Fast and furious: China’s carmakers catching up quick

By Will Freeman and Tom Miller

For years, China’s domestic carmakers have languished in their foreign competitors’ slipstream. Strip out the legion of blue trucks and white minivans that crisscross the hinterland, and Volkswagen, GM, Toyota and Honda are the vehicles of choice on the country’s 3.8m km of highway.

But sales of Chinese brands are accelerating: four out of every 10 cars bought in China in the first half of 2009 were domestic brands, led by BYD, Chery and Geely.

BYD’s F3 – a blatant rip-off of Toyota’s Corolla – is China’s top-selling model so far this year, helping the Shenzhen-based carmaker shift 205,000 vehicles between January and July.

Even government officials, who until recently wouldn’t be seen dead in anything other than a black Audi or Mercedes (or, at a pinch, a black Volkswagen or Buick) are being won over.

National People’s Congress member Yang Wenyu is happy with his sleek new (and very black) F3. “I don’t care that it’s Chinese!” the Beijing official declares. “I bought it because it’s great value – Chinese cars are pretty good quality these days.”

Local brands are popular because they are cheap, dominating the market for cars priced below Rmb90,000 (US$13,000). But margins at the low end are also razor thin, leaving Chinese brands with a tiny share of total profits.

Domestic carmakers like BYD are now attempting to move up the value chain, fighting their foreign rivals for the juicy middle of the market (Rmb90,000-Rmb160,000). Mr Yang paid Rmb110,000 for his BYD – the same price as a low-end Toyota or Nissan.

Domestic brands have built up considerable R&D operations in an effort to improve car designs and quality. Geely invests at least 8 per cent of revenues in R&D, considerably more than the international standard of 5 per cent. Domestic players have also gained expertise by employing Chinese engineers with experience of working for foreign carmakers.

The result is that Chinese automakers are beginning to produce better quality, independently engineered vehicles.

Both Chery and China Brilliance, which were chastised in the media for failed crash tests in Germany and Russia in 2007, have redesigned their cars with higher quality steel and better components, and have since begun to pass many international crash tests. Last year Geely produced its first batch of home-grown engines and automatic transmissions.

Chinese brands have also made great strides in exterior and interior body design. Geely introduced three smart sub-brands at the Shanghai Automotive Show in April (although the pride of the fleet shamelessly aped Rolls-Royce’s Phantom).

But beating out the foreign competition will be extremely tough – especially as the stakes for foreign car makers struggling with shrinking global sales are so huge. Passenger vehicle sales have more than tripled in China since 2005, and the country is on track to overtake the US as the world’s largest car market this year.

GM, for example, views China as a lifeline. GM-owned Buick sells twice as many cars in China as it does in the US.

For domestic players, climbing the value chain means competing against multinational carmakers already refined by decades of fierce competition and global consolidation, and with superior arsenals of know-how and technology.

Foreign carmakers are increasingly competitive on price after have slashing costs in recent years by sourcing a higher percentage of parts from domestic manufacturers. And many have adapted their models to the Chinese market, setting up local facilities to modify cars to fit Chinese tastes.

Moreover, domestic brands may struggle to maintain their customer base as the first generation of car owners upgrade to more expensive second cars. And at the high end, there is little chance of BYD, Chery or Geely replacing BMW or Mercedes.

Yet it would be unwise to rule out the current leaders of the pack. The vast majority of China’s dozens of domestic players are likely to fall by the wayside – but it is a decent bet that at least one of China’s carmakers will stay on the track.

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