April 22, 2005
China Looms as the World's Next Leading Auto Exporter
By KEITH BRADSHER
SHANGHAI, April 21 - Industrial heartlands from the Great Lakes
region to Germany, look out - here comes the Chinese auto industry.
A senior DaimlerChrysler executive, Ruediger Grube, startled a
roomful of journalists and his own aides at the Shanghai Auto Show on
Thursday by disclosing that the company intended to export small cars
from China to the United States. Daimler is already in talks with one
of its Chinese joint-venture partners to build a factory for the
exports, he said, and would like to work out the details and make a
final decision on the project in the second half of the year.
But any cars from such a venture would be only part of what now seems
to be shaping up as a broad assault on global automotive markets by
Chinese companies and the Chinese divisions of multinational
companies.
China's auto parts exports of everything from Delphi parking-brake
components to Johnson Controls seat covers are already increasing to
countries around the world. Sizable exports of fully assembled cars
by Chinese-owned automakers like Hafei and Chery have already begun
to developing nations in South America, Africa and the Middle East.
DaimlerChrysler's negotiations now make it increasingly likely that
significant numbers of cars will be shipped from plants in this
country to the United States and Europe as soon as 2008.
Robert A. Lutz, the vice chairman of General Motors, said here that
he expected at least one of China's homegrown automakers to be
successfully exporting around the world in the next five years.
"We're rapidly approaching that point," Mr. Lutz said. "I wouldn't
venture to say which one it will be."
Until recently, high costs for auto parts, a scarcity of top-quality
steel, a shortage of experienced engineers and a history of uneven
quality had prevented China from using its inexpensive labor to gain
any significant share of the world automotive market.
But all these problems, including quality, are gradually being fixed,
even as Chinese industrial workers, at $2 an hour or less including
benefits, remain among the lowest paid in the world.
"In terms of quality, the cars from China and the cars from Korea are
the same," said J. M. Noh, the president of Beijing Hyundai and an
automotive-quality expert who spent 15 years in Hyundai's
quality-control departments in South Korea before coming to the
company's joint venture in China.
The prospect of fully built cars from China appearing in showrooms in
the United States and Europe risks renewed international
confrontations over China's trade and currency policies.
The Chrysler unit of DaimlerChrysler does not now sell a very small
sedan of the sort the company proposes to import from China; its
smallest offering in the United States is the slightly larger Dodge
Neon. But the planning for such a car is likely to stir memories of
how Japan and South Korea each started by dominating the American
subcompact market and then steadily moved to larger vehicles.
In Detroit, the United Automobile Workers responded to the
DaimlerChrysler announcement with a blistering attack on China and on
Washington's trade policy.
"The $1.50-to-$1.95-per-hour labor cost in the Chinese auto industry
is not arrived at by any 'natural' operations of a free market," Ron
Gettelfinger, the union president, said in a statement, "but through
artificial repression of wages by a brutal regime which outlaws
independent trade unions and jails more labor activists than any
country in the world."
"China's repression of its own workers and its manipulation of its
own currency," Mr. Gettelfinger added, "are unfair trade practices
which must no longer be tolerated by the U.S. government."
In China, Honda has just finished building a factory in Guangzhou,
near the southeast coast, for exports to Europe starting in late May
or early June. More speculatively, the Chery Automobile Company has
announced plans to begin shipping some cars to the United States in
2007, although it faces formidable difficulties in developing an
American dealer network.
But auto executives say that the real challenge from China, at least
for the next several years, will lie in the auto parts industry. The
Commerce Ministry forecasts that Chinese automotive exports, mainly
parts, will rise to a range of $70 billion to $100 billion by 2010
from $11.8 billion last year.
"I see more opportunities for the components base and major
subassemblies for export," said James J. Padilla, president and chief
operating officer of the Ford Motor Company.
At the same time, China's need for imported auto parts is leveling
off as car sales slow in its domestic market and automakers find that
they can more easily buy locally. After running trade deficits in the
auto sector for the last three years, China's automotive exports in
the first two months of this year, at $2.01 billion, were almost
double its imports, at $1.17 billion.
Continental Teves, for example, is now able to make or buy nearly all
the parts for brakes that it sells in China except for antilock
braking system valve blocks, which still come from Germany.
BorgWarner has begun making timing belt gears and sprockets in China
for Volkswagen's huge operations here, instead of importing them from
one of its factories in Italy.
The Chinese government is pushing not just parts makers but auto
assembly plants to export. Regulations bar multinationals from owning
more than 50 percent of auto assembly joint ventures in China.
But Beijing authorities made an exception two years ago and allowed
Honda to own two-thirds of the assembly plant just completed in
Guangzhou after it promised to export all the cars from that factory
to Europe.
Asked whether DaimlerChrysler was seeking a similar deal for the
factory it is negotiating to build for the production of small cars
for the American market, Mr. Grube said only that a number of details
of the operation were still being worked out.
To be sure, China's auto sector still faces several obstacles to
exports - most notably the uneven quality of many small parts and the
lack of a dense infrastructure of reliable local suppliers of the
many different screws, rods, bearings and other parts essential in
assembling larger auto components.
Timothy R. Donovan, executive vice president and general counsel at
Tenneco Automotive, said that quality problems had been a significant
cost in Tenneco's manufacturing of shock absorbers, struts and
mufflers, which are sold almost exclusively in the Chinese market.
Tenneco has to employ extra workers to sort and check incoming parts
because defect rates are 15 to 20 percent higher than in advanced
industrial nations, Mr. Donovan said. But the workers inevitably do
not catch all the defects, which are found later in the production
process or even on arrival at the assembly plant, he said.
The later a defect is found, the higher the cost of rebuilding or
throwing out the entire part. To make matters worse, the same grades
of steel often cost more in China than elsewhere because of high
local demand, and many high-strength grades must be imported at even
greater expense.
"Their supply base, from a cost standpoint and a quality standpoint,
is not up to world-class standards," Mr. Donovan said, while adding
that quality is now improving.
While Chinese parts now hold a large and rapidly growing share of the
market for lower-quality replacement parts purchased by repair
garages, automakers in industrial nations have so far been wary of
relying on parts from China for installation in new cars.
But this, too, is beginning to change, with Mr. Donovan saying that
Tenneco is starting to receive requests from automakers to submit
contract bids for production in China.
Some Chinese manufacturers complain of receiving many invitations to
bid from European, American and Japanese automakers that have little
intention of buying, but want to use the bids to demand much lower
prices from long-established domestic suppliers.
"These groups come in from Ford or G.M.," said Todd Fortner,
president of the Changshu Automotive Interiors Company, "and we don't
know if they're just surfing" for low bids. "Sometimes, I get tired
of answering all these requests for quotes."
The big question in the longer term, Mr. Fortner added, is whether
industrial nations will keep their markets open to imports and avoid
protectionism.
"The Chinese economy is capable of doing $100 billion" in annual auto
parts exports, he said, "but whether the U.S. economy or the European
economy has the stomach for it remains to be seen."
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