Wish the Chinese Automakers Coming to America Good Luck


Ford's Focus is the company's best seller in China. Source: Ford Motor Company.

It's no secret that Ford (NYSE: F  ) and General Motors (NYSE: GM  ) , among other major auto manufacturers, are banking on China for a large portion of their growth by the end of this decade. At the end of 2013, China's market accounted for estimated sales of roughly 20 million vehicles -- the first country to top 20 million in a year -- which compared to roughly 15.6 million units in the U.S. market. By 2020, those numbers are expected to reach as high as 32 million in China compared to a mature U.S. market that could reach around 17 million.

The good news for domestic auto investors is that Ford and GM are driving strong growth in China; the bad news is that Chinese automakers are about to bring their products to America.

Looking ahead in China
For 2013, Ford posted incredible sales gains in China; sales were up nearly 50% to a record 935,813 units, which was good enough to pass Toyota and Honda in the region -- something that hasn't happened for much of the last decade.


A comparison of the four automakers sales in China. Source: Automotive News DataCenter.

Ford plans to continue its growth strategy in China this year and has two facilities set to begin production, and an additional two facilities that will begin producing in 2015. GM and its Chinese joint ventures will be investing nearly $11 billion in the country through 2016 to improve production capacity, keep up with robust sales throughout the decade, and further expand its lineup. 

While Ford and General Motors continue to capture growth in China, some of their attention will soon turn to defending against Chinese automakers who will try to shake up U.S. showrooms, as the Japanese and South Koreans have previously done, sooner rather than later.

BYD's electric E6 is rumored to have a range of 186 miles. Source: BYD

Enter BYD Co.
While you haven't likely been in a BYD passenger car, you may have taken a ride in another one of its products. The Chinese automaker is already in the U.S. vehicle market, selling its electric buses to fleet operators.

As soon as 2015, the Chinese automaker BYD Co. will be entering the U.S. market, and with a backer you might have heard of: Warren Buffet's Berkshire Hathaway. Thus far, BYD's plans are to introduce about four vehicle models in its U.S. debut near the end of 2015. The company will likely focus on electric models which could be an Achilles' heel as the segment hasn't proven to be profitable for many automakers. Not only that, but the electric vehicle segment already has an American niche player, Tesla Motors, which has seen incredible success with its Model S and is a few years away from producing a mass produced and more affordable electric vehicle which would make BYD's entrance into the segment much more difficult.

BYD isn't the only Chinese automaker planning its debut. Geely, whose parent also owns Volvo cars, plans to export models to the United States in 2016.

However, simply unveiling a new vehicle lineup in the U.S. won't guarantee success similar to top Japanese and South Korean brands -- far from it. Consider that after three decades, Suzuki decided the competition was too fierce in the U.S. market and pulled all of its passenger vehicles out of the country and chose to focus on selling motorcycles and all-terrain vehicles here instead. For every successful import brand, there are multiple brands that have failed, such as Saab Automobile or Isuzu Motors. Even of the import brands that remain, for every Toyota or Honda there's a Mitsubishi or Mazda that have failed to gain any traction. Mitsubishi and Mazda have been around since the early 1980s and the two combine for a slim 2.2% share of the U.S. market. Even worse, if recent trends continue, that figure will likely decline again in 2014. 

Entering the U.S. will prove a difficult challenge for the Chinese automakers, and neither BYD nor Geely will likely have much of an effect over the next decade, if ever. While Chinese automakers essentially have no brand recognition, they do possess something far worse: stereotypes.

Most of us, wrong or right, have a stereotype in our heads of cheap and poor-quality Chinese products, even if those products are the furthest thing from being vehicles. That stereotype of cheapness is easily overcome when consumers are at the store grabbing $1 binders, paper clips, or scissors. However, that's not a marketing ploy that will work very well with vehicles -- ask Detroit how producing cheap and poor-quality vehicles worked a decade ago.

Spoiler alert: It wasn't pretty.

Bottom line
One interesting thing the Chinese forced upon foreign automakers on their home turf was joint ventures. At first, foreign automakers, such as Ford, GM, and Volkswagen, were so far advanced that the Chinese depended almost entirely on the foreign parts of the joint venture to be successful. That has slowly changed, and the Chinese automakers have begun to catch up and will one day have some impact on the U.S. market, albeit likely far beyond this decade.

While the Chinese have a hurdle most other automakers haven't -- stereotypes of Chinese products being cheap and of poor quality -- one thing is for sure: More competition will be coming to America, and sooner rather than later. 

Say goodbye to "Made in China"
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Read/Post Comments (7) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2014, at 1:52 PM, Soakee wrote:

    A quote from the article regarding cheap, low-quality vehicles: "ask Detroit how producing cheap and poor-quality vehicles worked a decade ago". I'm puzzled by this because the makers of cheap, low-quality vehicles from a decade ago was the Koreans, not the Detroit 3. Some of us can never forget those Hyundais and Kias.

  • Report this Comment On January 24, 2014, at 2:30 PM, TMFTwoCoins wrote:

    I disagree Soakee. Nobody wanted to own a passenger car from Detroit back then, nobody. It was trucks, SUV's or bust and passenger cars were thrown out there at losses just to keep production volume up. That's why resale value tanked and the rest was history leading up to the great recession where Chrysler and GM filed for bankruptcy. That's changing now, look at the Fusion/Focus/Fiesta/Impala for solid examples, however, that has definitely not always been the case.

  • Report this Comment On January 25, 2014, at 2:44 AM, puppybone69 wrote:

    I'm very willing to buy a rickshaw, but only if a cute little Chinese guy wearing a pointy hat pulls me around in it.

  • Report this Comment On January 25, 2014, at 10:16 AM, rocsoe wrote:

    They'll sell if they have American styling, making Detroit's product looking like it came from Asia.

  • Report this Comment On January 25, 2014, at 10:49 PM, gw69 wrote:

    wish you good ruck, you can sell them at walmart, but you should finish the car interiors with pastel polyester, and make them double size to fit the average walmart shopper, and equip them with a major air filtration system because china manufacturings' air pollution is now reaching our shores.

  • Report this Comment On January 26, 2014, at 4:20 AM, Orionds wrote:

    The current image of poor workmanship from China should not apply to BYD as (if you Google results) you will see that BYD has won awards for quality and crash security.

    BYD already has technology in their current line-up of vehicles that outstrip those in the US, probably even Tesla - one of these being range and even fuel economy for their hybrid vehicles (1.6L / 100 km) while boasting superior performance (0-60 mph in 5.9s).

    BYD also has a leg-up in their public transport vehicles that use EV technology. Their buses have continually beaten other (among them European) rivals for contracts in cities and municipalities around the world.

    I feel US car manufacturers should really worry when BYD brings these to the US.

    In China, at the moment, it is the only Chinese manufacturer in the top 10, albeit in 10th position. This is, however, significant when you consider BYD was in the red not long ago after a series of poor marketing policies which they have now addressed and are moving ahead with quality SUVs, buses, trucks and passenger vehicles that have advanced technology and features.

  • Report this Comment On January 26, 2014, at 10:33 AM, TMFTwoCoins wrote:

    @Orionds

    I understand BYD's quality, and that isn't what I questioned. Rather, I questioned the average U.S. consumers' ability to accept that by moving past typical Chinese product stereotypes.

    I have no doubt that BYD's electric vehicles are very viable but if that's what the company's niche is going to be, it will be difficult with the EV market in such infancy with all the big dogs pumping R&D to catch Tesla. That's a matter of my opinion, though..

    Should US automakers be worried? I think so as well, but I also feel BYD is a very long ways away from making any real impact in the market. We'll see though, it's going to be a very interesting development to watch!

    Thanks for reading and leaving a well thought out comment,

    Daniel

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