China’s carmakers crank up exports

The Financial Times, December 2, 2012

For the first time, China is expected to export 1m vehicles this year. Faced with rising competition in their home market, the largest in the world, Chinese carmakers are finding it easier to go abroad and sell cars in less sought-after markets such as Iran and Iraq.

China’s car market has slowed along with the domestic economy and passenger car sales rose only 6.9 per cent in the year to October. Domestic carmakers have been particularly hard hit by the abolition of government tax incentives that favoured them, losing market share to US, European and Korean rivals.

Japanese carmakers in China have been forced to cede market share due to a Sino-Japanese territorial dispute that caused public protests against Japanese cars. But very little of that market share has gone to Chinese carmakers who have less than 30 per cent of the market by volume.

They have responded by cranking out exports to some of the world’s less prestigious markets: China’s top car export markets for the first three quarters of this year were Algeria, Iraq, Iran, Russia and Chile. By the end of October, China’s total vehicle exports for the year exceeded the total figure for 2011, and passenger car exports rose 43 per cent year-on-year in October alone.

“It is really a function of domestic demand,” says Bill Russo, head of Synergistics auto consultancy in Beijing and former head of Chrysler in China. “As the market slows, the pressure on inventory goes up and the natural safety valve is to direct cars to the export market.”

“Passenger vehicle exports have become the main driving force for growth for Chinese domestic automakers,” says Namrita Chow of IHS Automotive in Shanghai, adding that “Chinese automakers are foraying into markets generally outside regions targeted by international automakers, allowing them to achieve growth” and offload excess inventory.

With a few notable exceptions, like Great Wall Motors, a well-respected privately owned Chinese group best known for its sport utility vehicles, most Chinese car companies are targeting the lower end of export markets. They have no choice, because they lack products outside that segment.

But it is a risky strategy, says Lin Huaibin of IHS Automotive. “If you enter overseas markets at a low price level, then it is very hard to climb up later . . . they do not want to repeat the mistake they made in China where (domestic) brands are associated with low prices and are finding it hard to move upmarket”.

After decades of exporting mostly cheap, low quality products – and several scandals involving death or injury caused by Chinese exports of pet food, toothpaste and other products – the country’s manufacturers in a range of sectors face the same problem: how to combat the bad image of brand China overseas.

Haier, one of the world’s largest home appliance manufacturers, has partly solved that problem by choosing a name that sounds more German than Chinese. But that will not work for everyone.

Chery, the largest car exporter with 165,000 foreign sales in the first ten months of the year, says 30 per cent of its sales come from overseas, where the company’s lower priced models are the best sellers.

Geely, owner of Volvo and the second-largest exporter so far this year, denies that pressure at home is forcing it to seek export markets. With Geely’s domestic sales expected to grow 10 per cent this year “we don’t need to shift our focus to exports,” says a company spokesman.

Overseas sales now account for about a fifth of Geely total sales “and the proportion will continue to grow as the growth of sales overseas will still be much higher than that at home – we still have a huge market out there to expand in,” the company says. Previously Geely has said it plans to sell as many cars overseas as at home.

Great Wall, the fourth-largest and most upmarket of the Chinese exporters, has a different strategy. “We aim at quality rather than quantity for overseas markets,” a company spokesman says, adding that many Great Wall products overseas are priced at or near the level of similar Western and Japanese products. “We want to build the brand image of Great Wall and change the impression in overseas markets that Chinese cars are low in quality and sell cheap.”

Like Chery, which has started construction of a factory in Brazil, Great Wall is increasingly producing cars overseas for foreign markets. By 2015 Great Wall expects to have 24 overseas production facilities with capacity of 500,000 units.

But Klaus Paur, global head of automotive research at Ipsos, says that for many Chinese automakers, focusing on exports “is not a sustainable strategy” and they must first concentrate on the challenges of increased competition they face back home. “If they are selling well outside China, that may distract them from fixing the problems they have in the China market itself,” he says.

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