-made cars were better designed and could demonstrate your status, more people might buy them," Zong said. Not all of Zong's compatriots can afford a Mercedes-Benz, of course. But most of them still prefer foreign brands to domestic ones.
Volkswagen and General Motors sold the greatest number of vehicles in China in 2011, the world's largest car market, followed by NissanHyundai and Kia. All domestic car makers combined captured only about 30% of their home market, the lowest proportion of any major economy.
This is not what Beijing intended. In contrast to other "strategic" industries like telecom and banking, the auto industry has been gradually opened to foreign investment over the past two decades, as Beijing allowed foreign car makers to form joint ventures with domestic partners.
But the goal was always to help Chinese manufacturers acquire the technologies and expertise necessary to build their own strong brands, an outcome that eludes the industry.
Race to the Bottom
State-owned car makers - such as Shanghai Automotive Industry (Group) Corporation (SAIC), First Auto Works (FAW) and Chang'an Automobile Group - have begun paying more attention to building their own brands, at Beijing's urging.
It's been an uphill battle. With shorter histories, inferior technology and smaller marketing budgets, their products are mainly confined to the low-cost segment, where profits are thinner.
Meanwhile, independent Chinese carmakers such as Geely, Chery, BYD and Great Wall have introduced their own lowprice models, intensifying competition. Most Chinese brands continue to trade on the China's traditional forte: driving down manufacturing costs and making money on high volume and thin margins.
In contrast, foreign car brands charge double or more and still sell far more units, all on the strength of their brand, technology and styling. The playing field has tipped further towards foreign players in the past few years. First, Beijing ended a tax break on cars with engines smaller than 1.6 litres last year.
"The companies with smaller vehicles tend to be Chinese-branded carmakers. So they benefitted most from the stimulus and were hurt the most by the removal of the stimulus," said Bill Russo, a senior advisor at consultancy Booz & Co and the former head of Chrysler Asia.
The policy had helped overall vehicle sales to grow 46% year-on-year in 2009 and 32% year-on-year in 2010 - unsustainable rates of expansion, Russo said.

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