Is China an Opportunity – Or a Threat?

Is the short-term gain worth the possible long-term pain?

By Chris Haak

04.25.2007

Nearly all of the major players in the global auto industry – GM, Ford, Volkswagen, Toyota, Honda, etc. – have a significant presence in China. Why wouldn’t they, after all? It’s a big market now, and a huge potential market that will only grow at a torrid pace over the next several years. Companies like GM and Ford who are seeing double-digit sales declines in their home market are seeing their sales in China growing at 20-30% per year. That’s good, right?

Well, I’m not so sure. Of course, these sales are providing necessary sales volume and cash to keep the companies afloat during difficult times at home. But, typical of the usual practices in this industry, I fear that they have taken too shortsighted of an approach. As the old idiom says they’re being, “penny wise, pound foolish.” Or, more specifically, they are sacrificing their long-term competitive position both in China and worldwide for the sake of a few years of breakneck sales increases.

The reason is that the Chinese government mandates that all foreign auto companies partner with a local firm in order to manufacture sell their vehicles in China. China has not made its motivation for this policy a secret – it wants to develop a globally competitive auto industry. For an example of how it works, GM has a joint venture with SAIC (Shanghai Automotive Industrial Corp). In the initial part of the venture, GM brings modern engineering, design, and manufacturing processes to SAIC in return for market access and factory capacity. However, SAIC gains more expertise from GM, SAIC becomes a direct competitor to GM in the Chinese market. SAIC is in the process of rolling out models that compete directly with SAIC GM products.

The next logical step is for Chinese auto manufacturers to compete with the GMs and VWs of the world on a more global stage; perhaps in other developing markets such as Southeast Asia or India first. Meanwhile, GM’s sales growth in China will slow, eventually level off, and possibly decline as the domestic industry, favored by government policies, picks up the ball and runs with it. The end game is that the very companies that Western auto manufacturers taught how to build quality cars will be taking away their sales around the world in the next few decades.

The elephant in the room in all of this also is China’s utter contempt for intellectual property rights. If it weren’t so sad and egregious, it would be funny to point out the way Chinese companies blatantly copy products of other manufacturers and sell them at a discount. We’ve seen knockoffs of the Mercedes C-Class, Honda CR-V, Chevy Colorado and more, but my new personal favorite, courtesy of Winding Road, is the Huanghai Auto NCV. This crossover was recently shown at the Shanghai Auto Show, and it is an almost identical copy of a Pontiac Torrent from the windshield forward, and a Lexus RX350 on the rest of the vehicle. The fact that such an obvious rip-off could be displayed at a major international auto show without consequence just proves how lightly the Chinese take intellectual property rights. Don’t take my word for it, though – see for yourself.

It’s bad enough that the Chinese have dictated the conditions under which their auto industry is opened, while they will enjoy nearly unfettered access to the home markets of these automakers in the coming years. But when that is compounded with blatant intellectual property violations, neither the country nor its industry has any credibility to me. Meanwhile, Western auto companies continue to help Chinese firms who will eventually steal sales from them. Are they making deals with the devil? Perhaps.

2006 Lexus RX 330 and the 2007 Huanghai Auto NCV (rear)

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