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.
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.
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.
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.