Quality Gremlins Hinder PRC's Global Auto Assault

I've featured quite a few articles on China's attempts at global auto market domination before [1, 2, 3, 4, 5]. This is none too surprising as the PRC is now the second largest auto market in the world. Today, Reuters has a feature on how the road to global auto markets for Chinese automakers will likely pass through the developing world before reaching US shores with their wares. There is still some way to go before Chinese cars are fully competitive, especially in terms of safety standards and construction quality. Plus, there are forces working against setting prices too low in an appreciating Chinese yuan and rising shipping prices as well:

China's auto makers have set their sights on becoming the next exporting powerhouse on the world's roads and they have made emerging markets, from Latin America to Russia, their proving ground. They have reason to be satisfied so far: China sold 612,700 cars abroad last year, up nearly 80 percent, mostly in the developing world, according to the commerce ministry.

But like the Japanese and Korean car companies that went before them, Chinese firms are finding they have to win customers with cut-price deals before they can establish their names. "People don't know these cars. They just see they're Chinese and think that means they're bad," said Rafael Bader, a commercial director at Cinascar, the biggest importer of Chinese cars in Ecuador, Colombia and Venezuela. "It's a reality we have to confront."

Cinascar has tried to change the popular perception by waging a public relations campaign and offering extended warranties along with prices that are 20-25 percent cheaper than competitors. The firm has been in Ecuador for only ten months and its numbers show that it has already catapulted into 11th place by units sold out of the country's 43 dealers.

Doubts about quality, though, are hard to shake. The Changhe Ideal, the car Cortez was considering, had defects visible to the non-expert eye. The car's logo had seemingly been stuck on in haste and sat at an awkward angle; some paint had come off its body; and gaps between the side panels were clearly uneven. To be fair, the Changhe was one of the cheapest on the lot. It is even hard to find a car that cheap in China as Chinese producers have generally kept their best cars at home, deliberately targeting the low end of foreign markets.

Safety concerns have dogged Chinese cars in their attempts to break into the United States and Europe. The latest in a string of crash test failures came last year with the Brilliance BS6, billed as a premium sedan at a budget price. "An ice cube stands a better chance of survival in the Sahara than the driver of a BS6 does in a severe front or side impact", Car and Driver magazine said on reviewing the test results. Brilliance Auto, BMW's partner in China, went back to the drawing board after the embarrassment and the BS6 notched up three stars out of five in a later test, paving the way for its launch in Europe in the next few months.

Perhaps not surprisingly, Chinese automakers have had an easier time getting their wheels on the ground in developing countries where safety and emission standards tend to be lower. But poorer countries offer more than just the path of least resistance; analysts say they also present a vast untapped market with enticing growth potential.

Sitting in Cinascar's Quito office, the urbane Bader spreads out his arms to show what lies in wait for auto makers who can do things on the cheap. Up to now, cars have been out of reach for the 80 percent of Ecuadoreans who get by on low incomes, he said. "We are bringing opportunities for the maid who has dreamed of having a car but has had to travel on the bus," he said...

But Chinese automakers are loath to get sucked too deeply into the pricing race to the bottom, a senior executive at Great Wall Motor, China's largest SUV maker, said. Cost pressures mean that competing on price alone is not a viable long-term strategy, said the executive, who declined to be named as he is not authorized to speak to the media. Shipping rates have soared over the past few years on a boom in seaborne trade, which in no small part has been driven by China's rise and rise as an economic power. Another price push is the yuan's appreciation of more than 18 percent since mid-2005 when China depegged its currency from the U.S. dollar. "There won't be a sudden spike in Chinese car prices overseas, but an uptrend is inevitable with a stronger yuan and rising shipping rates," he said.