It wasn’t long ago that many commentators expected the Chinese to begin exporting vehicles to the American market and dramatically undercut the price charged by American, Japanese and Korean automakers. Warren Buffet, for example, famously invested in electric car maker BYD.
But just as Buffet found that BYD was no where close to internationally prevailing quality standards, so too is the entire Chinese auto industry finding it far more difficult than it expected to compete against the incumbents. I researched this in Shanghai in 2008 when I examined the relationship between General Motors and Shanghai Automotive International Corp. (SAIC.) The Chinese have about 140 auto companies affiliated with municipalities or provinces. They had assumed that by forcing foreign manufacturers to establish joint ventures with Chinese companies, the Chinese would be able to siphon off key technology, management know-how and the like. The clear Chinese strategy was to draw the foreigners in, learn how they did what they did, and then do it cheaper.
The problem was, GM and other incumbents understood the game and played it beautifully. Here is the latest piece of evidence in today’s Wall Street Journal that the Chinese may never be able to mount an international push with their automobiles.
Chinese Cars Fall Farther Behind
The Xiali, once a status symbol, struggles to keep pace with Volkswagen and Chevrolet
ENLARGE TIANJIN, China—Two decades ago the most popular car in China was the Xiali, an unassuming sedan that nevertheless lent its buyers a feeling of wealth and success.
Today, more than three-quarters of the new sedans that Chinese customers drive off the lot are foreign-branded cars like Volkswagens and Chevys. Xiali’s star has faded, joining the growing ranks of struggling domestic brands hoping to shore up sales and stay relevant in the face of what is expected to be a brutal shakeout in the years ahead.
In January, Xiali’s parent warned it expects to report a loss of as much as 1.75 billion yuan, or $280 million, for 2014. That would mark its second consecutive annual loss. After three such years, its shares could be delisted.
The Xiali is losing customers such as Liu Jiaxiang, who says he grew tired of glitches ranging from broken door handles to faulty interior lamps over three years. “When it was passed by a big truck on the highways, I could feel it shaking,” said the 28-year-old engineer. Last year Mr. Liu bought a Peugeot 508.
Xiali’s maker, state-backed Tianjin FAW Xiali Automobile Co., will offer its first automatic transmission model this year as part of a planned comeback. “I’m confident that Xiali will survive,” said Zhang Zhigang, a spokesman for FAW Xiali. “When people are aware of the benefit of small cars, such as fuel efficiency, they will come back.”
Even as China’s car sales grow at a 10% annual clip, many of its domestic auto makers are expected to report 2014 results that will be their worst in years. Great Wall Motor Co. , considered a rising star, projects a 2% decline in net profit for 2014, its first year-over-year drop since 2008. Geely Automobile Holdings Ltd. , whose parent company owns the Swedish Volvo brand, warned of a roughly 50% slump in last year’s net profit, its first year-over-year decline since 2002. Great Wall cited hefty research expenses and Geely blamed its drop on a 24% slump in its overall car sales.
Government data shows that local-brand passenger vehicles accounted for 38% of China’s domestic market in 2014, down from 46% in 2010. For sedans, local brands’ share fell to 22% from 31%.
Foreign auto makers are launching more-affordable cars, entering into what used to be a Chinese redoubt. Rising affluence has left Chinese consumers favoring foreign-designed cars, which are perceived to be safer and stylish. Meanwhile, China five years ago cut back on subsidies that helped local brands.
Chinese companies are closing the quality gap but still trail foreign brands. Chinese brands had 131 problems for every 100 vehicles, according to a quality survey from J.D. Power & Associates last year, compared with 155 in 2013. By contrast, foreign brands had 95 problems per 100 cars, the survey found.
Meanwhile, more Chinese cities are restricting the number of new license plates they hand out to reduce traffic and pollution, with some cities adopting a bidding system for licenses. Analysts and car makers say the limits hurt local brands because they encourage car buyers to buy larger, more expensive cars to avoid hanging a costly, hard-to-get license plate on a cheap ride.
“At most five domestic brands could survive,” said Jiang Xinguang, an executive director at China Automobile Dealer Association. According to the association, there were 25 Chinese sedan brands available for sale in January. “Without sustainable profit growth, how can they continue with research and improve competitiveness? It’s a vicious cycle,” he said.
Like many Chinese auto makers, FAW Xiali has powerful state backing. Half of its stock is controlled by state-run auto maker FAW Group Corp., which is a major Chinese partner of Volkswagen AG and Toyota Motor Corp. FAW declined to comment.
The Xiali became a symbol of Chinese progress in the 1990s, when much of the country still rode bicycles and people had few other options. By 1998, a year before Xiali went public, it sold nearly 100,000 cars, accounting for 20% of China’s car sales for that year.
Xiali’s troubles began in 2011 with the removal of the small-car subsidies, knocking its profit down 64% that year. Intensifying competition with Volkswagen, General Motors Co. , Nissan Motor Co. and other foreign brands further hurt results. Xiali also said it has been hit by new local restrictions on car purchases meant to reduce traffic and pollution. A Tianjin registered license plate costs more than 20,000 yuan, or half of the retail price of some Xiali cars.
“Naturally, this has made many people stop and think twice,” said Chu Da, a dealer for FAW Xiali in Tianjin. “I would feel very lucky if I could sell 40 cars a month,” he said, adding that volumes are just one-tenth of what they were five years ago at his shop.
FAW Xiali also owns Weizhi, another low-cost brand. The two brands sold a total of 72,000 cars, down 45% from a year earlier and less than a third of the sales volumes in 2010.
FAW Xiali has started to shift some of its focus to build sport-utility vehicles, which are increasingly popular in China. In October, FAW Xiali released its first SUV model under the new brand Junpai. The company says it is working on another compact SUV model.
With the launch of the SUV, “we hope to build an image of youth and fashion,” said Mr. Zhang, of FAW Xiali.
—Rose Yu
