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Chinese carmakers prepare for Europe

You might wonder why Chinese carmakers would want to go abroad: China’s automotive sales were up 53% in 2009, with 13.6 million units sold, making it the biggest car market in the world.

Yet Chinese car firms have been gunning hard for sales in the UK and western Europe, both deemed as vital to global expansion plans developed by automakers BYD and Chery, explains Yale Zhang, a Beijing-based auto analyst at investment bank CLSA.

“They know that if you put Russia, the Middle East and Latin America together they’re still worth less than half the value of the EU market,” says Zhang.

BYD and Chery have separately vowed to become the world’s largest automakers in volume terms within the next decade.

Wang Chuanfu, chief executive of BYD, told the People’s Daily newspaper that selling cars in both the UK and USA was part of his game plan.

Great Wall is shaping up to be one of the first Chinese manufacturers to make it to the UK after signing a deal with Subaru, Isuzu and Daihatsu importer IM Group to import its vehicles from 2011.

IM Group had been sizing up a deal with Great Wall early in 2009 and now it has been finalised the deal will see Chinese vehicles enter the Baltic states of Estonia, Latvia and Lithuania first this year and then the UK and Scandinavia in 2011.

Quicker than predicted

This entry of Chinese models into the UK will be much quicker than analysts predicted, with many citing at least another four years before manufacturers from China broke through.

It’s unclear what models Great Wall will be bringing to the UK, but it insists all have been built to meet EU
approval standards which will deliver the “crash-worthiness equal to European and Japanese vehicles”.

The problem that has dogged Chinese manufacturers from breaking through into the Western markets so far is that of design and safety.

Executives behind China’s privately invested carmakers are usually an ebullient bunch, but after a near decade of shipping cars to Africa and the Middle East, forerunners Chery, Geely and BYD are finding the fuel emissions and safety rules of the UK and western Europe tougher going.

Having lately watched Brilliance Auto struggle to sell its electric cars in Germany, Geely and its peers are using the global recession as a chance to fix fatal flaws in their sales model, explains Songlei Mei, chief analyst at the Shanghai offices of JD Power.

He identifies three key problems for local automakers to sort out before they get cars on British roads: “The problem is one-third a design problem, one-third manufacturing and one-third a marketing problem,” explains Songlei.

The carmakers, Songlei continues, have hired foreign designers, but have neglected to bring manufacturing processes up to speed with what the designers are coming up with.

“You can hire talent, but then you find that you don’t have the manufacturing equipment or the know-how to build what they design.”

Part of the problem is that neither BYD or Geely have a carmaking heritage: the former is a battery maker, the latter originally a fridge and motorbike maker.

The recent purchase by Geely of Aus-tralian auto-parts maker Drivetrain for $40 million (£24.7 million) is part of the company’s efforts to improve manufacturing quality, says Zhang.

Privately owned firms such as Geely – which have watched their state-owned peers SAIC and FAW solve the design-manufacturing conundrum by joint ventures with the likes of Volkswagen and GM – have lately been buoyed by the availability of credit from state-owned banks.

They also get state help in opening export markets, says Yale Zhang, noting government-funded overseas publicity campaigns pushing car brands such as Geely.

Dominik Declercq, China representative of European carmakers’ association ACEA, has watched Chinese carmakers bring batches of cars into the EU, below the radar of Brussels regulations which demand that carmakers with imports over 5,000 units must comply with EU laws on emissions and car safety.

Quash worries over safety

Declercq says European carmakers welcome new competition on home turf, but advises Chinese brands to quickly quash any worries over safety: “European consumer organisations started testing and came up with horrible crash test results.”

Declercq sees this as a fatal weakness – Chinese carmakers share a lack of experience in dealing with EU product safety frameworks, trade unions and consumer bodies.

“These are not factors of doing business in China.”

Then there’s fuel: Chinese carmakers are struggling to move to Euro V from Euro IV emission standards, which were introduced to large Chinese cities like Beijing only last year.

Having to fit new particulate filters and catalytic converters into UK-bound vehicles is a cost worry for Chinese brands such as Geely, which has pledged to sell sedans at less than €10,000 (£8,980).

“It’s hard on their cost base,” agrees Declercq, who adds that technical specifications are much less stringent in the Middle East, where Geely and Chery have both had success.

Chinese carmakers are also exasperated by new EU rules requiring malleable fronts to mitigate injury to pedestrians in the case of an accident.

Having to invest more in design and technology inputs could erode the competiveness of Chinese carmakers.

Despite these difficulties, Declercq reckons the UK and western Europe will see “significant exports” from more Chinese manufacturers within five years.

A willingness to buy in foreign engineering know-how and technology means “all the elements will be in place” from a hardware perspective.

He believes the availability of Chinese government cash and cash-stressed foreign auto-parts makers will speed up the process.

“And Chinese carmakers have a very short learning curve.”

But while they’re working hard on hardware, Chinese carmakers may have bigger problems in marketing when they are green-lighted to sell in Britain and other mature markets.

Chinese car executives are still trying to figure out how to provide distribution and after-sales service, says Songlei Mei.

“There’s a reluctance to pay for greenfield sites, but similarly a reluctance to lose control of the dis-tribution pattern.”

Another headache is finding the right price.

While the quality of their vehicles is improving, Chery and Geely remain wary of competing with icons such as VW and GM.

“They have no wish to compete head-on with foreign brands,” says Zhang.

Less sure in developed markets

“In China they’ve carefully chosen a segment at the low end and stick to that. But they’re much less sure of how to price for developed markets like Britain.”

While auto sales in China have jumped from eight million units in 2007 to 13.6 million in 2009 the hunger for UK and Europe remains among Chinese car makers.

ACEA is mentally prepared, says Declercq: “We will have to live with the fact that there will be other brands coming into the market.”

He advises firms not to repeat Brilliance’s mistake: rather than Germany, he suggests opting for a soft landing in a country like Holland, which doesn’t have a native car industry.

Newcomers will fight for market share, he adds: “The big difference in selling cars in western Europeis that there are no untapped markets, unlike south-east Asia or Africa, where the majority of buyers are first-time drivers.”

Chinese carmakers will be counting the cost of adapting to design and environmental rules. But there’s a huge advantage in passing the test, notes Declercq.

“If they can crack the European market they can crack anywhere.”

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