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MADE IN CHINA: YOUR NEXT CAR
BY CAM MCGRATH
ADDITIONAL REPORTING BY AMENA BAKR
Keep an eye on that hot pink, rather boxy, little Chinese car you just passed on the freeway. By the end of the decade, it might be no longer be a novelty. Chinese passenger cars have entered the Egyptian market and by competing aggressively on price, are quickly grabbing a share.
In the early 1950s, Soviet leader Joseph Stalin presented his Chinese counterpart Mao Zedong with five Russian-built limousines. Mao liked them so much, he decided to build his own. And so, China’s automobile industry – and a tradition of knockoffs – was born.
The first Chinese-built automobile rolled out of the iron-paneled factory gates of state-owned First Auto Works (FAW) in 1956. As individuals did not own cars in those days, the “Red Flag” car was merely a pomp ride for Mao and Politburo bigwigs (In 25 years, only 100 of the bulky, black limo knockoffs – all pieced together by hand – were built).
By the 1980s, however, China began to open up and dozens of joint ventures with western automakers assembled passenger cars for a growing number of individual drivers. It wasn’t long before the domestic partners of these joint ventures began to have ambitions of their own.
Car enthusiasts have panned China’s attempts at becoming a world-class automaker. But while they’ve been laughing, the industrious Chinese have been working: copying, testing and refining auto design with the aim of creating low-cost vehicles to compete with those of world-class automakers.
“The first generation of Chinese cars were a complete disaster,” says a German automotive consultant, speaking on the condition he not be named. “But then again, recall that the earliest Japanese cars were originally just knockoffs. Only in the late 1970s and early 1980s did Japanese automakers begin to design their own vehicles.”
It took Japanese brands such as Toyota and Honda nearly 20 years to develop the technology and expertise of a respectable automaker. Korean brands such as Hyundai, once the laughing stock of the auto world, spent 15 years building their reputation. “If they stay on pace, Chinese automakers could do it in 10,” the consultant told Business Monthly.
With 1.3 billion potential customers, China is the potential motherlode for automakers. Last year, some 5 million automobiles were sold in China, making it the third largest market in the world behind Japan and the US. But as foreign auto giants launch massive offensives in China, the country’s domestic automakers are looking abroad. To succeed, however, they will need to position themselves differently from what they did in the past. “To sell worldwide these automakers will need to better understand the concepts of a car and improve their quality,” says automotive industry expert Tamer El-Shazly. “The quality is constantly evolving, but will need more time.”
In going abroad, Chinese automakers are employing several strategies, including direct exports and building plants in foreign countries, including Russia, Iran and Malaysia. The boldest ones are seeking to merge with or acquire local and foreign production lines. A string of M&As beginning in 2002 has created some of the most incestuous partnerships in the automotive industry. SAIC, for instance, is a joint venture partner of GM in China, yet it also held a 20-percent stake in Chery Automobile Company at a time when the Wuhu-based automaker was flooding the market with a knockoff version of a GM passenger car [see sidebar, page 48].
CRASH AND LEARN
Backed by state subsidies and an artificially low exchange rate, Chinese automakers have put their export strategies into overdrive. While passenger car exports were a modest 31,000 units in 2005, they are growing at over 200 percent a year. So far, marketing efforts have focused on the developing world, where standards and customer expectations are considerably lower.
The Chinese have no illusions. They know their vehicles often fall short on quality, safety and environmental standards. But for the next generation of cars, there will be no shortcuts. Chery, for instance, has just built a state-of-the-art $200 million engine plant equipped with high-quality machinery imported from Germany and Austria. Brilliance China Automotive Holdings, meanwhile, produces its vehicles in the same factory in Shenyang as its venerable joint venture partner, BMW – from whom it’s borrowed invaluable engineering and quality control techniques.
But it’s not just the tooling that’s changed, it’s the skills. Foreign joint venture partners have developed the domestic labor pool and introduced new technologies. What’s more, China has managed to woo back thousands of engineering students who studied at prestigious universities in the States in the 1980s and 90s then went on to build promising careers at Ford, GM or Chrysler. With them comes invaluable hands-on experience in gauging quality and improving design. And, of course, a few trade secrets.
After years of churning out knockoffs, Chinese automakers are determined to add value to their brands by launching their own designs. Some, such as Brilliance, Chery and Geely, have established their own R&D programs. They have also commissioned European designers to develop concept cars, which are then assembled using a combination of local and imported components.
Chery hired Italian design houses Pininfarina and Bertone – renowned for their work with Ferrari and Lamborghini respectively – to design new models for export. Geely has developed models in collaboration with Ruecker AG of Germany and Maggiora SPA-Auto of Italy, while Hafei contracted Pininfarina to design several of its models, including its export flagship, the compact HF Lobo hatchback – several thousand of which are already cruising Egyptian streets.
Effat Abdel Atty, CEO of Martrade, the sole Egyptian distributor of Hafei, says knockoffs are a start, but the ultimate goal of Chinese automakers is to manufacture cars with their own designs. “Copying is not a bad thing in the beginning,” he argues, “but Hafei chose not to do it. Instead, they went to the leading company that designs cars in order to have a unique design, which gives it an edge in the market. And by design I don’t mean just the car’s external appearance. No, a design is more than that – it includes every part of the car from the inside out.”
Western automakers see where this is going, and have reportedly taken steps to prevent Chinese automakers from mastering core technologies. Geely says it took over a year to find a company willing to sell it a specialized tool used to make gearboxes – a delay it claims was due to pressure on the tool-maker by multinationals. Chery, however, quietly collaborated with Austrian firm AVL to develop the first Chinese engine in 2005, a 2.0-liter, four-cylinder engine it named ACTECO. The engine is said to outperform the small Mitsubishi motor previously used in its cars.
While China’s autoworkers make about 1/10th of their Korean counterparts and 1/30th of American union rates – labor only accounts for about 10 percent of production costs; much of the rest is the cost of materials. Industry analysts say that if Chinese automakers can manufacture their own engines and gearboxes, they could drastically reduce the cost of producing a vehicle. And as volumes increase economies of scale will bring production costs down even further.
MAKING INROADS
China’s next generation of passenger vehicles – having leapfrogged up the evolutionary chain – are scheduled to arrive on European and American shores later this year. A modified Chery QQ will lead the charge – provided it passes safety and emission controls. The three-door minicar is expected to sell for about d5,000, 30 percent cheaper than the strikingly similar Daewoo Matiz.
On the other side of the Atlantic, Brilliance could be the first Chinese brand to land on American soil. US-based Global Holdings International says it will open its first US showroom for the Brilliance Zhonghua sedan (rebadged in Egypt as Galena) later this year. Geely, whose 7151 CK sedan debuted amidst jeers last January at an international auto show in Detroit, plans to launch an updated version of the car – one that meets all US safety and emissions requirements – in 2008 with a targeted sticker price of $7,500. And New York-based Visionary Vehicles plans to begin selling newly designed mid-range Chery models in the US market in 2008.
Chinese automakers have also set their sights on Egypt – a growth market of 72 million people driving less than 3 million cars. Imported Geely Sparkys were among the first Chinese-built cars to hit Cairo streets, in mid-2004, with Hafei and Chery models hot on their tail. “Our main target is people who have always wanted a car, but could never afford it,” says Ayman Kamel, CEO of Symex International Automotive, the Egyptian distributor of Geely, Maple and Changan vehicles. “By bringing in these cars, we’ve managed to introduce a new segment to the passenger car market.”
Sales figures suggest a favorable response. Hafei and Chery reported selling 1,600-1,700 units each last year. Geely representatives declined to give a figure, saying only that 2005 sales “exceeded expectations.”
According to the Automotive Marketing Information Council (AMIC), an independent body that monitors car sales in Egypt, the influx of Chinese cars had a significant impact on the market, accounting for a “sizeable portion” of passenger vehicles sold in 2005.
Still, Chinese cars have a long way to go to reach the level of sales of more established brands. “According to feasibility studies that were done at the beginning of this year, it is clear that Japanese cars are going to be the top sellers in the market this year,” says Kamel. “We’re planning to fight this by playing on the price factor – our cars will simply be cheaper.”
Geely, Chery and Hafei models start around £E 40,000, making them amongst the least expensive passenger cars in Egypt. Minicars such as the Sukuzi Maruti, Kia Pride, Fiat Uno and Renault Cleo are about the only cars that can approach this price, while other cars of equal compartment and engine size begin around £E 80,000.
Rock bottom prices are attracting a wide range of buyers – from fresh graduates in need of a commuter vehicle, to families seeking a cheap yet fully-loaded vehicle, to high-level customers who need a second or third car for their kids to use. The low-cost brands are also proving popular as commercial fleets and, in the case of Port Said, as taxis.
But overcoming the widespread perception that Chinese products are cheap only because they skimp on quality is a major hurdle, especially as Chinese automakers have near-zero brand recognition in Egypt. “I totally understand why so many people think all Chinese products are disposable and do not trust their quality as this is true to a certain extent with goods like pens, toys and clothes,” admits Abdel Atty. “But when we talk about cars it’s a totally different issue because this product is specifically designed to be durable.”
Abdel Atty says Chinese automakers have pumped enormous capital into the automotive sector fully aware that profits will require stable returns over the long term. “The minimum amount of investment needed to open a car factory is $8 billion. No one is going to put this kind of money into a venture that produces low-quality cars,” he adds.
Akram El Sobky, marketing manager of trading company CIG, hopes to convince Egyptian buyers that China can produce cars cheaply without sacrificing quality. “When we first launched Chery, everyone was looking at it as a low-quality car,” he says. “But when people started purchasing the product they began to feel the [quality] difference and started comparing it with Korean cars.” He argues that a fully-loaded Chery offers a whole lot more than a similarly-priced Korean vehicle. “Compare the price, for example, of a Hyundai, Daewoo or Kia with ABS, two airbags, electric windows and mirrors, central locking… only in a Chinese car will you find all this at a sticker price under £E 70,000.”
El Sobky says Chery’s success in the market is reflected by the resiliency of its sticker price. “While others have reduced their prices to gain more market share, we increased ours because of the high demand on our cars.”
For Brilliance, which is taking a run at the luxury car market – where status and prestige are primary selling points – even more is at stake. In April 2005, the company signed an agreement with Bavarian Auto Group (BAG), the licensed assembler and distributor of BMW in Egypt, to become the first and only Chinese automaker to assemble passenger cars in Egypt. “This is a natural partnership: they need us and we need them,” president of Brilliance at the time, Lin Xiogang, told Business Monthly. “And we have in common BMW, which is a very important go-between.”
The first Brilliance Galena, a 2.0-liter luxury saloon car designed by renowned Italian designer Gioretto Giugiaro, rolled out of BAG’s 39,000-square-meter plant in Sixth of October City in late February 2006. But long before it hit showroom floors in Egypt, marketing executives mulled whether Galena’s association with China would be a blessing or a curse. Two schools of thought emerged – one to promote Galena as a truly Chinese car assembled in Egypt; the other to market it as a synergy of international ingredients. By the car’s official launch last month, the latter had clearly won out.
“This is a truly global car that happens to have been conceived in China,” insists Mohamed El-Sayed, general manager of Bavarian Auto Group. “It has Italian design, Japanese technology and German quality control, [and is] built in a German factory managed by Germans, who have a heritage of quality.”
But El-Sayed admits it will take considerable effort to overcome the public’s negative perception of Chinese products, particularly as earlier imports of some low-quality Chinese cars only helped to reinforce these ideas. “The overall perception, not only of Geely and Chery, is hindering us and has kept us back a bit… we are not yet on the front line,” he says. “But I believe we can create [for Brilliance] a class of its own that you cannot compare to Geely and Chery.”
And it will certainly have to if it intends to, as Bavarian Auto insists, “fill the gap between mid-range saloon and the higher end of the market.” With a sticker price of about £E 159,000, Galena is positioned against 1.6-liter mid-range sedans such as the Skoda Octavia and Renault Megane. “Our main goal is to attract 1.6-liter customers, who represent 45 percent of the [passenger car] market, by introducing a 2.0-liter luxury car that is fully priced as a 1.6-liter car,” says El-Sayed.
In its favor, the Galena has a spacious, plush interior and special features like reverse radar (for parking) that no other car in its price range can match. Yet it does not have the brand value of BMW or Mercedes luxury cars, which nevertheless sell for twice its price.
El-Sayed expects 1,600 units will be sold by the end of 2006 – an impressive first year for any car in its price range. The big question will be how far Galena’s backing by a respected entity such as Bavarian Auto Group – which uses the same factory line to assemble both BMW and Brilliance – will translate into sales. “Bavarian Motors has a proven track record of reliability and credibility it cannot jeopardize,” says El-Sayed. “This will undoubtedly add value, especially when it comes to customer service.”
BUY NOW, PAY LATER?
The Egyptian consumer is highly price conscious, but with more auto brands available, aftersales service has become a primary concern for buyers. “Even though Chinese cars are selling now they will not continue in their success unless they improve aftersales, because word-of-mouth is a powerful influence in this market,” warns El-Shazly, explaining that aftersales includes everything from warranty, to service stations, to availability of spare parts. “If the Chinese don’t fulfill the whole equation, sooner or later they’ll fall.”
Geely models come with a two-year or 40,000-kilometer warranty; Brilliance, Chery and Hafei offer three-year or 60,000-kilometer warranties. Dealers take pride to point out that these warranty periods are comparable to those offered by many established brands. Yet customers that Business Monthly spoke to were decidedly mixed; many didn’t expect their cars to live beyond the warranty period.
“A two or three-year warranty is fine for a car that will run 200,000 kilometers with only minor maintenance, but these Chinese cars are breaking down from day one. You’ll be lucky if you make it through the entire warranty period,” says 29-year-old Amr Ahmed, who had considered buying a Chinese car, but decided to spend an extra 30 percent to purchase a Korean brand.
Walid Hegazy, a 36-year-old accountant, has no regrets about the fully-loaded Chery QQ he purchased four months ago. “I had a limited budget and, to tell you the truth, I didn’t want to buy a used car,” he says. “I wanted a new car with all the options and at least a two-year warranty, so this was the most suitable choice for me.”
While Hegazy admits he feels uncomfortable about taking the car on long road trips, he says it’s an ideal commuter vehicle. “It’s true that it might be a little less stable than other cars on the road, but it’s perfect for the city and that’s why I bought it,” he says. “I just need it to get to my work and back each day. So far, I’ve had no problems whatsoever.”
Some owners spoke of a spare parts supply shortage, a charge that all brands denied. Martrade’s Abdel Atty went so far as to insist: “If a customer comes to me and asks me for a spare part that I don’t have I would tear apart a new car and give him the part he wants – that’s how important a customer’s request is to me.”
As a local assembler, Brilliance should have the upper hand on the supply chain. “As per Egyptian law, we assemble the car locally with at least 45 percent local components,” explains El-Sayed, whose warehouse is stacked to the roof with Galena parts. For other brands, however, the challenge of importing sufficient spare parts to cover demand is a daunting task.
Symex’s Kamel insists Geely has established solid supply lines for parts. “In the long term, we’re planning to manufacture our spare parts in Egypt instead of importing them,” he says. “We’re also looking forward to assembling our cars here, but this step has a long way to go as we’re only beginning our operations here and need to first secure a stable and strong foundation for the company. By assembling or manufacturing our spare parts in Egypt we would [save] on the costs of importing all our parts from A to Z.”
Abdel Atty also sees the value of assembling locally, but says Hafei must first attain the appropriate economies of scale. “In order to start assembling cars you must make sure you can sell 5,000 to 6,000 per year, and we still haven’t reached that point,” he says.
SHANGHAI’ED DEALS
Chinese cars are moving, but automobile distributors that Business Monthly spoke to indicated that doing business with the Chinese was anything but easy. Several complained of painstaking bureaucratic hassles, while others accused their Chinese counterparts of unabashedly reneging on deals.
Chinese automakers that sign exclusivity licenses with local partners are always keeping an eye out for a better deal. CIG, for instance, spent millions marketing Chery vehicles and developing its aftersales network only to hear that its Chinese partner was secretly in talks with another distributor. El Sobky of CIG insists the rumored deal will never transpire. “We have an exclusive deal with the Chinese so they can’t give anyone else the license,” he says.
Meanwhile, automotive analyst El-Shazly compared the local distributorship licensing to a devious game of musical chairs. “The Chinese have huge manufacturing capacity and want to sell wherever and to whomever,” he says. “They’re not looking to stay a long time; they’re just trying to sell as many cars as they can as quick as they can.”
One distributor, speaking on the condition of anonymity, said the Chinese have already earned a bad reputation for reneging on their deals. For now, Egyptian companies are scrambling to secure distributorship licenses for hot-selling Chinese vehicles, but if Chinese automakers don’t stick to their deals, they could be made very unwelcome. “In our everyday dealings with them they are very difficult,” the distributor said. “I think this is mainly due to the fact that they are relatively new to the automotive industry and don’t have much experience yet.”
KNOCKOFF KINGS
While Chinese automakers are working to develop their own car designs, Chinese brands are more famous for their derivative qualities. Shuanghuan Automobile Company’s Laibao SRV, for example, is an exact replica of the Honda CR-V sport utility vehicle. Or at least until you look beyond its shell.
Nissan, meanwhile, has accused Chinese automaker Great Wall Motor Company of cut-and-pasting the front end of its Frontier SUV on its Sing SUV.
But perhaps the most celebrated case of IPR infringement is the Chery QQ, a spitting image of the Daewoo Matiz (marketed elsewhere by GM as the Chevy Spark). In 2004, GM’s subsidiary in South Korea, GM Daewoo, filed a $9.6 million lawsuit against Chery for allegedly pirating its brand. Chery claims it developed its Chery QQ independently, though the engineers it recruited from Daewoo were unable to explain why the two cars are so identical you can switch the door panels and key components between them.
SafEty first
A premature attempt by Chinese automakers to enter the European market last year ended in embarrassment after Jiangling Motors Company shipped a container of its Landwind – a Chinese-built SUV derived from the Opel Frontera – to Belgium. Even before the vehicles got off the sales lot, the marketing campaign hit a speed bump. The Landwind scored 0 out of 5 in an ADAC crash test, the worst score ever seen by the German car club. Video showed the SUV’s passenger cabin imploding like a rotten pumpkin during a head-on collision at 64km/h.
CHERY
Wuhu-based Chery is a small operation harboring giant expansion plans. With less than a decade of experience under its belt, the upstart carmaker has used the capital infused by Shanghai Automotive Industry Company (SAIC)’s purchase of a 20-percent stake in the company in 2001 to fund its aggressive production strategy.
Chery’s first design, a Daewoo Matiz clone dubbed the QQ, is perhaps its most successful. The company’s R&D department is aggressively developing its own designs and engines.
Chery produced over 180,000 vehicles in 2005, an 80-percent increase over the previous year. It also churned out vehicles from its assembly plants in Iran and Russia, and has announced plans to build factories in Syria, Algeria, Pakistan and Venezuela. If all goes well, its QQ should be in Europe by the end of the year. In the US, Chery has teamed up with Malcolm Bricklin of Visionary Vehicles, who introduced Subaru to America in the 1960s and Yugo in the 1980s.
GEELY
Geely, which got its start in refrigerator parts in the 1980s before migrating to motorcycle manufacture, was the first private Chinese company to take a shot at passenger cars. Guided by its founder and chairman Li Shufu, whose mantra is to make his cars available to the common man, the company has expanded quickly. It now operates factories in China and Iran, and recently clinched a deal to assemble in Malaysia.
Early designs were purely derivative. The Merrie hatchback, created by bolting a Mercedes-like grille on the body of a Daihatsu Charade knockoff, was introduced in 2000 and soon became Geely’s bread-and-butter car. In 2003, Geely introduced its most impressive derived model, the Beauty Leopard, a sleek two-door coupe with a built-in karaoke player.
Geely’s sales jumped 54 percent in 2005 to reach 150,000 units, about 5 percent of China’s car market. The company hopes to begin mass sales in Europe next year and test markets in the US in 2007.
ASSEMBLY LINE
Brilliance is the first Chinese automaker to launch assembly of completely knocked down (CKD) vehicles in Egypt through its partnership with Bavarian Auto Group, but others are expected to follow. By assembling vehicles in foreign markets, Chinese brands can take advantage of lower taxes and reduced freight fees.
Developing countries with large populations and low, but rising automobile ownership are prime targets for CKD plants. Egypt, Iran and Russia are hot on every automakers list. Egypt is especially coveted as a gateway to African and Middle East markets, many of which offer good sales potential but insufficient consumer base to merit establishing plants.
BRILLIANCE
Brilliance China Automotive Holding is one of China’s leading automotive manufacturers through its subsidiaries and joint ventures, with listings on the New York, Shanghai and Hong Kong stock exchanges. Since its beginning in the early 1990s, the company has remained focused on a smaller line of high-quality products. Its earliest efforts were in manufacturing its JinBei minibus, a licensed rebadge of the Toyota Hiace that continues to sell well in China. In 2002, it introduced the Zhonghua mid-sized saloon car – the first passenger car designed exclusively for a Chinese automaker. Two other models – including a sporty coupe – are currently in the works.
Brilliance entered a joint venture with BMW, beginning production of BMW 3 and 5 series sedans at its Shenyang plant in 2003. The cooperation has further improved the quality and reputation of Brilliance’s own lines.
The company opened its first overseas CKD assembly project in Egypt in early 2006 and is in negotiations to open plants in Iran, Russia, Vietnam and Malaysia.
HAFEI
Harbin Hafei Motor Company, better known as Hafei, is a subsidiary of a government aircraft manufacturer with seven models of cars and minivans to its name. Outside China, however, the brand is exclusively associated with the Lobo – an Italian-designed five-door minicar. Attempting to broaden its portfolio, the company introduced the Saibao in 2004, a mid-sized sedan based on the Mitsubishi Dingo.
Hafei reported selling 208,000 vehicles in 2004. The company’s newly launched passenger car line has reportedly cannibalized minibus sales, which were traditionally its cash cow.
While Hafei officials make less noise than their counterparts at Chery and Geely, they are rumored to be mapping out a strategy to enter western markets. Saibao test vehicles have been sent to Europe for crash and safety testing, while the Sutera, a tweaked version of the Lobo assembled in Malaysia, is expected to arrive in the UK later this year.
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