Chinese Cars To Hit European Market

In recent years, German car manufacturers saw just one market of the future: China. But things may turn around soon, as Chinese auto producers start looking to the European market.

German companies like Volkswagen, BMW and DaimlerChrysler have all invested heavily in China, building new factories there in order to benefit from the country's automobile boom. Yet China could become a worry to European carmakers in the future.
The Chinese are not buying as many compact cars as German companies hoped for. And now, Chinese carmakers are beginning to export inexpensive vehicles to Europe.
The first shipment of the Zhonghua, a classic notchback sedan, is expected to arrive in the German port of Bremerhaven this fall. With the caliber of a Mercedes-Benz E-class, the five-door model from China has got a smaller price tag at under 20,000 euros ($23,875).
The sedan built by car manufacturer Brilliance, the joint-venture partner of BMW in the northeastern Chinese city of Shenyang, already got a positive reception at the automobile trade fair in Leipzig earlier this year.
An appealing car, with an exotic touch
Brilliance wants to export 3,500 cars to Europe this year. In the coming years, this figure is supposed to continually increase by 20 to 30 percent.
"One of the benefits of the Zhonghua is the fact that the car is from China and therefore presents a new face on the European market," said Brilliance's export manager Liu Juan. "It's very appealing, with a hint of an exotic touch."
"Another benefit is that though it may be a car from China, it is thoroughly a European automobile: designed by an Italian and optimized by Porsche," she added. "In this sense, it fulfils European needs."
Three Chinese manufacturers export to Europe so far. This week, 200 of the first SUV Landwind were delivered to the Netherlands. They have reportedly all been sold already.
The model by Jiangling Motors, which Ford also has a stake in, costs between 17,000 and 18,000 euros -- half of the next affordable competitor.
Beijing's status mentality
But why should China go to Europe and the United States when international manufacturers currently have one goal only: China, the fasting growing car market in the world?
The answer is simple: sales difficulties in their own country and the enormous status mentality of the Chinese government.
Beijing wants to prove to the world that it can now build cars suitable for the world market. Without financial support from the government, the Landwind would never have been able to drive off the production line in Jiangxi province.
The price is decisive
Europe might still be looking down its nose at Chinese cars. But market observers reckon that the Chinese might follow the same road as the Japanese, which convinced more and more customers in the long-run with low prices and much technological gadgetry.
In times of economic recessions, many a customer will think twice if he can refuse a deal 30 to 50 percent less just because of the "Made in China" stamp, said Liu Juan.
"The price is decisive," she said. "In the future, we want to increase our competitiveness even further in all sectors: management, production, sales and finances. If we succeed in achieving the same level of management as our foreign competitors and, at the same time, at Chinese prices, then we can certainly beat them."
China can score in the long-term
The ambitious aspirations of Chinese manufacturers on foreign markets reflects a change in China's industrial policies. In the past 20 years, China has systematically built up its production base by bringing foreign companies like Volkswagen or General Motors into the country.
Estimates show that the production capacities of the Chinese automobile industry will triple by 2007 to 15 million cars per year. This would put it 50 percent above the expected demand.
Industry experts are of the opinion that the Chinese can score mainly with inexpensive models in the compact car sector in the long-term, as they offer good design and technology.
The Association of German Automobile Manufacturers VDA isn't worried, though. VDA president Bernd Gottschalk said that China will not achieve a significant market share in the next five years.

Author: Kerstin Lohse (sac)

http://www.dw-world.de © Deutsche Welle

With the caliber of a Mercedes-Benz E-class

China's still-developing economy is far more inefficient than the juggernaut of our nightmares. And those inefficiencies will, over time, take a bite out of Chinese economic growth.

That may already be happening. The Chinese government recently lowered its forecast for 2005 economic growth to 8%. That's a rate most countries in the world envy, but for China it's a slowdown from the 9.5% growth in the first quarter of 2005 and from 9.4% for all of 2004. And some analysts are projecting that growth could slow to 6% or 7% in 2006.

The problem seems to be a developing profit squeeze -- ironic, no? -- now hitting Chinese companies. The costs of raw materials such as oil and iron ore are up, but Chinese companies can't raise prices. Remember how mega-retailers such as Wal-Mart Stores (WMT, news, msgs) used the threat of buying from low-cost Chinese manufacturers to wring almost every last penny of profit out of suppliers based in the U.S. and Europe? Well, now Chinese suppliers are getting a dose of the same medicine, and it hurts. And even in China, companies hire fewer people, expand more slowly and build fewer new plants when the books show red ink.

The Chinese profit squeeze
The profit squeeze is widespread. It's hit the petrochemical sector, where Jinzhou Petrochemical on July 13 forecast a loss of $70 million for the first half of 2005. That's 10 times higher than the loss the company predicted for the same period back in April. Profits in China's auto industry are projected to decline by 50% in the first half of 2005, and profits actually have already declined 60% in the first four months of 2005, according to the Chinese Ministry of Commerce. TCL, one of the country's largest companies, will lose enough money in its mobile-phone business to throw the whole company into the red for the year.

Press releases from individual Chinese companies and Chinese government ministries reel off a list of reasons for the profit squeeze. The standard causes are sluggish sales growth, fierce price competition and rising prices for raw materials.

Not surprisingly, though, no one in Beijing ever adds to the list the inefficiencies of a Chinese economy that's still relatively primitive and shockingly bad at allocating capital. The result is massive over-investment in sectors already bloated with excess capacity.

Take a look at the steel industry. Steel production in China grew by 23% in 2004 to 273 million tons. It is on trend to grow by another 50 million tons, or about 20%, in 2005, and it is projected to increase by yet another 50 million tons, or about 15%, in 2006.

Considering that major steel-consuming companies are growing at much lower rates -- auto-industry production grew by just 1.5% in the first four months of 2005, for example -- is it any wonder that steel prices are falling?

And yet, it's still remarkably easy to raise massive amounts of money in China to build a new steel plant. On July 12, Wuyang Steel announced a plan to invest $700 million to build an iron ore and steel-plate plant in central China.

Politics drives capital allocation
Why? Because capital in China is still largely allocated by politics. You can raise money to build a steel mill if national politicos, who want to develop the slowly growing inland provinces, put the muscle on national banks to make the loan. (And, of course, you get the loan if you've dressed up your board with the sons and daughters of high-ranking party officials who can put the muscle on just about everyone.)

Any investor in the United States watching the judge hand down a 25-year prison sentence to former WorldCom CEO Bernie Ebbers knows our own capital markets don't do a perfect job of allocating capital. But our markets are still much more efficient than the Chinese system.

After misallocating capital, the Chinese system then requires a top-down plan from the officials in Beijing to fix the mess. For example, a day after the announcement of a new steel plant from Wuyang Steel, China's State Council announced a policy to consolidate the steel industry by driving smaller steel mills out of business. The goal is to put 70% of the country's steel production in the hand of the country's 10 largest steel makers by 2020. (China's top 15 steel makers now produce about 45% of the country's steel.)......

Moving China toward a consumer economy (and away from an export-driven emphasis on industrial development) would, in my opinion, be the best way to raise living standards for rural Chinese. It would also be good for workers in U.S."

Opel on the Outside, Mao on the Inside

By Gerald Traufetter in Antwerp, Belgium

A Dutch car dealer is about to bring the first Chinese-built cars to Europe. It's not the prettiest car ever, but it is cheap. Most importantly, it's a powerful symbol of a globalization process that has seen European companies transferring technology to the Chinese for years. Now, with their know-how, they want to tackle the European market.

DER SPIEGEL
Dutch car dealer Peter Bijvelds: "The work is really pretty bad."
If Peter Bijvelds were a normal car dealer, you would be right to question his sanity. "This here," he says as he runs his finger nails over the dashboard, "is pretty cheap plastic."

Then he pokes his finger at another cheaply made part of the car. "The work is really pretty bad." If that wasn't already enough to keep one from buying the car, he then adds: "The motor is also a little bit weak."

But Bijvelds is beaming on this rainy summer morning. He then jumps into his real sales pitch: the price of the new 5-door sports utility vehicle is only €17,000. "You can't get as much car as this for that amount anywhere." And the 27-year-old Dutchman doesn't need to worry about advertising the car. He's getting tons of free publicity. Surrounded by camera teams, he proudly shows off three long rows of Landwind cars, a Chinese brand most European automobile industry insiders have never even heard of.

The cars are located on the quay at the port in Antwerp, Belgium, and they are creating a small chapter of business history. They are the first cars produced by the Chinese to reach European shores. D-Day brought American automobiles to Europe in 1944 and the Japanese arrived in the 1960s. Now, a new wave is invading Europe: "Made in China."

"The car is 40 percent cheaper than a comparable Western model," says Bijvelds, who clearly enjoys the shockwaves he is sending through established automobile manufacturers in Europe. "All 200 of the cars here have already been sold."

But the Landwind is much more than a Chinese "Yugo" -- it's a tinny symbol of globalization. It's being produced by Chinese workers who, according to Bijvelds, receive a monthly salary of 40 to 50 euros (that's not even a fraction of the average monthly wage of €2,800 at Opel's plant in Bochum, Germany). The engine comes from Japan's Mitsubishi and the body closely resembles the Opel Frontera, which used to cost €30,000 until General Motors suspended its production a year ago. Thirty percent of Landwind's manufacturer, the Nanchang-based Jiangling Motors Company, is owned by American car-maker Ford. And General Motors gave the Chinese permission to use the Frontera's design. Indeed, the connections to the west can be seen everywhere in the project.

The irony of bringing Chinese cars to Europe doesn't escape Bijvelds, either. He says the way western car manufacturers deal with China is a bit schizophrenic. Everyone from Volkswagen to BMW wants their autos to be represented on the Chinese car market, one of the world's biggest. To do so, they've built modern factories in the Middle Kingdom, they've handed over the expensive technologies they've developed through licensing agreements and now they can only look on defenselessly as their own markets are attacked using weapons of their own creation.

But experts apparently think the Chinese tigers could present a real business opportunity for European car wholesalers like Bijvelds. And for his part, the Dutch importer is also negotiating with other Chinese firms to distribute their cars on the European market. This year alone, Bijvelds intends to sell 4,000 Landwind sport-utility vehicles.

So what do his customers get? Well, a car that's a lot like one of the fake Rolexes that are made in small, make-shift factories in Shanghai. The watches work for a few years, then the battery dies. You just replace the battery and the solid quartz clock mechanism starts ticking again.

Opel
The Landwind is an almost perfect copy of the Opel Frontera, pictured here, which ceased production last year.
Viewed from its exterior, the Landwind looks like a perfect copy of the Frontera. You can only see the sloppiness after you open the door. The buttons are cheaply attached and the floor is covered with poorly applied fake leather. But it's the fumes from the factory fresh cars that really get you -- they're so strong that they'll likely be giving new owners headaches for months to come. The seats are made of matching leather, but they don't have good footing when the car turns, which it does easily, with only the slightest turn of the steering wheel. Of course, there's also the clutch and the transmission, which are reminiscent of those in a delivery truck. Then again, Bijvelds isn't promising his customers any more than that.

For his part, Bijveld defends the car's durability. For at the heart of this car, like the Rolex with the solid quartz mechanism, the guts of the Landwind is a Mitsubishi motor. In fact, it's the same exact motor used in Mitsubishi's own Outlander SUV. It may not be perfect, but the engine does have a proven track record.

In fact, Bijveld believes the car has been too solidly built for the nuances of the western car market. "The Chinese engineers have put in a chassis and tires that are intended for the sand and other off-road driving," he says. After conducting test drives, Bijveld asked the Chinese to make modifications. "How are they supposed to know that people here prefer to drive their SUVs in the city?" he asks. For the Chinese, the first foray into the European automobile market is the start of a steep learning curve.

the caliber of a Mercedes-Benz E-class