Detroit’s Next Big Problem… And Japan’s, Too

by Eric Peters
EricPetersAutos.com

Would you buy a Chinese car?

The “Western” automobile industry – our guys, the Europeans and even the Japanese – are praying to the Motor Gods you won’t want to. Detroit is already reeling from high labor costs and declining market share; the Japanese have their own problems – including the tsunami’s aftermath (temporary) and (not so temporary) the fact that for the most part they’ve become like Detroit in the sense that their cars are no longer high-value/low-cost but as or even more expensive than the American stuff. Ditto the European makes. Most are high dollar; few get high gas mileage.

The industry, as it exists today, may be about to face a perfect storm – a vortex of high (and rising) fuel costs, inflation, a weak economy and high unemployment… tailor-made for El Cheapo Specials from China (and India, too).

These vehicles will range in price from about $7,000 (maybe less) for a small, economy-oriented family sedan to around $18,000 for a mid-sized crossover SUV. That would be about 30-50 percent less than the sticker prices of equivalent in size/features American-Japanese-European vehicles.

One Chinese company – Chery Automobile Co. – says it hopes to sell as many as 250,000 of them in the United States within a few years from now, selling them through a network of 250 dealerships. The company plans to have a complete lineup of 18 separate models competing in every category/niche – with projected annual sales of more than 1 million units.

Wal-Mart new car pricing – and volume – may soon be coming to a dealership near you.

A Chinese autoworker earns the equivalent of about $2 per hour – vs. $60 per hour, on average, in wages and benefits earned by an American autoworker. That alone gives Chery Auto (and other Chinese car companies, of which there are at least six at present) a tremendous competitive advantage – shaving thousands off the cost of building a car relative to what it would cost to do the same job in a U.S. plant. (General Motors estimated, pre-bankruptcy, that its union/pension obligations alone add about $1,500-$2,000 to the “build cost” of every new vehicle – and pointed to these add-on costs as part of the reason it went bankrupt.)

But the real advantage the Chinese car companies have is the absence – or near absence – of cumbersome and expensive-to-comply with occupational safety and health and environmental regulations in China. Regulatory compliance costs boost the price of every U.S.-built car substantially – although these costs are hidden from the consumer and simply folded in to the car’s sticker price. The exact figure varies depending on whom you ask, but the industry consensus is that keeping Washington happy adds anywhere from 10-15 percent to the bottom line cost of every new vehicle built in this country.

But in China, it’s still very much like it was in the U.S. circa 1950 – good times for industry, with environmental/worker safety rules and regulations taking a back seat to the mission of stamping out as many cars as possible as efficiently – and inexpensively – as possible.

While it’s true that Chinese-built cars, like any cars sold in the U.S., will have to meet federal emissions (and crash-impact) standards, the cost of such things as polluted air in Guangzhou are not reflected in the sticker price of a Chinese-built car shipped to the United States for ultimate purchase by an American consumer – unlike its U.S.-built counterpart.

Some industry analysts think these cost/price advantages will be offset by the poor quality of Chinese-made cars relative to American, Japanese and European vehicles. Some even dismiss Chinese-built cars as oriental Yugos – pointing out that the cars being built in China at present have been found to have as many as 374 problems reported per 100 vehicles vs. the current industry average of just 118 problems per vehicle for “name brand” vehicles.

But while the expected low quality of China’s first generation of cars will probably keep them on the periphery of the U.S. market for awhile, it’s worth recalling the case of Hyundai. The once-mocked Korean automaker is now a major player in several segments of the U.S. market. Hyundai’s first-generation cars were also Pinto-esque, but that changed very quickly. Indeed, almost overnight. Today, Hyundai has some of the highest customer satisfaction ratings in the business – and its low cost/high value business model has cut deeply into segments that were once “owned” by the domestics and, even more tellingly, the Japanese.

Speaking of which: The mainline Japanese automakers were also once dismissed as purveyors of low-quality crap cars that most American buyers would never consider. I’m 44 and “made in Japan” was synonymous with junk when I was a kid.

Who’s laughing now?

Dismissing the incredible potential of China’s automobile industry may be whistling past the graveyard.

The Chinese are as committed to penetrating the U.S. market as the Japanese and Koreans were before them – maybe even more so. And the Chinese have those built-in advantages of far lower worker/regulatory compliance costs to give them a leg up on the competitive ladder.

According to auto industry analyst Maryann Keller, “The Chinese are probably five or six years away from being able to sell a competent low-end car.”

It may happen a lot faster than that.

Things are speeding up… .

Reprinted with permission from EricPetersAutos.com.

May 11, 2011

Eric Peters [send him mail] is an automotive columnist and author of Automotive Atrocities and Road Hogs (2011). Visit his website.

Copyright © 2011 Eric Peters

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