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Wednesday
Dec282011

The US Auto Industry Drifts Off To China

Though practically every car sold in the US today contains Chinese-made components, the announcement that a few Chinese-made cars would arrive in Canada raised a lot of eyebrows. It would be a Honda Fit assembled in the same plant where the European version, the Jazz, has been built for years. But Chinese-designed and branded vehicles have not made it yet. Chinese automakers, of which there is a whole slew, are scrambling to improve their technologies from nice-looking but shoddy copy-and-paste models to reliable products that would be competitive in developed markets. It’s a government priority. And they’re getting there through the back door.

China's automotive market, with new vehicle sales in the 18-million-unit range in 2011, has leapfrogged the US market with its 12 million units. Some analysts estimate that sales will reach 28 million units in 2017 (highly optimistic if the China bubble blows up before then), and no major automaker wants to miss out on the opportunity. They all have invested heavily there, though the National Development and Reform Commission is pushing foreign automakers to share more of their advanced technologies with their Chinese partners—and they all have to have Chinese partners.

The push to develop new technologies is immense. China has already outdistanced the US in published patent applications, according to a report from Thomson Reuters, though it is still lagging behind the US, Japan, and Europe in patent grants. The surge in applications is in part due to incentives that the government is offering in its amazing effort to push the country up the industrial and intellectual food chain to where products are designed from ground up in China. Targets: pharmaceuticals, technology, and ... the auto industry.

Developing technologies in China is one way. Another way is to go shopping in America. And in most cases, government-owned enterprises are behind it. For example, BeijingWest Industries. The joint venture of three government-owned companies—Shougang Corp, Bao'an Investment Development Co., and Beijing Fangshan State-Owned Asset Management Co.—bought the chassis division from Delphi Automotive during the crisis in 2009. Building on Delphi’s technologies, it now develops and manufactures brake and chassis components for a variety of US and European automakers.

Delphi embodies what’s wrong with manufacturing and financial engineering in the US. In 1999, when GM spun it off, it was a mega manufacturer of automotive systems. In 2001, the company cut 11,500 jobs. In 2004, it got into hot water over its accounting practices. In 2005, six years after its IPO, it went bankrupt and closed 24 plants. In 2006, it closed another 21 plants. Throughout, GM began to source its components elsewhere, particularly in China.

Visteon, Ford’s version of Delphi, is another example. Visteon designs and manufactures automotive interiors, lighting systems, climate control systems (second largest supplier in the world), and electronics, including driver information, audio, and powertrain systems. When Ford spun it off in 2000, 80% of its revenue came from North America. In 2009, nine years after its IPO, it went bankrupt and closed numerous plants. While the “reorganized” Visteon is still a primary component supplier to Ford, it now supplies other automakers as well. Its center of gravity is shifting to its Asia Pacific Corporate Office and Innovation Center in Shanghai. And the building of its North American Corporate Office and Innovation Center in Van Buren Township, Michigan, is up for sale.

Already, Visteon is consolidating its interior systems into Yanfeng Visteon Automotive Trim Systems, its Chinese joint venture with Huayu Automotive Systems, which is a subsidiary of China's largest automaker, Shanghai Automotive Industry Corp. (SAIC), which is owned by the Chinese government. And now analysts believe that Visteon may also merge its electronics entities into Yanfeng and sell its 50% stake to SAIC—hence, to the Chinese government.

To match quality and design standards of the best in the world and to become competitive in the US, Chinese automakers can't rely on copying existing technologies. They must learn how to design, engineer, and manufacture vehicles from the chassis up. And to accomplish that, China is weaving a matrix of companies with state-of-the-art capabilities, both in China through its joint ventures and overseas through acquisitions.

The most visible acquisition occurred when Zhejiang Geely Holding Group bought Volvo Cars from Ford in 2010, but the most significant movements are happening in the components sector where much of the unglamorous engineering and manufacturing work takes place. Clearly, China has set out to conquer the global automotive markets, but not by trying to flood the US prematurely with Chinese-branded vehicles.

The US trade deficit with China will hit $300 billion this year. It’s politically convenient to blame China’s yuan policy. But the driver is an enduring strategy by US corporations. And now a trade war has broken out.... The Trade Debacle With China.

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Reader Comments (5)

If I recall correctly, I read a few weeks ago that Daimler was attempting to sell 10% of the company to the Chinese. If THOSE folks are throwing in the Chinese towel, the rest of the non-Chinese automotive must truly be DOOMED.
December 29, 2011 | Unregistered CommenterShibumi
Shibumi - Thanks for your thoughts. I'm keeping my eyes on it. The auto industry certainly thinks China is the future. And that's where a big part of the money is going. Someday, there will be something called "overcapacity" ... and that's when China-built cars will start sloshing around the world.
December 30, 2011 | Unregistered CommenterWolf
When China was opening up her economy, like any other western country, lured by the big market sold off their technology to China. When China introduced highspeed trains or launched a space ship, the native's effort is not decried, but not proportionate to their technological prowess. In the trap laid by China, many western countries fell head over the other in selling off their technology. GM sold their technology/lines in anticiaption of big business to scuttle Ford's entry and so on. China cleverly played one upon another to get her work done and the point of no return is reached. The same product with some tinkering, she is going to sell it to the western counterparts at a throw-away price, killing the competition and expanding the market , all in one shot. Thanks to the avarice and greed of the western companies and foresight and negotiation skills of the chinese govt. It is heads I win and tails you lose.
January 9, 2012 | Unregistered CommenterRajan
many people may think a large population may make large car sales, but not true in China, money is in the citys and owning a car in the city is expensive even by western standards, car's do need a parking space and at $25.000,- U.S. dollars people need to save for 2 cars at their first car purchase.
city government in China are turning in to western ticking/ fining machines, someone has to pay for big government , so the car will be the golden goose.
And now that you have your car in China, you will need to go to work , sit in traffic and have no place to park, so China may become the factory for the worlds car industry but large car sales number forever are not likely.
moreover soon the flood of low mile/km cars will hit the market,, remember Chinese live, work and play in the City, the few that venture out are limited, and the subway system becomes very attractive again after you have swallowed your pride of over spending on that import BMW and sitting in traffic.
February 7, 2012 | Unregistered Commenterlucas
Auto industry basically depends upon the sales and marketing of vehicle models. If the sales and marketing going right, then it will be great for the auto industry and the growth of the automotive industry become stable. Otherwise it will not be a healthy growth or even the auto industry will be in loss. China is the largest automobile market in Asia. So, obviously the growth of auto industry is here. Now, China becoming the most popular and profitable automotive market around the World and for that reason, the USA auto industry also drifting towards China for its business and marketing.
August 8, 2013 | Unregistered CommenterPaul Sturling

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