While Chery and Geely still dawdle in their sales negotiations with U.S. dealers, Zhonghua cars produced by Brilliance China Automotive Holdings Ltd. are busy driving their way into Germany.
In the next five years, German-based HSO Auto Trading will import a total of 158,000 Zhonghua cars manufactured by Brilliance and distribute them in Germany, the Netherlands, Luxembourg, Belgium, Austria, Switzerland and Poland.
Brilliance knows something about Germany after all: Victoriously entering the German market certainly seems to have become a bellwether for eventual success internationally.
After successfully launching its products in Germany, Chinese company Haier has since become a giant in the international home appliance market and has seen its business taking off in developed countries.
But will Brilliance's fortune be similar? Its chance of success is largely based on how well the company can innovate and adapt to international market conditions, how patient it is and how well the rest of the Chinese auto industry performs to raise the reputation of all domestic autos worldwide.
Breaking stereotypes
The international market still tends to associate Chinese products with the word "cheap."
At present, the majority of the exported Chinese cars are sold in less developed countries in Southeast Asia, the Middle East, Africa and Latin America. In spite of rapid sales growth in developing countries and ambitious expansion plans to developed countries, Geely and Chery have both postponed their timetable of entering the U.S. market once and again due to "quality problems," according to Malcolm Bricklin, CEO of Visionary Vehicle LLC, which had sought a partnership with Chery, but failed.
Brilliance breaks the stereotype, to some extent.
"Cars manufactured by Brilliance meet the quality, security and design requirements of HSO, thus the company has become HSO's partner," Beijing Business Today quoted one HSO Auto Trading executive as saying.
Statistics from the Chinese Ministry of Commerce show that in the first half of this year, Chinese vehicles exported to Asian countries accounted for 47.4 percent of the total export value, and those sold to European countries followed with 21.5 percent. Africa, South America, Oceania and North America lagged behind as export destinations. Europe is the fastest growing single destination for exported Chinese cars, up 420 percent from 2004 to 2005.
"It is not that we lack the sense of quality but we underestimated the quality demand in the international market and didn't undertake a thorough investigation of the special market conditions in the overseas market," said Zhang Ji, an official with the Ministry of Commerce. Zhang pointed out that Chinese automakers did not make necessary changes to their cars in line with the demand of the target market, which eventually resulted in the failure of their cars to cater to local conditions.
"The auto industry in those developing countries is not developed, but they have enormous market demand," Zhao Jie, Vice President of Geely, explained. As the consumption level in those countries is relatively low, the "made by China" cars with good price to performance ratios have been their choice products, according to Zhao.
Indeed, statistics from the Ministry of Commerce show that in 2005, China exported 11,000 more cars than it imported.
"Although we lag behind developed countries in the automotive industry, we have been taking the lead among developing countries for at least a decade," Zhang said.
Chinese brands
But how much time will it take for Chinese automakers to become powerful competitors in the international market? That's anybody's guess, but going international is definitely difficult.
"It's been tough, very, very tough," said Zhao Fuquan, former Vice President of Brilliance. "Especially in terms of money, management and society."
After working overseas for foreign companies for 20 years, Zhao was invited to work for Brilliance, taking the responsibility of manufacturing cars with their own independent design and technology.
Zhao compared car manufacturing to building a skyscraper. It would be easy to form a joint venture, as "we could rely on the foreign side, which has already laid a sound groundwork." However, to build a skyscraper on one's own, "we will have to choose every single nail and take full responsibility," said Zhao.
Heavy investment in research and development sometimes hinders the profitability of domestic automakers that are devoted to manufacturing cars with independent intellectual property rights.
Expansion setbacks have not disillusioned Chery, which is pouring more money into research and development.
In 2005, Chery invested more than 1.45 billion yuan in research and development (R&D), which is about 13 percent of the total sales revenue. Geely's R&D is about 6 to 7 percent of revenues. But the average R&D input of domestic companies is less than 1 percent, which is about one-fifth of that of developed countries, according to Xu Guanhua, China's Minister of Science and Technology.
"Our low profitability is due to heavy investment in R&D," said Qin Lihong, a sales director at Chery. "We sacrifice today's profit for future development."
Difficulty
Statistics from China Customs show that in the first three quarters of this year, about 252,300 cars were exported to foreign countries, with the amount doubling from the same period of last year. That brought in $2.21 billion in foreign exchange.
However, the increasing number of order sheets does not mean that China has maintained sound market shares. Domestic automakers tend to cut the price of their products in order to grasp more overseas market shares. Ministry of Commerce statistics reveal that the average export price of Chinese autos plummeted to $9,100 in 2005 from $16,100 in 1999.
Considering the enormous R&D expenses, it takes time for China's automakers to make a real profit.
"I don't really see that the United States will emerge as a significant market for Chinese exports in the next five to 10 years," said John Moavenzadeh, Executive Director of the International Motor Vehicle Program. "There will be some low-end Chinese imported cars, but these products have to overcome stringent regulatory standards, appeal to a demanding U.S. customer base and develop viable distribution channels."
As China's Minister of Commerce Bo Xilai noted, "The development and export situation of the Chinese auto industry still faces huge pressure and challenges."
Bo continued, "We will have to suffer huge losses if we expand exports blindly. Whatever your brand is, foreign consumers only recognize that you are from China. If the reputation of one Chinese auto is ruined, the reputation of the whole industry of China will also be hurt seriously."
WTO impact
When China finally concluded its WTO negotiation on automobiles, insiders feared the opening of the auto sector would take a toll on the domestic automotive industry. Some even worried that fragile Chinese automakers would collapse if international players all swept in.
Quite the opposite has occurred.
Instead of being devoured by international players, Chinese automakers have seen their sales both at home and abroad soaring.
According to China's WTO accession commitments, China reduced the import tariff on foreign automobiles to 25 percent from 200 percent before its WTO accession in 2001. Meanwhile, the import quota for automobiles was eliminated in 2005.
The price cut of imported cars has benefited Chinese consumers to a large extent. On the other hand, the surging imported cars have pressured Chinese automakers to seek a way out in the international market.
According to Zhang Ji, about 43,000 China-made vehicles were exported in 2003, increasing 96 percent compared with 2002, and another increase of 80 percent was reported in 2004 to 78,000. The number soared to 173,000 in 2005, up 120 percent.
"Independent innovation is paramount for the economic development of the whole country," stated Ma Chuanli, President of Harbin Hafei Automobile Industry Group. "Without innovation, we would be enslaved to others, be devoured by others, or die alone," Ma said.
Big export events for independent Chinese brands:
In 1982, 117 Dongfeng camions and some spare parts were exported to Sudan.
In 1994, Chang'an light vehicles began exportation to the Middle East and Syria.
In 1997, Changcheng pickup trucks were exported to the Middle East and Africa. From 1998 to 2002, Changcheng ranked first in vehicle export volume among Chinese automakers.
In 2001, the first series of Chery cars was exported to Syria, marking Chery and China's first step to enter the international car market.
In 2003, Geely made its debut in the international car market by exporting 500 units. It was the first time a privately owned Chinese automaker exported.
In 2003, Zhongxing pickup trucks and Zhongxing SUVs manufactured according to the North American standard were sold in the American market.
In 2005, Fuquankou cargo ship, owned by China Ocean Shipping (Group) Co., sailed to the Middle East, carrying 120 Dongfeng trucks and more than 300 China-made cars. It signaled the end of the foreign monopoly on ocean liners transporting cars.
In 2005, the quantity of exported cars surpassed that of imported ones in China for the first time.
In 2006, Brilliance signed a five-year contract with a German company to sell 158,000 Zhonghua cars in Germany and some other European countries. It was the largest ever export order sheet from a developed country for China.
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