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Chinese Auto Companies look to the U.S. Market

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A May 22, 2007 report in the German newspaper Handelsblatt said China’s Chery Automobile wanted to re-examine its agreement to build small cars for Chrysler to be sold in the U.S. under the Dodge brand. In response, Chrysler officials said they were “confident” that an initial agreement with Chery will be finalized (Handelsblatt, 2007). The automobile business is expanding rapidly in China, making China one of the world’s largest automobile manufacturing centers. One of China’s long term goals is to rank among the world’s leading car producing and exporting economies (Fishman, 2006). Chances are, before long, American consumers will be visiting Chinese car dealerships such as Chery or Geely in the streets of America. However, before enjoying success in the U.S. market, Chinese automakers must address some key political, economic and communication obstacles.

The Political Perspective

From the political perspective, the question is whether Chinese companies will be able to accommodate Americans’ yearning for high quality, cost effective and “environmentally-friendly” vehicles that appeal to the American psyche, while countering negative stereotypes in connection with cheap commodities and Communism.

First, to enter the U.S. market, Chinese cars must meet environmental standards, but this could provide an opportunity if automakers can tap into the growing American concern about global warming. In terms of environmental friendly automobiles, so far only brands from Japan and South Korea, such as Toyota, Honda and Hyundai, have qualified. Chinese companies have a chance to seize this opportunity and offer high quality, fuel efficient, cost effective automobiles to experienced and discerning American consumers.

Second, Chinese automobile companies must accommodate the American psyche, which means creating incentives for the “average American” and countering negative stereotypes pertaining to Chinese brands. They will have to address questions like: “What makes Chinese cars unique?” and “Why should I buy a Chinese car?” Hyundai offers a great example. In 1998, the Korean company needed to give the American consumer a reason to buy a Hyundai. The company’s answer was “America’s Best Warranty:” six-year bumper-to-bumper and ten year or 100,000-mile power train coverage. By 2003, Hyundai’s sales had soared 315 percent to 375,119 cars (Sqautriglia, 2003). For shrewd American consumers, a new Hyundai, with its unprecedented warranty, became a much better deal than a used Honda.

Third, to counter the negative belief that Chinese autos endanger American jobs, Chinese companies ultimately need to follow Japanese and Korean models by creating jobs in America. For example, Toyota directly employs over 38,340 people, and has invested $16.8 billion in equipment and facilities in North America. Similarly, Hyundai America Technical Center operates from its 200,000-square-foot, $117 million headquarters in Superior Township, Michigan.

Fourth, Chinese companies only will have to downplay not only their “Made in China” label but also China’s political ideology of Communism. The concept carries a strong negative connotation in the American mind in part because students are taught at a young age about Americans battling the evil force of Communism throughout the 20th century against the Soviet Union, North Korea, Vietnam and Cuba.

The Economic Perspective

For Chinese manufacturers, the situation is somewhat similar to that faced by the Korean auto industry in the late 1980s, suggesting a possible niche for Chinese brands entering the U.S. market. At the same time, Chinese companies will have to negotiate with a much more demanding American consumer than did the Koreans.

Throughout the 1970s, demand from abroad accounted for less than 20 percent of the Korean auto production; the first Korean exports were sent to Ecuador in exchange for bananas (Green, 1992). The most important event in the development of the Korean auto industry was the oil crisis of the 1980s. Due to a 300% hike in the price of oil and domestic political turmoil, demand for cars fell by over 50 percent in South Korea. “Industry-wide capacity utilization plunged to a mere 26 percent, and all three Korean automakers [Hyundai, Daewoo, and Kia] faced bankruptcy” (Green, 1992). The Korean Institute of Economics and Technology concluded that the only way to salvage the auto industry was to export (Green, 1992). Similarly, with the increasing competition between brands from all over the world in China, Chinese brands will probably turn to foreign markets as a survival strategy.

The first step the Korean government took was consolidating the auto industry into just two suppliers, Hyundai and Daewoo, to avoid unnecessary competition (Green, 1992). Kia, South Korea’s third auto producer [now a part of Hyundai] was left to produce light trucks and would not enter the automobile market until 1988 (Green, 1992). While Daewoo created a joint venture with General Motors, Hyundai took the more aggressive route by setting up its own network of dealers in the United States (Green, 1992). In 1986, Hyundai introduced the simple but reliable Excel to the American market. Within the first four months, Hyundai had broken the record for the highest number of sales by a foreign brand in the first year (Green, 1992). In 1987, even though car sales were down 10 percent in the United States, Hyundai’s sales rose by 56 percent, selling a stunning 263,610 cars (Green, 1992). Another way of characterizing Hyundai’s success is to say that, by 1988, Hyundai had become the fourth leading exporter to the United States behind Toyota, Nissan, and Honda (Green, 1992).

What lessons can be drawn? First, South Korea was the first developing nation to capture a significant share in the American import market (Green, 1992). Second, the Chinese will be entering a very similar niche market in the U.S. – the entry level car market. In the 1980s, with low production costs, and ultimately a low selling price, Hyundai competed in the American market competing with used Toyotas and Hondas. The American auto industry, with high labor costs and other issues related to labor unions, had an incentive to build high-end cars for higher profit margins. The Japanese also opted to supply higher end vehicles because of American ceilings on the total number of autos Japan could export to the United States Thus, the Koreans were left with an open niche of entry level cars which they could drastically undercut price and cost. Koreans were offering what many Americans really wanted–new cars, but at used car prices.

Today, American automakers, with high labor costs of $28 USD per hour (The Economist, 2006), and financial difficulty still find themselves with an incentive to produce higher profit margin vehicles as compared with entry level cars. Japanese companies face some of the same high costs for a large portion of their output as their American competitors since many of the cars built for sale in the U.S. are assembled on American soil. This leaves the Korean companies and used cars as the competition for Chinese exporters. Chinese, with labor costs as low as $2 USD per hour (The Economist, 2006), can undercut the Koreans even taking transport costs into account just as the Koreans undercut the Japanese in the late 1980s. Research shows that developing nations normally lack the technological know-how to build cars that compete with the mid-level and flagship cars offered by established firms, but they do have the labor cost advantage that allows them to compete at the entry level. The Chinese can use Hyundai’s success as a model. Hyundai still undercuts Honda and Toyota in terms of price; but now, after 20 years, can also compete in terms of quality.

While it is true that market conditions are ripe for Chinese entrance to the American entry level market, it is important that Chinese firms consider the current American buyers, and how they have changed over time. In 1989, Hyundai saw sales drop 30 percent, and another 29 percent in 1990 (Green, 1992). The reason for this sudden drop was that the Japanese regained the incentive to supply in the entry level market. Such competition improved the quality of all cars offered for sale in the United States, including used varieties. Therefore, Chinese automakers will now compete with used Hondas and Toyotas instead of with used Fords and GM cars like the Koreans once did. This competition has also raised the American buyer’s expectations in a car. American consumers expect that their cars will last “forever,” regardless of the fact few consumers expect to keep their cars for very long periods. Further, American consumers expect high gas mileage in compact cars, and American law mandates high safety and emissions standards.

The Chinese automakers need to realize that American buyers are strikingly different from those in Mainland China. Americans are experienced and sophisticated shoppers for automobiles , American buyers are in a position to demand high standards from automobile suppliers. Comparatively speaking, Chinese auto consumers are relatively new to car purchases. In 1998, there were only 4.2 million privately owned vehicles in China (Sit and Liu, 2000). Today, with the rapidly growing middle class, there are over 20 million cars on Chinese roads (Dahl, 2005). With this growth there are a lot of first time car buyers. Some of the recent success of companies like Geely and Chery within Mainland China may be partly attributed to the less demanding Chinese consumers and undeveloped used car market.

The Communication Perspective

A Chinese auto brand will also face some communication challenges inherent in their journey toward success in the U.S. Two of the major ones are negative perceptions of China and Chinese brands by the Western world and their low proficiency in understanding local cultures when abroad.

A misunderstood country by the West, China appears to be a paradox. Historically, China has always triggered a sense of mystery, exoticism and sophistication from its ancient civilization (Hodder, 1999). Today, China is partly known as a country of Communism, cheap labor, counterfeits, and sweatshops (Kynge, 2006; Dubey, 2006). For example, The Wall Street Journal recently reported that Chinese carmaker Changfeng’s attempt at showcasing its new car models in Detroit is a demonstration of Communists lauding competition (Shirouzu, 2007).

Most Americans are comfortable buying U.S.-brand products made in China, but buying Chinese brands is a different game. “Sure, iPod may be manufactured in China, but since an American company retails it, we trust it more,” one U.S. customer explained (Dubey, 2006). Despite the ubiquity of Chinese-made goods in American’s everyday lives, research and anecdotal evidence suggest that association with China hurts rather than helps Chinese brands (Wang, 2007). “Chinese brands suffer from negative perceptions, and perhaps, negative realities, ” said Interbrand (2006).

In contrast, Chinese people view their country as being one of the most trustworthy nations (Ramo, 2006). Such a “best/worst” collision on the image of China endangers strategic planning as well as brand perception for Chinese companies overseas. Such a negative perception of China related brands threaten to generate stereotype, prejudice and discrimination and unpromising sales in the U.S. market for Chinese cars. To correct and counter such negative perceptions, Chinese auto companies need to modify their public image, open up direct communication channels with American customers, and learn to manage conflicts with American partners. Lenovo’s Liu said only after greater numbers of Chinese firms strengthen their overseas presence like Japanese companies did in the 1980s can foreign consumers understand that Chinese firms follow the rules.

Finally, Chinese auto companies, with limited experience of marketing and management in the U.S., face a new, cultural tariff. A recent World Bank report found that more than 85 percent of CEOs of failed Chinese joint-ventures attributed their difficulties to differences in managerial styles and corporate culture (Accenture, 2006). The most serious problem facing Chinese auto companies is a lack of strong international experience in marketing, management and communication. Possible conflicts between Chinese automakers and American consumers could stem from cultural misunderstanding or cultural ignorance on the part of the Chinese companies. The best policy of adaptation is to transform from “going global” to “going local.” It is important that Chinese companies strengthen their local association in terms of the extent of local participation in the business process. Chinese companies need to proactively participate in local community-building efforts and to demonstrate good corporate citizenship, perhaps through charitable works and other community involvement.

Conclusion

Chinese companies are facing an uphill battle when considering entering the U.S. auto market, having to downplay their country’s reputation for manufacturing cheap goods and to deal with their country’s political ideology, in addition to facing new communication and business challenges. However, as the domestic competition in China continues to grow, exporting abroad, and especially to the massive U.S. market, may be necessary for survival. To achieve high performance, Chinese auto companies need to identify their competitive advantages and build the necessary operational and communication skills to capitalize on these opportunities.

In addition, currently the image of products “Made in China” is in crisis. Multiple issues have surfaced in the international trade arena concerning the quality of China made products. From contaminated pet food to lead-painted toys to poisonous toothpaste, American consumers are becoming even more skeptical of the quality of Chinese products and services. The Chinese government and Chinese companies will need to improve image management for long term credibility. A lot needs to be done to progress toward the day that “Made in China” equals high quality, safety and reliability. If Chinese car manufacturers desire to succeed in American markets, much needs to be communicated to the consumers about the quality, service and maintenance plans for cars made in China.


References

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