China Auto: Crouching Tiger, Looming Giant

The turmoil in the auto business isn’t just with the American manufacturers; it is global, striking even the supposed gold standards such as Toyota and Honda. But in chaos there is opportunity, and China looks to capitalize on that. From the New York Times:

China plans to build up a ”Big 10” group of globally competitive automakers, led by General Motor Corp. partner Shanghai Automotive Industrial Corp., an industry association said Wednesday.

The plan, part of a wider stimulus package for the auto industry, is also aimed at boosting sales and production this year to 10 million units and keeping growth at about 10 percent in the next few years, according to a report posted on the Web site of the China Association of Automobile Manufacturers.

The plan outlined in the report dovetails with the country’s long-term strategy of consolidating numerous small regional manufacturers into bigger national auto groups, while at the same time encouraging use of more fuel efficient, lower polluting vehicles.

Foreign-brand cars still dominate the Chinese market thanks to a government policy of inviting foreign automakers to partner, as minority stakeholders, with local companies, such as Shanghai Automotive, also known as SAIC.

But the final goal has always been for the country to develop its own brand vehicles.

Well, yes, their goal is to develop their own brands, but their real goal is to penetrate the international market, and especially the US. The Chinese have been making noise about this for years; there was talk of bringing the primitive Chery here (by wildcat Malcomb Bricklin no less), but the cars weren’t ready for prime time and it was aborted. Make no mistake though, this consolidation is about positioning; the Chinese see the global weakness as an opening. They are right.

Back in November Marcy pondered whether SAIC and other Chinese makers were looking to scoop up the remains if Chrysler and/or GM were forced into liquidation; that is still a relevant inquiry. Anything the empowered, and Chinese government assisted, China auto groups can scoop up is gravy in their quest. Oh, and by the way, even the New York Times doesn’t believe that Cerberus has a dog long for the fight with Chrysler, with both an editorial and a story out yesterday questioning their motives. I wonder if Dan Quayle has been to the orient lately?

8 replies
  1. plunger says:

    I dare say there is no sound business reason to invest in auto manufacturing in the US for at least the next two years. The overhang of supply is enormous, while demand for new cars has virtually disappeared. A glut of ever-cheaper used cars continues to grow, as repossessions and outright sales (due to household reduction of total vehicles) – combined with massive incentives (driving the resale value of used cars considerably lower) all conspire to make used cars infinitely more attractive to purchase than new ones (particularly when the new car warranty is only as reliable as the life span of the company backing it up).

    For every person who already owns one or more cars, the prospect of massive intervention (with their own money) in the form of incentives to purchase new vehicles only serves to undermine the value of their existing asset(s), the cars they presently own.

    The country is absolutely over-carred, over-homed, over-strip-malled, over condoed, etc. It is simply wrong-headed to pretend that the oversupply of everything can be corrected by producing more of it.

    Are Americans really stupid enough to believe that there is any benefit in destroying the trade-in value of their existing vehicle for the promise of the “shiny new thing?” The correlation of incentives to the resale value of used cars is direct, and highly destructive of existing personal balance sheets.

  2. spoonful says:

    The ascent of Chinese auto makers is not only inevitable, but based on the quote above, it is absolutely necessary because it will encourage fuel efficiency and reduced pollution in China. If, as a result of this ascent, the majority shareholders in GM or Chrysler become Chinese nationals rather than from the United States, that may be inevitable if such shareholders receive an offer from the Chinese that they can’t refuse. In that event, it might not be a bad thing economically, either, if such a transfer of ownership came with a commitment to retain existing worker unions, and maintain and invest at certain levels in state of the art manufacturing facilities.

  3. bmaz says:

    There is no reason to believe there would be such a commitment, or if there were, that it would be binding. Secondly, the benefit of research and design, of which the US has always been the leader, goes offshore; that is very bad. Thirdly, it is the US that has the state of the art manufacturing, not China. I fail to see what is advantageous in your scenario.

    • readerOfTeaLeaves says:

      Yet again, as your guest last week illustrated, Americans do not seem to grasp the signal importance of either e-n-g-i-n-e-e-r-i-n-g, nor of the crucial role of manufacturing in a society.**

      However, I thought this was the ‘money quote’ in that very good NYT editorial you link to:

      But Cerberus said giving fresh money would violate its fiduciary duty to investors, breaking company rules limiting how much it can commit to any given investment.

      We suspect these rules would be more pliant if Cerberus deemed Chrysler to be a good deal.

      It seems the secretive private-equity fund is willing to gamble on Chrysler’s survival with the taxpayer’s dime, but not its own.

      So… who owns Cerberus?
      What legislation enabled it?
      Who pushed that legislation through Congress (Dem AND Republican)?
      How was Abramoff’s gang connected to that legislation, if at all?
      What offshore, non-US interests are using Cerberus to enrich themselves at US taxpayer expense…?

      Might be time for another bmaz post on how to revise Corporate Structure under US law…(puleeeze!!)

      ** In recent years, the UW’s Husky Stadium was being remodeled and added onto. The steel for the project was purchased from {name of country in East Asia diplomatically omitted here}. The structural steel didn’t withstand the weight ratios and windspeeds it was supposed to withstand; the building collapsed.

      Again, and mostly because that recent earthquake in China was horrifying, and sad beyond expression. But look at how those buildings and schools collapsed! They need to do more work on their building codes, requirements for acceptable strength and weight ratios on their cement/concrete, and associated factors. That earthquake was tragic beyond words, and my heart really goes out to them. Here’s hoping that it will result in better engineering and design going forward.

    • spoonful says:

      The benefit of fuel efficient and minimally polluting vehicles in China is a given. The benefit of Chinese ownership (or any foreign majority owner) is the cash such buyer would bring to the table. Such a buyer would have it, While a domestically owned auto industry would be preferable to foreign ownership because of the likely commitment to maintain the manufacturing base here, such an outcome is by no means assured or even likely. In the event the auto industry does not survive this period, foreign ownership of this industry is preferable to no industry at all. Devil is in the details as far as obtaining union and operational commitments, but this new administration has the potential to be pretty sharp, although we haven’t seen it yet.

  4. Jonathryn says:

    Such a plan would be ambitious, and the Chinese leadership is ambitious. They also realize the importance of branding in the West–witness the acquisition of IBM’s PC business as well as, I believe, some American appliance manufacturers. They would also need a functioning method to sell cars to consumers here, which would involve keeping the existing dealership model (conversely they might opt for the Japanese approach), so it would be a matter of timing. I also think that by employing Americans, they could navigate regulatory hurdles such as crash test safety and efficiency standards.

    But conditions in China are deteriorating so much that I wonder if this is at all possible (I’ve been reading about severe, major dislocations in the Chinese economy), or whether those at the top of China’s command economy have the management skills and cultural finesse to operate in this environment. It’s one thing to export to the US using bought-up US brands, but running US auto corporations from Beijing would be something completely different.

    One thing is certain: if Chinese leaders with deep pockets and a long-term investment horizon see something in US automakers, why doesn’t Wall Street or major investors like Kerkorian?

  5. readerOfTeaLeaves says:

    bmaz, great link to that NYT blog article; very interrresting.

    …Even on that assumption, given market conditions, they would be unlikely to be able to sell $30 billion in newly issued stock or raise $30 billion through bonds or loans, because of information asymmetry: put simply, no one would believe them. …Information asymmetry does not exist in the case of Chrysler and Cerberus because the people who wrote the viability plan are essentially the same people who could provide the money — an additional $5.3 billion in new loans on top of the $4.3 billion already committed.

    FWIW, former Wa Gov Gary Locke is a great Commerce appointment for many reasons, and it looks as if he’ll have plenty on his plate. (IIRC, his grandfather arrived in Washington as ‘Loq’, then like so many of us changed the spelling.) Locke is a terrific selection, IMHO.

    (And am I the only one to note that despite all the hoopla about Obama’s father from Kenya, we now have Chu and Locke of Chinese ancestry, and Shinseki of Japanese ancestry? Almost as if we’re entering the 21st century or something…)

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