European Car Makers – The Chinese are Coming!

For those old enough to remember it there could be a sense of déjà vu in the current global automotive market.   Back in the 1970’s Europe and the US viewed Japanese car makers as a bit of a joke. Their cars were cheap with a tin-like feel, very much focused toward the non aspiring buyer interested more in purchase price and running cost than image, performance or longer term value. How that changed! Japanese re-sale values have been ahead of many mass produced western brands for years now as buyers came to realize the manufacturers were forging a new path in reliability and affordable quality engineering. Kia is adopting exactly the same approach. Their models come with a seven year warranty, unprecedented in the automotive world and specifically aimed at developing a brand image of long term reliability and solid re-sale values like the Japanese. As important as reliability was innovation. Japanese and then Korean car producers consistently offered models with more extras as standard, finding ways to bring new technology at an affordable price where western car makers continued to charge premiums.

Nick Reilly, chief executive of General Motors Europe believes we are making the same mistake again, only this time with China, according to an article in the Telegraph newspaper. Mr Reilly should know what he is talking about. He formerly headed GM’s Asian business and so has first hand knowledge of the Asian market. European and American automotive companies face a fierce battle to remain competitive and are at risk of being overtaken by Chinese and Korean manufacturers he said, “their (Asian) rate of progress in terms of technology, innovation and quality improvements is really remarkable and we are totally underestimating the technological advances they are making. The gap has completely shrunk. It is a tenth of what it was and a quarter of what we expected it to be. I think everybody thought we had 10 or 15 years before China became competitive, and that is just not true.”

The fact we are underestimating them is reflected in our political attitude that if they can sell a car competitively with so many extras and at that level of reliability and quality they must be cheating. Our response is to get protectionist. In Mr Reilly’s words, “Generally I think there is a complacency or a refusal to accept the huge economic shift there has been.”

Bemoaning the state of UK’s car industry, Mr Reilly said the weak pound should be a major boost to British car exporters but producers were failing to capitalize on the opportunity because their cost structure was severely impacted by the loss of the UK’s automotive supply chain. The UK now has to import so many of its car components on which a weak pound has pushed up parts costs mitigating what should be a margin improvement in the sales of finished cars. China, on the other hand, now has the largest internal car market in the world and although the manufacturing base is fragmented at present it is consolidating and ultimately a number of major producers will come to dominate as they have in the west. Meanwhile a massive supply base is developing in China that will only further fuel innovation and competitiveness in the years ahead.

Electric vehicles are an opportunity for western manufacturers in general and British car plants in particular to fight back. Nissan, Honda, and Toyota have committed to next-generation production in the UK. However Reilly warned that Europe was technologically behind Chinese companies in batteries and electrification, “The amount of money that China is investing is absolutely enormous in this type of technology,” he said. China has held its manufacturers back from an offensive on Europe to meet its massive home market, but for China to add 10% of extra capacity to develop exports is nothing at their rates of growth and extra 1.5 million cars flooding the European market though would be devastating.

–Stuart Burns

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