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China’s carmakers develop an appetite for foreign markets

Cracking export markets in Europe and the US is the next frontier for China’s global-minded carmakers. Next year, for example, Geely Automobile, based in Zhejiang, will start sales of its Lynk & Co brand in Europe after launching in China later this year.

Rival Chinese automaker Great Wall already sells a diesel pick-up truck in Italy, and plans to ramp up sales as well. This month, it made its global ambitions clear when it announced it would like to acquire Fiat Chrysler’s Jeep brand, though no formal discussions have started. Great Wall is also building a full assembly plant in Russia scheduled to open in 2018.

Chery is currently the biggest Chinese auto exporter, mainly to emerging markets, while Great Wall has the most experience exporting to developed markets, notably Australia, though volumes are quite low, says Janet Lewis, head of transport at professional services company Macquarie in Tokyo. GAC Trumpchi, the highest rated Chinese brand for quality, according to consultancy JD Power, plans to launch exports to the US in either 2018 or 2019.

All see conquering the top international markets as the route to becoming truly global. “Chinese brands are where the Japanese were in the 1960s and 1970s, or where Korean brands were in the 1970s or 1980s,” says Bill Russo managing director of Gao Feng Advisory in Shanghai.

Chinese automakers have long been reluctant to export. The country became the world’s largest car market in 2009, with some of the fattest margins on car sales, and Chinese brands have privileged access. Many have joint ventures with international companies that manufacture in China, giving the Chinese partners access to technology as well.

28m

Number of vehicles produced in China in 2016

Going abroad means fighting tooth and nail for comparatively thin margins against the likes of Volkswagen and Hyundai, and some brands prefer to consolidate their markets at home before venturing abroad. Compared to the 28m Chinese vehicles produced in 2016, total vehicle exports were 810,000 units, including trucks and buses. The five vehicle exporters were SAIC, Chery Automobile, BAIC Group, Brilliance Automotive and Anhui JAC.

Another reason for the reluctance to export is based on experience. The first wave of Chinese exports to western markets in 2005-2006 was a disaster. Chinese cars were at that point unable to pass stringent emissions and safety tests. Geely even appeared at the Detroit auto show in 2006, but its “China Dragon” car failed to take off, while Brilliance, the Shenyang-based carmaker, sold just 968 cars in Europe from 2007 to 2011, according to Jato Dynamics, after originally planning to ship 158,000 sedans there.

Flash car: Geely will begin exporting its Lynk brand to Europe in 2018 © Bloomberg

However, a decade later, the appetite for exporting has returned. GAC Trumpchi appeared at this year’s Detroit auto show and announced it would start exporting to the US next year. Geely likewise has chosen 2018 as the year it will test European markets with its Lynk brand.

Much has changed in 10 years. First, Chinese cars have vastly improved in quality. According to data from the Initial Quality Study by JD Power, the quality gap between Chinese and foreign brands in 2005 was yawning.

JD Power measured 380 problems per 100 Chinese-branded vehicles that year against 193 for international mass-market brands. By 2016, Chinese brands had 112 problems per 100 vehicles compared to an even 100 for international brands. “Made in China” is no longer the mark of bad quality it once was. Chinese factories already export Buicks and Volvos to the US market, while Ford will move global production of the Focus to the country in 2019. And Chinese Hondas are sold in Europe.

Cross-pollination with international brands has benefited China. Geely is buttressed by its 2010 purchase of Volvo and its Lynk and Volvo brands share technology platforms. Lynk cars could theoretically be made at Volvo plants in Europe or in China.

But one thing Chinese carmakers lack is the brand power that western carmakers have accumulated through decades of global experience.

Chinese brands are still forced to compete on cost, and lowering prices is nearly impossible for small volumes of exports to the top global markets owing to the cost of testing and meeting emissions and safety rules. For example, the prices Great Wall charges in Italy are not much lower than competitors such as VW and Hyundai.

But exporting is nonetheless identified by quite a few Chinese brands as an important strategy. Many are bumping up against growing competition in the crowded Chinese market, where 46 local brands now struggle against each other and international carmakers. Most analysts suspect that consolidation of the industry will eventually result in five or six large Chinese brands becoming national champions.

“We have already seen growing consolidation of brands and that will be a growing trend,” said Zhu Huaron, president of Chang’an Automobile, one of China’s largest domestic carmakers, during a conference in Chongqing in June. He is one of those who thinks that, eventually, China’s domestic brands will be reduced to five.

In that struggle for primacy, exports will be essential, says Macquarie’s Ms Lewis. “Exports are absolutely critical to get to the volume levels — several million — that are likely to be necessary to remain viable as a global automotive company.”

Additional reporting by Sherry Fei Ju

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