China’s Natural Market for Vehicles and Other Things

 

In response to my recent post on China’s vehicle exports Dan posed a question that I am asked frequently: “How long before we start seeing Chinese cars in the United States?” My answer is always the same: “It’s only a matter of time.” 

If the Japanese and Korean car companies have been able to penetrate the U.S. market, there’s no reason why the Chinese won’t be able to as well. Dan also makes a good point about one of his clients, a Chinese manufacturer of high-end motorcycles and ATVs that is exporting quite successfully to the U.S. In his mind, if a Chinese company can bring these products into the U.S., why can’t they bring in cars as well?

 

I agree with Dan’s logic. ATVs and motorcycles are assembled products and a stepping stone to even more sophisticated assemblies like autos. I would even go a bit further, however. When Chinese cars ultimately arrive in the U.S., they may not just be cheap alternatives to those produced by more established assemblers, but some may come equipped with interesting, new technologies.

 

For example, if Warren Buffett is right, and BYD has the best battery technology in the world,  it would be smart to bring their technology into a U.S. market that is hungry for alternatives to gasoline and diesel-powered vehicles. With partners like Buffett and Mid American Energy, my guess is that is exactly what BYD is thinking.

 

In the meantime, there is a very interesting market for Chinese vehicles and other assembled products outside the U.S. and the developed markets of the world—as China is discovering. Think of it this way. The most highly-developed economies in the world are the U.S., Western Europe, the U.K., Japan and Australia. While these are great markets for Chinese certain products, they are not a natural market—at least not yet– for many others, including vehicles and other end products.

 

First, all of the developed markets have well-established manufacturers of sophisticated products like vehicles that tend to use China’s manufacturing base to lower their costs by sourcing castings, forgings and other components. For the most part, the foreign-invested assemblers are not making vehicles here to be sold in markets outside China.

 

Secondly, the developed markets have the highest per capita incomes in the world. While cost is an important consideration for consumers in these markets, it isn’t necessarily the overriding factor that it is in less developed parts of the world. 

 

Third, the most developed economies have the strictest emission and safety standards, making them the most difficult for Chinese manufacturers of assembled products like vehicles to enter.

 

And finally, when all is said and done, the number of people in the most highly developed economies totals just over 1 billion, only 15 percent of the global population.

 

China’s assemblers are finding that the 5.8 billion people who live in the much less developed countries of the world are a natural market for all of their products, including vehicles. Per capita incomes in these countries are much lower and closer to what they are in China, making cost the key consideration, just like it is in China. The operating environments, including road conditions, fuel quality and driving habits, in these countries are more similar to those in China than they are to those in developed economies. Likewise, emission standards are equal to, or even lower than, those prevailing in China. Lastly, none of the other emerging economies have annual vehicle production that is close to China’s output of 9.5 million. Of the BRIC countries, for example, Brazil produces 3.0 million vehicles per year; India, 2.3 million; and Russia, 1.7 million.

 

For a fleet owner in, say, Turkey, who is running trucks all over the Middle East, the decision is quite simple. Would he rather pay $100,000 for a truck from Germany, or buy a $25,000 truck from China Heavy Duty Truck? At 25 percent of the German price, that truck from China will do all that he needs it to do; is easier to maintain; more than meets all applicable emissions standards and is built to operate in more challenging environments.

 

For these reasons, China’s assemblers have found very receptive markets for their products in other emerging economies, and are now filling the vacuum. Of the 557,737 vehicles exported by China during the first nine months of 2008, 29 percent went to Russia and other former Soviet Bloc countries; 25 percent went to countries in the MENA (Middle East North Africa) region; 11 percent were sold in Latin and South American countries; 10 percent went to Southeast Asia, primarily Vietnam; 7 percent went to Africa; and a mere 6 percent went to the United States, Italy, Germany and the U.K. combined. China’s largest export market for vehicles was Russia, followed by the Ukraine. During the first nine months of the year, China exported over 78,000 vehicles to Russia and 58,000 vehicles to the Ukraine.

 

Since China’s original truck technology came from the former Soviet Union to First Auto Works in the early 1950s, it’s somewhat ironic that Russia and former Soviet bloc countries are becoming some of the largest markets for Chinese trucks and cars. Here’s what China Daily had to say about the expansion of China’s auto industry into Russia and other emerging markets:

 

Russia has become a hot new destination for the fast-growing Chinese overseas auto production market. A slew of Chinese auto makers have plans to assemble vehicles in Russia using technologies and components mainly from China.

 

 

·         Nanjing Automobile Group, Fiat’s partner in East China’s Jiangsu Province, said it has clinched a US$200 million deal with a Russian company to produce light-duty trucks in the nation with the largest land mass. The Nanjing auto group will build 40,000 own-brand light-duty trucks in Russia by 2010.

 

·         Chery Automobile is expected to set up an assembly plant in Russia later in 2008. Chery will produce its Fengyun sedans and Tiggo sport utility vehicles (SUVs) in Russia with an annual manufacturing capacity of 6,500 units next year.

 

·         First Automotive Works Corp (FAW), China’s top state-owned automaker, began assembling vehicles at an existing Russian plant last month. Its production in Russia will reach 800 to 1,000 SUVs and pickups in 2008 and up to 6,000 units next year. “We will possibly invest to build a new plant in Russia,” a FAW official said. “Russia will become a springboard for us to enter the European market,” the official said.

 

·         The feverish move to enter the Russian marketplace comes after Chinese automakers have already built assembly plants in Southeast Asia and the Middle East. Chery started to produce its own vehicle brands in Iran at the end of last year. Geely, China’s biggest privately-owned car maker located in Zhejiang Province, clinched a deal with a Malaysian partner in May to make its cars in that Southeast Asian nation. Production in Malaysia will reach 30,000 units in 2009. Brilliance China Auto, BMW’s partner in Shenyang, Liaoning Province, signed an agreement with an Egyptian firm in April to produce its Zhonghua sedans in the African nation.

 

As Chinese companies become larger, the price and functional features of their products will resonate with the 5.8 billion consumers in other emerging markets. The ultimate prize, the 1 billion consumers in the most developed economies of the word, will be the most difficult to obtain, but there’s little question that Chinese companies will eventually provide compelling value propositions to this market as well. This story is now playing out in autos. Look for other finished products to follow suit as Chinese manufacturers move up the value-added chain.

 

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