Toyota's loss isn't quite China's gain
Like the rest of the global carmaking industry, Chinese auto manufacturers are looking for ways to capitalize on Toyota's setback. And they like to talk big—at last month's Detroit Auto Show, BYD Auto reiterated its ambition to be the world's biggest carmaker by 2025. But the reality is that China's carmakers are still at an early stage of development—and their best bet for growth may be to stay at home.
Chinese auto firms' main assets are young, motivated engineers, a hard-working labor force and an ability to manufacture cars at low cost. China's best-selling model last year was the BYD F3, a Toyota Corolla look-a-like that starts at just $10,000 and offers surprising options like backup radar, 8-direction seat adjustment and dual airbags. The Chery QQ, a perennial favorite among car buyers in second- and third-tier cities, starts at just $4,000. When it comes to innovation, the Chinese excel at cobbling together parts already developed by vendors operating inside China, thereby avoiding research and development costs. The BYD F3, for instance, is powered by an engine and transmission purchased from Mitsubishi. The QQ borrows styling cues generously from the Chevrolet Spark. Some foreign-owned parts makers operating in China's auto industry say that Chinese R&D stands for "receive and duplicate."
What Chinese automakers lack is a strong culture of quality and a system that assures a consistently high level of reliability for every product that goes out the door. Many people working in car plants in China today do not have a driver's license and are unfamiliar with the basic operations of a car. One plant manager shared his exasperation at finding cars on the final assembly line with rear view mirrors facing the front of the car. The company founders are also aware of a giant gap between their own individual genius and the capabilities of their first line of management. Talent in the middle is thin, and executive departures are frequent.
Those shortcomings are mostly a result of youth; BYD, for example, has been building cars for less than five years. It was only a few years ago that Chery cars were mocked with a popular rhyme in Mandarin: "Qirui, Qirui, xiuche paidui," or "Chery, Chery, get in line for repairing."
The nature of China's car market also helps explain why Chinese car makers struggle with quality: Seven out of 10 car buyers in China this year will be taking a car home for the very first time. Without prior ownership experience, they tend to tolerate more quality glitches than first-time buyers in America and Europe. Owners of Chinese cars rarely experience major breakdowns like engine failure or a broken axle, but they do face chronic irritations like windows rolling only part of the way up, loose knobs, inadequate heat or excessive wind noise.
A culture of quality is not something that can be bought off the shelf or developed overnight. Despite their grand plans, Chinese carmakers will find it hard to break into the developed world until this shortcoming is well behind them. In the meantime, their best option for overseas expansion is to continue exporting into developing markets where incomes and quality expectations are both modest. In 2009, China's top five export markets were Algeria, Vietnam, Syria, Egypt and Iraq. In these markets, customers will tolerate minor flaws in a basic vehicle that transports them from Point A to Point B—so long as the car is affordable.
Building an export business in developing-country markets, however, can be precarious. China's car exports dropped by a stunning 50% in 2009. The main culprit was fallout from the global financial crisis and new cases of protectionism in the Ukraine and Russia. As a result, look for China's car companies to concentrate most of their resources at home, where car sales by unit exploded by 46% in 2009 compared to 2008 to become the world's largest market by vehicles sold.
An even more compelling reason for staying at home is that China is different from Japan and Korea. Japanese and Korean brands had little or no foreign competition at home, so they naturally felt the need to enter the American market to prove their competitive worth. China, on the other hand, already plays host to all of the world's best automakers.
Chinese automakers now control only 30% of the domestic car market. If their brands can steadily raise quality and market share at home, they will have proven themselves capable of competing anywhere in the world. This stay-at-home, practical approach also reduces the probability for the kind of unhappy overseas drama now besetting Toyota in America.
As Chairman Mao Zedong used to say: "Who's strong and who's weak doesn't matter much. What really counts is who's getting stronger and who's getting weaker." In the wake of its massive recall, Toyota inevitably will be seen as a less dominant competitor. Meanwhile, if quality at car firms like BYD and Chery continues to improve, then the Chinese will have moved one step closer toward their ambition of building high-quality cars for the world.
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