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China's Auto Boom Doesn't Necessarily Mean Doom for U.S. Industry


Impressively big smallness. That's how Honda describes its new Honda Fit model, a "bite-sized wonder" the company is pushing to a U.S. car market suddenly hungry for fuel efficiency. The Fit is indeed a snazzy car, and features a customizable back seat that allows owners to alter the vehicle's interior configuration on a whim. The most interesting aspect of the Fit, however, may be its nationality. Despite the Honda nametag, the Fit is half-Chinese. It is the product of a joint venture between Honda and China's state-owned DongFeng Motors, and is also being marketed in Europe as the Honda Jazz. The model is one of the first Chinese automobiles Americans and Europeans will see on their highways -- but many more are on the way.

Like the Fit, China's auto industry is impressively big for not being particularly large. According to 2006 data from the International Organization of Motor Vehicle Manufacturers (OICA), China produces just shy of 6 million vehicles per year (including cars and commercial vehicles). The Chinese Automotive Industry Yearbook, a compendium of industry statistics, puts that number higher, at around 7 million, and predicts it will increase to 8 million in 2007. In a global context, this is a modest sum -- OICA says over 66 million vehicles are produced worldwide each year. But consistent growth rates and a blossoming export market, particularly in the sphere of auto parts, signal a grander role for Chinese automakers in the near future. For some established western automakers, the question is becoming not how to beat this emerging behemoth, but how to join it.
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What does all this mean for western automakers? It doesn't mean surefire doom, but it does force them to place a strong emphasis on efficiency, says Rhys. "As new players elbow their way in, we have to find things we can still manufacture efficiently, to use good old comparative advantage," he says. Rhys suggests a focus on producing items that require significant knowledge or expertise -- human capital. "But there's no reason to believe the entire world auto industry has to decamp to China."


DaimlerChrysler's recent push to restructure and possibly divest its American operations highlights the difficulties American and European car companies have had with bloated product lines and sky-high personnel costs. Meanwhile, more streamlined Chinese operations are flourishing. Though the vast majority of China's auto production goes into domestic sales -- the country's domestic market is massive, already the world's second largest and rapidly expanding -- exports are growing even faster. They doubled in 2006, coming to around 340,000 units. They are expected to double again in 2007. The majority of these exported vehicles target developing economies in the Middle East, Latin America, and Russia. But now Chinese manufacturers are attempting to make the leap to more developed markets, which often require higher quality and safety standards.

Thus far, nearly all these efforts have been made in collaboration with multinational producers. Seventy percent of automobiles produced in China, including those made for domestic consumption, are manufactured through joint ventures with non-Chinese companies (though the Chinese government predicts homegrown brands will have taken over 60 percent of this market by 2010). DongFeng's partnership with Honda is a fairly typical example. The companies have been working collaboratively for over a decade, and since 1998 a DongFeng production facility in Guangzhou has been making engines for Honda's Accord, Odyssey, and Fit models being sold in China. But it wasn't until recently that the companies decided to take on the export market. DaimlerChrysler is also trying to hook up with a Chinese producer, Chery, to sell cars in the United States.

Even if the automotive offspring of these joint ventures are a resounding success in the United States, analysts say a Chinese boom need not necessarily threaten American auto production facilities. It's no easy thing to ship a car across the Pacific. It's much easier to ship auto parts. "Parts can be stacked very efficiently in containers, and you can put a large number in," says Garel Rhys, an economist at Cardiff University in Wales. So even if a Chinese factory can produce an engine less expensively than a U.S. factory, it may still make sense for American automobiles to be built regionally, with parts shipped in from abroad.

To an extent, this is what's already happening -- a point commonly overlooked in an American dialogue keenly focused on protecting U.S. automakers. Although China's automobile production has shown steady growth, it is the auto parts industry where the country's growth has really exploded. "What you're really starting to see with China is exports of parts and components," says Loren Brandt, an economist specializing in China at the University of Toronto. Brandt says China's components industry nets over $100 billion per year, and points out that nearly every major multinational parts supplier has set up operations in China -- companies like Delphi, Visteon, Lear, and Bosch.
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The result is that it's more difficult than ever to say where a car is actually from, regardless what company's name it bears -- and even regardless of the country in which its final assembly takes place. A car with a Japanese brand and a Chinese engine might be made in America. With this in mind, industry observers say it's a mistake to think strictly in terms of national boundaries when discussing booming Chinese production. "It's getting harder to say this is an American car, this is a Chinese car, this is a Japanese car," says Marina Whitman, a former GM executive now working as a professor at the University of Michigan's business and public policy schools. "The Japanese have had a very clever strategy of Americanizing their image as much as possible. They manufacture much of their stuff here. China can do that too."