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CARS

A Lenr, Green DetroitChina is now the world's largest market for cars;

Chinese leaders aim to own the biggest piece of it.

By MnlrNnA LIU

M ERICAN TASTES DOM INATED THE WORLD,S AUTO TT,T OTIVE MAR-

ket for a century but all that's changing now. Today it's the increas-

ingly well-to-do Chinese car-buyer that industry wants to woo and

win, thanks to this incredible fact-China has, over the last three

months running, surpassed the u.s. in terms of volume sales of au-

tomobiles. Ever wonder why Ford's new Fiesta has an instrument panel that

looks like a cell phone? Because that's what's familiar to its target audience of

26

2o- and 3O-something Chinese. ICs also

why Chinese versions ofthe Fiesta come insedan size, with four doors, rather than as

hatchbacks, which are anathema in theMiddle Kingdom.

The future of auto design was on dis-play last week at the Shanghai Auto Show,

where, in 30 football fields worth of space,

international and domestic carmakers viedfor the attention of Chinese consumers.The timing of the biennial event, China'soldest international auto show, was fortu-itous. No one expected the Middle King-dom to nab first place in the global automarket from America for at least anotherdecade, but the financial crisis has had a

NE\MSWEEK I MAY 4, 2OO9

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sharp dampening e{fect on U.S. sales. TheChinese, meanwhile, spurred on by theirgovernment's enormous stimulus pack-age, have kept spending. Beijing's 2009auto sales target is 10 million units, an in-crease of 10 percent from 2008, and a fig-ure that would cement its position, with anestimated I million more unit sales thanthe U.S. "No one expected China to emergeas the leading volume market this fast,"says William Russo, a Beijing-based busi-ness consultant who specializes in the au-tomotive sector. "This will give China ahuge say in setting the standards and ar-chitecture for the entire industry."

If Beijing gets its way, the future will besmall, green and-of course-made inChina. The shock of the global financialcrisis, and the resulting need to stimulatethe auto sector has persuaded Beijing todig deep into government coffers withmore than $733 million to promote the nr-ral sales of small cars and trucks (which

\,.

domestic makers specialize in) and $zzomillion to fund andupgrade newgreen au-tomotive technologies that many considerto be the wave of the future for the indus-try. Ultimately, Chinese planners want tocreate a new Detroit-a leaner, meaner,cleaner global automotive hub.

It won't be an easy road. The fivetop-selling brands in the country are stillfamiliar foreign names-Volkswagen,Hyrndai, Toyota, Honda and Nissan, inthat order-though the top four are all jointventures between these foreign giants andold Chinese-state run companies, likeShanghai Automotive Industry Corp. orSAIC, a behemoth that has joint ventureswith both Volkswagen and GM. Butmusclingtheirwayonto the scene are somebrash, local rising stars-including privatecarmakers Chery Automobile Co., GeelyAutomobile Holdings and BYD Auto Co.-that have been ramping up production andsales. While most are still beginners when

NEW GEEIY: No longer a sofa on four wheels

it comes to things like brand development,marketing and quality control, togetherthey already represent one third of domes-tic sales-and Beijing's policyrnakers thinkit's time for local players to lift their profile.The first big push toward that goal willcome via stimulus-package money. In late

January domestic carmakers were thrilledto discover they would reap the lion's shareof benefits from official stimulus effortssimply because they specialize in small, in-expensive cars popular in second-tier citiesand towns. Govemment initiatives includ-ed the halving of retail taxes (from 10 to $percent) on vehicles with less than t.6-literengine displacements, and $700 million ingovernment subsidies to entice farmers in-to trading their tractors and rural clunkersin for new small cars and trucks.

Local players immediately began reap-

2t

ing the benefits. China's fifth-biggestmanufacturer, Chery, saw sales in Janu-ary and February shoot up 25 percent; it's

aiming for 18 percent growth in 2009. BY

shifting its policy support to smaller cars

Beijing has upped the pressure on Chinasbiggest manufacturers, both foreign anddomestic, to scale down in vehicle size.

Just by coincidence, Ford started sellingits new Fiesta-with an engine displace-ment of t.5 liters-in China a little more

than a month after the new tax cut. Cus-

tomers bought more than 4,000 in six

weeks of presales transactions. Yet small-er cars are only the first part ofthe gov-

ernment's master plan. China's stimuluspackage also includes $zzo million forupgrading automotive technologies, es-

pecially in alternative-energy vehicles. To

help offset the high cost ofbuying clean-

".rergy vehicles, subsidies of nearly

$8,800 are being offered to local govern-

ment agencies and taxi fleets in 13 citiesfor each hybrid vehicle purchased. Therebate will also reportedly be o{fered toprivate car-buyers to soften sticker shock.

Such incentives helped make Shanghai's

auto extravaganzalast week the greenest

A-list car show in history. Although noneof them represent cutting-edge technolo-gies, China's homegrown electric and hy-

brid vehicles were visible at every turn.Chery, China's top-selling local brand,exhibited four alternative-energy cars.

The private Lifan Group, based inChongqing, unveiled its hybrid 320 EV.And BfD Auto, a Shenzhen-based firmbest known for putting batteries in one

fourth of the world's cell phones, had on

display its much-touted F3DM, a plug-inelectric car with a backup gasoline en-

gine, that started selling last Decemberfor around $22,000.

The company leveraged its famous

er, greener homegrown vehicles are stillin their infancy. It's perhaps telling thatat the Shanghai show, BYD Auto officialsdecided to exhibit their plug-in with gen-uine license plates, rather than mock-upsas is typical. "The technology is so newthat some Chinese worry such cars

would never even get licensed," says mar-keting representative Jasmine Huang'"This will reassure them." Despite the re-assurances, only a few dozen F3DM's

have been sold, and even then, not to in-dividuals but to government units andbanks. Private purchases are expected tobegin only in June. Meanwhile BYD'starget date to start selling in the U.S'market has slipped from 2010 to 2011,

due to the ongoing economic crisis, says

export manager Henry Li.This underscores the many challenges

facing Chinas domestic players. At pres-

ent their ability to penetrate e4ortmarkets is insignificant, partly because

Chinese safety standards lag behind those

in Europe and the U.S. Even at home, forexample, Chery's popular Q.Q. comPact

suffers from a perception of being tooflimsy to be safe-especially after a photocirculated on the Internet, showing a Q.Q

Ghinese companies have a keYadvantage-the fact that most arefavored by the Ghinese $overnment.

battery expertise to create what it says is a

safer and more environmentally friendlylithium-ion phosphate battery for thenew plug-in. BYD has now leaped ahead

of more established international modelssuch as Toyota's Prius and GM's Volt tobring an affordable plug-in car to the

market-B\D's model is nearly half the

expected cost ofthe ChevY Volt.But despite the hYPe, o{Iicials and

consumers alike acknowledge that small-

28NEWSWEEK I MAY4,2OO9

wedged between two buses, squashed likea soft-drink can.

Marketing and consumer research alsoremain alien concepts to domestic players.At the Shanghai Auto Show, Geely unveilednearly two dozen new models-including ablatant clone of a Rolls-Royce Phantom,down to the winged hood ornament. Com-pany chief Li Shufu then invited visitors tofilI out suggestion forms to record their re-actions to the bewildering proliferation ofnew products. "We're trying to get opinionsfrom all walla of life," says Li, whose firmhad to delay its entry into the U.S. marketdue to quality-control issues.

By contrast, Ford, for example, inten-sively researched China's under-30 con-sumers who are the new Fiesta's target

audience. Its findings encouraged Ford toteam up with Microsoft to develop SINCtechnology so that drivers can connect theircars to their MPI players. "We spent a lot oftime talking with zS-year-old Chinesewomen about their tastes," says John Parker,Ford's executive \? for Asia-Pacific andAfrica. "They wanted sryling, fuel econo-my-and Internet connectivity."

Chinese auto companies still have a keycompetitive advantage-the fact that mostare run by (and favored by) China's com-mand-and-control government. The statecan tweak policy and macroeconomiclevers that virtually change the gameovernight-witness Beijing's swift andsuccessful response to the financial crisis.Compared to democratic countries where

SO tOl{G BIG THREE: China's target is tocreate 10 world-class carmakers

poliqmaking can be protracted and messy(just look at America's efforts to revampthe automotive industry), Beijing has amajor leg up. They can simply decide whatthe future will look like, and state-ownedenterprises must toe tie line.

Already, Chinese leaders have signaledtheir determination to consolidate thecountryh chaotic and overcrowded autosector, and drag it up the value chain. Of150 entities licensed to produce vehicles,just 20 ofthem account for 95 percent ofthe market. Beijing has decided that ofthese 20, a globally competitive "Top Ten"will emerge (a decree which will inevitablybe helped alongby the fact that Beijing hasless pesky unions and local and regionalpoliticians to deal with). "We even knowwho eight of those l0 are," says Russo, whocites industry sources saying such num-bers are guidelines only.

To speed up the process, Beijing hastaken the unusual step ofwarning Chineseauto firms to focus on getting their own af-fairs in order before rushing offto buy for-eign automotive assets at fire-sale prices.With prestigious names such as Volvo andHummer on the block, "the world is forsale and looking for Chinese partners,"says Eduardo Morcillo, an M&A specialistwith InterChina Consulting in Shanghai.But government oIficials have spread theword that, as tempting as distressed for-eign assets mightbe, they're hard to digest."Chinese buyers [would] need to learn todeal with different management tech-niques, labor unions and whole new waysof thinking," warned senior planning offi-cial Chen Bin in a widely quoted interviewwith local media. "That can be difficult."Indeed-when Chinas biggest carmakerSAIC bought a49 percent share ofSouthKorea's Ssangyong Motor back in 2OO4,

the venture ended in tears when Koreanunions resisted Chinese cost-cutting.

These days, of course, cost-cutting isthe mandate in Detroit, Seoul and Shang-hai, which is the closest thing to a nervecenter that China's far-flung automotiveindustry has, thanks to SAIC's overshad-owing presence. And no one does fiscalprudence better than the Chinese, whohave managed to keep growing amid therecession thanks to their $z trillion in re-serves and the ability of their autocraticsystem to turn on a dime to deal withwhatever new economic challenge is pre-sented. Re-creating a cleaner, leaner,meaner Detroit in the Middle Kingdom isa lofty goal indeed, but ifanyone can do it,

T

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it's the Chinese.