I once worked for a colonel who'd address all obstacles by saying "you can solve any problem if you throw enough money at it." While our budget officer would have to breathe into a paper bag for a half hour afterwards, the colonel always managed to squeeze whatever was needed to resolve the crisis du jour from the budget– and solve the problem. Automakers native to the People's Republic of China (PRC) must have bugged his office; they've adopted the exact same philosophy.
Successfully implementing the "I'll buy what I need" strategy requires two things: 1) money and 2) knowing where to spend it. The Chinese automakers certainly meet criterion number one. The PRC is now the world's second largest auto market; auto sales are booming. The Chinese law requiring all foreign automakers to buddy-up with a domestic partner has delivered unto them an enormous financial windfall.
Criterion two– locating mission critical knowledge and/or technology– is a no-brainer. While there have been auto factories in the PRC since the mid ‘50s, the Chinese auto industry discovered the technological benefits of the aforementioned joint ventures (JV) since A Flock of Seagulls first flew. For the last thirty years, Western JVs have been flooding the PRC with new automotive designs, products and processes.
Initially, these JV partners used Chinese labor to assemble automobiles already in production elsewhere. The Chinese partners learned how to bolt together a car, but not much more. By the 1990s and early 2000s, the foreign partners had started designing models specifically for Chinese consumption, retooling their plants for full-scale manufacturing.
At this point, several "independent" Chinese auto manufacturers (i.e. companies not enmeshed in joint ventures) began leveraging their newfound carmaking skills to send in the clones: selling exact replicas of other manufacturer's models built for Chinese consumers.
Blinded by golden goosehood, stymied by laughable and unenforced Chinese copyright and trademark laws, GM, VW, Ford and others turned a blind eye to this sincerely flattering fraternal competition. Western automakers wrote it off as the cost of doing business in a military dictatorship. Besides, in China's burgeoning automotive market, there was– and is– plenty of pie for everyone! Of course, Chinese manufacturers had bigger plans…
For the last decade of so, Chinese automakers have started eying foreign markets. As they dipped their entrepreneurial toes into Western climes, they realized they lacked competitive cars, and the engineering expertise to design them. Disastrous European crash testing literally drove the point home.
So Chinese automakers have started throwing money at European and North American automotive companies. Michael Laske, president of Austrian-based AVL China, says "The Chinese fundamentally lack products and knowledge, but they need to get into the market very quickly." And so AVL is banking big bucks, designing an entire engine line from the ground up to pop China's Chery.
Companies selling world class technology in so-called mature markets are falling all over themselves in their rush to cater to China's hunger for the best of the best. The list of successful sellers includes BorgWarner (turbochargers, clutches, transmissions), Sweden's Autoliv (safety systems), Austria's Magna Steyr (marketing strategy, legal requirements), Robert Bosch (diesel technology), Italdesign-Giugiaro and Pininfarina (design assistance) and A.T. Kearney (management consultants).
The joint venture partners are infusing their Chinese partners/competitors with cutting edge technology. GM has an engineering and design center in Shanghai, soon to be joined by a hybrid research center. To provide Chrysler with a small car for the U.S. market, Chrysler's engineers are tweaking every aspect of Chery's operations. So what happens next, once this technology transfer is bang up-to-date?
China's domestic automakers will use their imported expertise to export cars abroad. Chery is already selling cars in Mexico; they've declared their intention to enter the U.S. market in the next two to three years. Chinese automakers will be out in force at this year's North American International Auto Show.
To further the cause of global export, the Chinese government is pushing their domestic auto makers to merge into a "Big Three" and a "Mini Three." Given the government's protectionist views, once the mergers and reorganizations are over, GM, VW, Toyota et al will find themselves out in the cold.
Western manufacturers seem blissfully unaware of their own usurpation. They keep pouring money and engineering talent into China– even as the Chinese manufacturers are taking the first steps toward merging into megacompanies. Once again, western car companies are so blinded by the money they're making that they can't see the dangers lurking beyond the next quarter's bottom line.
But hey, that's the way the fortune cookie crumbles. If we don't do it, someone else will. Make hay while the sun shines. Pump and dump cuts both ways. That kind of thing. But any automaker that doesn't see China as a short term play, that stakes its long term financial future on the PRC, is headed for a rude awakening. Sooner rather than later.
Very well put. The same guys that want you to “buy American” are the same guys trying to source all they can from China…
More western leaders should read the Art of War and play Go; it would give them a better perspective and understanding to help them avoid making these huge economic gaffs. It's going to be an interesting world as China replaces the US as the major world economy… PS What’s the car in the photo – it looks fantastic!
The car in the photo is the Buick Riviera concept which was designed in China and debuted at the Shanghai auto show earlier this year. They get cars with traditional Buick names like Park Avenue and Riviera; we get model names with no brand identity or heritage like Lucerne and LaCrosse. Go figure.
China in the long run will mimic Japan. Start off by being a low cost producer of cheap junky copied products to eventual full fledged competitive producer of original designed products.
This is bad news for Detroit especially as China was one of the few markets where they sold in large volumes, profitably. VW have steady market shares in other countries and Toyota and Honda are selling well in North America.
But how could they not see this coming, is anyone’s guess. But did Detroit prepare for this? Like they should have prepare for the fall of the SUV craze and the oil spike?
I don’t blame China for wanting to further themselves (in so much, that they want to expand), and I also don’t blame them for their protectionist attitudes, Renault is part owned by the government and when someone buys into a French company, they normally don’t receive voting rights (Nissan’s stake in Renault). Also, The United States is guilty of protectionism, too. When the steel workers were getting hammered by cheaper imported steel, the government imposed a series of imported steel tarriffs which became the subject of WTO talks.
But what I do blame China for is their lack of enforcement for copyright. That attitude needs to be reformed. For other countries to allow them to trade in their markets. Mind you, with the amount of power they’re getting, they’ll just force their way in!
“China in the long run will mimic Japan. Start off by being a low cost producer of cheap junky copied products to eventual full fledged competitive producer of original designed products.”
I know we could debate this all day, but I feel that there is a big difference in the cultures of the Japanese and Chinese. The Japanese seem fascinated by novelty and delicacy, whereas the Chinese seem to be very good at mass producing copies and not much else.
For example, the PC industry is fairly mature. Chinese manufacturers pump out plenty of quality parts, both as OEM (Quanta, Compal) and for domestic companies (Acer, Lenovo). The truly neat stuff you need to go to Japan for (e.g. Akihabara, Dynamism.com, etc).
I do see plenty of entrepreneurial spirit in both cultures; it just seems to be applied from different perspectives.
(Disclaimer: I’m Chinese.)
I was fortunate enough to be able to read this book when I lived in Hong Kong many years ago
http://www.amazon.com/Life-Death-Joint-Venture-China/dp/9627708860
It is considered to be the bible of doing business in the PRC even today 14 years after it was published. The frank writing style and no holds barred facts make you wonder what some big companies are thinking. There is no mystery to China: We have a billion potential customers, you dream of selling to all of them, do what we say and you will have access.
the chinese companies better be prepared to play American political football.
Korean, American, European, and Japanese car companies have to put up with kangaroo courts and shoddy IP enforcement in order to get those RMBs.
But they better be prepared to game on American style. China’s social and economic policies are radioactive to the American public and more importantly to the Congressional representatives that the American public (ostensibly) controls.
You can’t be a big business in this country without congressional angels protecting you.
And the Big 3 combined with the Japanese and Koreans have many angels indeed…
Right on with the analysis, Frank, although it might not be as gloomy as you predict. Remember that China’s consumers are as brand-conscious as anyone else in the world. That’s why, despite a number of highly competitive local cell phone manufacturers, Nokia, Motorola, LG, and Samsung still dominate the Chinese market. The same can be said for cars. No matter how good a Chery or FAW or SAIC Roewe might be, it still doesn’t have the cachet of an Audi, BMW, Toyota, or, dare I say, Buick.
Also, China’s not about to kick out the foreign competition. If SAIC can make money from both its own Roewe brand and GM’s JV, well, money talks and it’s a win-win for them. Erecting protectionist trade barriers on something as high profile as automobiles would only bring the wrath of Western nations and the WTO. Just look at the stink raised recently on auto parts as an example. No, if China has hopes and aspirations of exporting its cars to Western markets, it knows better than to bite the hands that have fed its auto industry for the past 20 years.
I’d like to ask a question.
If “me-first” protectionist trade policies and a willingness to flout accepted international decorum are making China a financial powerhouse, why do we have open borders and play nice?
Now I’d like to make a statement.
I don’t really care about the standard of living in Poland. I want a government that selfishly focuses on my needs the same way China focuses on its needs.
canfood: You can’t be a big business in this country without congressional angels protecting you.
Congressional angels? I tend to think of them as the devil’s spawn. But at least they’re our devil’s spawn. Except, of course, when they are acting in the interest of their large campaign contributors such as corporations, union, special interest groups, or foreign lobbyists. Or when they are acting purely in their own (sometimes criminal) self interest.
Mj0lnir :
January 3rd, 2008 at 10:21 am
I’d like to ask a question.
If “me-first” protectionist trade policies and a willingness to flout accepted international decorum are making China a financial powerhouse, why do we have open borders and play nice?
Two answers:
You should read “One Market Under God” by Thomas Frank, that will tell you all about free market fundamentalism.
2nd answer: Congress is largely paid for by wealthy industrialists and financiers for whom “free markets” and open borders are very profitable. Since the early 80’s the US has been engaged in an experiment in which it exports its manufacturing base abroad and invests in financial services and “knowledge” industries. This will end badly, as it always has for past empires.
I don’t really care about the standard of living in Poland. I want a government that selfishly focuses on my needs the same way China focuses on its needs.
I want an honest government that does what is right. The Chinese people have lived in subjugation for as long as there has been a China from fuedal lords to emperors to the current crop of “free market?” communists. They lie, cheat, and steal with no apparent concept of right and wrong. Not just American but other foriegn automakers are ignoring the past behavior of the Chinese government for short term profit. I can’t understand the overwhelming short-sighted greed that is driving manufacturers and countries to do business with these criminals (because that is what they are).
I guess Chinese are destined to success. Although they so far have been producing `under average` cars that copy western designs and are based on late 80ies japanese platforms, eventually they will veer away and start their own platform building. Their `winning ticket` is in their oriental minds. They are not scared of hard work and learning from their own mistakes. They are achievement oriented and sooner or later will accept `fair game rules`. I have no clue, why nobody has ever responded to my comments about `fair game` and how important it is in achieving long term success. Hands, that are not scared of elbowgrease, are destined for success. Remember, Einstein was 5% talent and 95% hard work.
This is unfortunetelly, bad news for Detroit. I will just keep silent.
By the way China holds 1.4 trillion of U.S. treasuries. And this is the best way to overcome the barrier of trade protectionism. Just by the slightest hint of `releasing dollar avalanche in world market` would destroy all trade barriers from U.S. party. I am not even mentioning credit lines of 2billion daily! See, no need for tanks, Keyhole satellites, or Sidewinders. Somehow I have a feeling that countries are respected according to the complexity of their manufacturing and science and not to their military power. And why not be it cars?
Just by the slightest hint of `releasing dollar avalanche in world market` would destroy all trade barriers from U.S. party.
But this would also adversely affect the value of their holdings. Seems like a game of chicken to me, but of course they’d think it through beforehand, figure out whom to bribe/intimidate while our political and business leaders would be just as stunned at such a development as they are surpised at the bursting of the real estate bubble.
Chinese cars selling in the US? It’s a GREAT thing!
See, people are complaining about copyright and a lack of fair play. But when Chinese car makers are doing business in the US, they are under American rules. Then, Americans can use the leverage and demand/enforce equal treatments.
Bring it on. Don’t just complain about doing business in China and still be a chicken when the Chinese want to do business in the US.
BTW, as for the “military dictatorship”, how many of you Americans have ever heard about Maher Arar?
He is a Canadian citizen. He was held by American authorities without a charge. He then was torture by a joint force of Americans and Syrians, for two years.
Eventually, the government of Canada stepped in and got him home. He was never convicted or charged; there was zero evidence of wrong doing. Having an Arabic name was his only fault. The US government never apologized.
There wasn’t a single Canadian citizen held by the Chinese government without a charge or a trial. There was no report of torture on a Canadian citizen.
I guess Canadians should stop buying American cars?
A link of background and many more links. Read for yourselves, if you are interested.
http://www.cbc.ca/news/background/arar/
wsn :
BTW, as for the “military dictatorship”, how many of you Americans have ever heard about Maher Arar?
Go ahead, get your jabs in. But comparing the misdeeds of our current crop of leaders (whose approval ratings are, incidentally, in the toilet) to the Chinese dictatorship is just a wee bit of a stretch.
That said, your first point is a good one: they need us as much as we need them. At least for now.
Western companies know fully well what they get themselves into. The problem is: They don’t have a choice. China is too big a market to ignore. If they don’t sell there, others will. So they’d lose lots of money while China would still get the technology.
To quote Bart Simpson: You’re damned if you do and you’re damned if you don’t.
Right now, all those companies have is the hope that the growing economy in China will lead to a better protection of intellectual property. A slim hope…
Thomas Minzenmay :
To quote Bart Simpson: You’re damned if you do and you’re damned if you don’t.
That expression has been around a lot longer than Bart Simpson. I can still hear my Dad saying it as far back as the 50’s. Probably been around (like a lot of his sayings) since a least WWII.
The US Car Makers have seen how China took something complicated like a DVD player, and sell it for $40…and make a profit.
Given the level of inefficency and bloat in the car industry, they have good reason to be petrified.
The chinese will figure out how to pass a crash test. They will figure out how to tune suspension.
Just like the $40 DVD player works well enough for 95% of the market, the chinese car will too. The few who care about the other 5% don’t really matter.
Great editorial.
We have all heard the uproar over lead paint on Chinese toys, but Wal-mart, which is a major distributor of Chinese goods, is still in business. Why? because Chinese products are cheap.North Americans will but what is cheap. They will not care how many human beings die making the products or how much pollution is poured into the environment or homw many american workers are out of work, as long as the car/shoe/toy is cheap. And as the high paying jobs in this country diappear, the cheaper the better.
The economic power will be China within 25 years. Better start learing the language now. I understand it is not the easiest to learn.
Chinese is an absolute b*tch to learn.
Great editorial.
I guess we Americans just have to learn to the cope with the idea that there’s only so much wealth in this world to go around, and eventually, that wealth and consumption is gonna have to be spread out a lot more evenly that it has been. That’s really the fundamental principle at play here… and not just with automobiles.
Thomas Minzenmay: Western companies know fully well what they get themselves into. The problem is: They don’t have a choice. China is too big a market to ignore. If they don’t sell there, others will. So they’d lose lots of money while China would still get the technology.
Here is a strong case for the power of a cartel. Western firms, with support from their governments, might have stood together to restrict their technologies until China gave (and held firm to) assurances of return on investment. Instead, each company is willing to shred another piece of its own flesh until it reaches bone in an attempt to get China to allow them to conduct business there. Both sides have something to offer, but only one side has a unified front to stand strong in the face of negotiation.
I won’t address whether or not cartels are ultimately beneficial, but I see here how one could have worked to keep things a bit more equal on both sides of the table.
Queensmet said “we have all heard the uproar over lead paint on Chinese toys.”
Those toys are North American branded and the company (Mattel) admitted there are “design flaws.”
After all, they are not really dangerous Chinese toys. They are American. More like the Ford Exploders.
I mean, how many Chinese branded toys have you seen here? Almost none. They are all American companies employing Chinese workers. Supposedly these companies should do some QA, right?
Qusus said “Chinese is an absolute b*tch to learn.”
Don’t think so. Chinese is as easy, and as hard, to learn as any other language.
Tell me honestly, is Chinese any harder than Arabic?
No, don’t compare to French. I mean, English and French and German, etc, they are all part of the Latin family and should not be considered as completely different languages. It’s like, a Chinese may regard English as being harder than Japanese. But those two languages share a lot in common.
What is entirely different about China, as opposed to post-war Japan, is the political ramifications of the economic partnership. Pre-WWII, Japan was not known as a technological innovator, and received generous amounts of intellectual property from Germany. Apart from the Zero fighter, which proved to be superior early in the war, Japan could not respond quickly enough to the Allied improvements in fighter planes, and thus lost the air and sea war.
After WWII, in order to support the economy of an eventual strong ally, the U.S. gave the Japanese cheap licenses to produce Western technology. The U.S. also made Japan promise not to build an offensive military. Within ten years of the war’s end, Japan was producing arguably better cameras than the Germans, and by the 1960s were producing excellent automobiles and consumer electronics. However, Japan was, and is, a close friend of the U.S. — but never had any real economic or military leverage over us. Even in the 1980s and the early 1990s (the “Gung Ho” period), there was no real threat, in retrospect, that the Japanese were going to take us over in any regard.
On the other hand, China fought us directly in Korea, with devastating effect, and supplied North Vietnam until their relationship soured in the mid-1970s. Since then, China is not an ally of any sort of the U.S. (e.g., Taiwan plus remember the whole spy plane incident?), owns a considerable reserve of our currency (i.e. leverage), is sending people into space, building up a modern military, and stealing Western intellectual property — all with our complete consent (i.e. corporate greed).
We can only hope that the 2008 presidential candidates have the gumption to speak to the China issue. The Western world, at the very least, needs to agree not to transfer technology to China — Japan understands this, and only farms out cheap assembly jobs to the Chinese.
As some others have stated, China is a military and economical threat to the US. Considering the military hardware they have recently purchased, blinding a US satallite with a ground based laser targeting system (which they used to target one of their own old weather sat’s to destroy), the American people have to be crazy to support them. Sending production off to China, or joint ventures with the Chinese is nothing short of Corporate Greed. After all, are those $120.00 Nike shoes any cheaper than if they were made in the US? No. They only difference is the larger profit margin feeding the Nike top end. Same with every other name brand product – Apple computer anyone? A Chinese car in the US? Yes, we see it coming. NOBODY in the US is being forced to buy Chinese products. Don’t buy them. I’m not on the “Buy American” platform, I understand a world economy, but I purchase products from first world countries 99% of the time. US, Canada, western European countries, Japan. Next time you buy something, look at where it is made. If China, ask yourself “Do I really need this thing?”
Since we’re dealing with The Truth here, it must occur to you that all the accusations you levy against the Chinese can equally be levied by the Chinese against the United States, with the exception that the USA puts its’ money where its mouth is and has an actual history of imperialistic foreign aggression, continuing to this very day, while China doesn’t.
Ha, tentacles makes a good point… ^^^^
Also, I meant Chinese was a b*tch to learn only in the context of original English speakers who are unfamiliar to a language that is not primarily alphabetized.
And yeah, Arabic is even harder than Chinese. (That seems to be the consensus anyways.)
Agree with tentacles. Muslim extremists didn’t choose to crash planes into Chinese skyscrapers, since China didn’t help the Jews to slaughter Muslims (a military democratic, actually).
I am not trying to defend the terrorists. But sometimes you need know why people got mad.
On the record:
The US is the only nation that used WMD (atomic bombs) on civilians.
The US is the country that invaded another country for suspected WMD activity.
The US supports ruthless military dictators in Afghanistan and Saudi Arabia, since the dictators obey their American master.
The US opposes a military democracy(Hamas) in Palestine, since that particular democracy is hostile against American rule. Hamas is not good by any chance. But it’s a democracy nonetheless. And there are reasons why people would blow themselves up. I wouldn’t, because I have a life.
@ wsn:
Just for the record, I come here for automotive news, reviews and opinions on such concerning the automotive industry, not scandalous propaganda against the United States. This isn’t intended to take anything away from the larger discussion, of course.
Lumbergh21 :
The Chinese people have lived in subjugation for as long as there has been a China from fuedal lords to emperors to the current crop of “free market?” communists. They lie, cheat, and steal with no apparent concept of right and wrong.
The Taiwanese are genetically the same people as the Chinese, and they have no problems living as a free, democratic society. In fact, they’re prospering and have become the leading manufacturer of computer chips. Your computer probably has motherboards and LCD screens made on that tiny island nation.
Also, it’s not just China that has flimsy copyright laws. If you walk into a random video store in South America, Africa, Asia, or Eastern Europe, you’ll probably find nothing but bootlegged goods. Most countries in the world ignore international copyright laws.
Americans only make a big deal out of China because it has a large population that they want to sell to. If China had the population number of Turkey or Ecuador, you probably won’t see American companies complaining about them.
ncpaladin- You have to understand the difference between a chinese product and a product made in China by a subsidiary. If Hitachi builds plasma Tvs in China, they are still japanese products, because japanese basically are responsible for engineering, stamping quality, and final assembly. If a China based company makes a TVset, then it is a chinese product. Strangely enough, A Mexico built Chevy Silverado is a pure American product, while USA built Pontiac Vibe is rather a pure Japanese product. A China built Magnavox Tv set is pure …Dutch. Blueprint and engineering origin is what makes the product origin, not the assembly location. Still, you are right about the profit margin. Sooner or later countries will understand that offshoring manufacturing doesn`t increase parity of their own citizens for the due products.
The US, Europeans and Japanese have been pumping money and expertise into China like crazy for the past decade or two. Do they really think that none of this will come back to bite them later … or do the managers just figure “I’ll get mine” and not worry about it????
Maher Arar has become some sort of hero to the left in Canada, which uses him to promote their tired bile of juvenile anti-Americanism. He's had his moment, he'll be compensated, and the rest of my fellow Canadians have moved on.
troonbop, he will be compensated by whom? We Canadian tax-payers pay for the crime that the Americans committed; I don’t have to be a “left” to feel unhappy about that. Justice is not served, yet.
The Arar case is a thing of the past, and maybe we should “move on” as you have suggested. But let’s get back to the original topic here.
Shouldn’t we just “move on” with the Chinese politics? I mean, it’s been 30 years since they started the reform and adopted market economy (to a certain extend). Chinese leaders are as faithful to Communism as Bill Clinton is to Christianity.
Exactly when and how should we “move on” is a tough question. But let’s not use double standards.
Fishmonkey:
The point that I was aiming at was that the current Chinese government and past governments do not share a common view of right and wrong with western nations, and yet we seem to expect them to play “fair”. Those who ignore the past are doomed to repeat it. I did not mean to imply that there was some genetic flaw or predisposition in Eastern peoples that made them destined to subjugation or dishonesty.
Wsn,
The Maher Arar story has received a fair amount of coverage here in the US. I have seen at least two major reports in the US, one on CNN and another one on PBS.
Unlike in China, we in the US actually have available domestically many news accounts of the unpopular, immoral, illegal and unwise actions of our government.
I’m certainly not defending the actions of the US Gov’t in this case, but how is that comparable to China, where coverage of an event like this would be strictly forbidden by government censors?
B.C.,
Just for your info: Quanta, Compal and Acer are not Chinese companies, they’re Taiwanese. Only Lenovo is Chinese, and their most highly regarded products are holdovers from IBM.
Taiwan is known for high quality products and respect for intellectual property. China is not.
I don’t know if you have traveled to a Western country or not (but I suspect that you have, because your English is excellent), but there is a clear distinction in Western countries between Taiwan and China, due to the vastly different political systems and history.
By the way, it’s good to have someone from China to give us some perspective from the other side.