Chinese OEMs Reaching Tipping Point

Chinese-designed cars used to be a joke. That’s not so true anymore. At the Beijing auto show earlier this year, Chinese automakers rolled out cars that could look right at home in the U.S. or Europe.

John McElroy, Columnist

June 2, 2016

4 Min Read
Chinese OEMs Reaching Tipping Point

Foreign brands dominate the Chinese automotive market, or at least up to now they have. Now Chinese automakers look like they’re ready to make their own Great Leap Forward. Not only are they achieving impressive improvements in design, engineering and quality, changes in consumer tastes are starting to swing the Chinese market in their favor.

Chinese designed cars used to be a joke. You couldn’t miss them. They were either garish or blatant copies of foreign cars. That’s not so true anymore. Companies such as Geely and Chery hired Western designers to show them how to style handsome cars with the proper proportions and stance.

At the Beijing auto show earlier this year Chinese automakers rolled out masses of new models that looked surprisingly good. They are the kind of cars that could look right at home in the U.S. or Europe.

But the big change is with CUVs. Just like every other country in the world, China is going CUV crazy. The switch pretty much caught the foreign automakers flat-footed. They’re racing like crazy to bring out new ones, but so are the Chinese. And in the lower price ranges the Chinese companies are making inroads, especially in the smaller megalopolises known as second- and third-tier cities. This could be the tipping point, where Chinese consumers start to take pride in buying cars completely developed in their own country by their own people.

The Chinese government would like to see that happen. From the outset it’s rigged the rules to benefit the home teams. First, it forced all foreign automakers to form joint ventures with Chinese companies in order to do business in China. Second, it established an import tariff on foreign cars, currently 25% for vehicles imported from the U.S.

But then it went further. It also forced all the major foreign automakers to create brand-new Chinese brands with vehicles that had to be developed from scratch in China. This was done to create a homegrown batch of chief engineers who could do more than just modify an existing platform from a foreign automaker.

Big Incentives for Plug-ins

Now the government wants Chinese OEMs to dominate the global market for electric vehicles. It’s offering generous incentives for any kind of plug-in vehicle, or what it calls a new-energy vehicle, as long as it’s made in China. Mind you, hybrid-electric vehicles do not qualify. That may be because Toyota dominates the HEV market and there’s no way the Chinese government wants to help a Japanese company.

The big push for new-energy vehicles is being promoted as a way to help clean up China’s notoriously bad air pollution. But several studies show China’s air will get dirtier, not cleaner, if the market embraces EVs. That’s because the country generates roughly 70% of its electricity from coal.

There is a reason for that. China has 100 years’ worth of coal supplies and has to import almost all of its oil. So the move to EVs probably is more about national security than it is about cleaning up the skies. And while the government has issued rules curbing construction of new coal-fired generating plants, it also has called for consolidation of the chaotic number of Chinese car companies – to no avail.

There probably are well over 100 car companies in China, though no one has an exact count. The government would love to see this reduced to three or four very large companies and another three to four medium-size ones. But it’s not happening. No one is going out of business and no one is getting bought out. Even the smallest car companies are learning how to survive by leaning on their suppliers to deliver new designs and technology. Even though outsiders tend to view the Chinese Communist Party as a monolith that can mandate whatever it wants, it doesn’t always work out that way.

Now we’re seeing Chinese tech companies, inspired by their Silicon Valley counterparts, getting into the automotive business. Companies such as Tencent and Baidu are investing in autonomous EVs and believe they too can be big disruptors in the automotive industry. So instead of getting fewer Chinese car companies, we’re going to end up with more of them.

There are two kinds of car companies in China, those that are state-owned and those that are independent. It’s the state-owned companies such as SAIC, FAW and GAC that hold all the joint ventures with foreign automakers. That would seem to give them an advantage. But it’s the independent automakers such as Geely, Chery and Great Wall that are making the biggest inroads with Chinese car buyers. They’re nimbler than the state-owned behemoths.

Foreign automakers have bet heavily on China. Those investments are going to come under increasing pressure as the government continues to enact regulations that favor Chinese automakers. But the foreign manufacturers’ biggest challenge could be the growing number of Chinese consumers who are starting to take a fancy to local brands. Keep an eye on this trend because it portends a tipping point in the Chinese market.

About the Author(s)

John McElroy

Columnist

John McElroy is the president of Blue Sky Productions, which produces “Autoline Daily” and “Autoline After Hours” on www.Autoline.tv and the Autoline Network on YouTube. The podcast “The Industry” is available on most podcast platforms.

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