Ignore China at your own peril

Autocar Pro News DeskBy Autocar Pro News Desk calendar 26 Feb 2007 Views icon3560 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Ignore China at your own peril
There is a structural difference between the Indian and Chinese auto industries. For instance, in two-wheelers, the segment’s structure in China is so different that nearly 75 to 80 percent of bikes made there could be considered counterfeits of some Honda variant or the other.

There are counterfeits of other companies such as Suzuki and Yamaha as well. India is the largest motorcycle market for branded products. It continues to have huge growth potential as the vehicle parc bike motorcycles is about 55 per 1000 people.


One also cannot be sure about the quality of testing or homologation of Chinese vehicles. This was seen with products of initial Chinese entrants in India. Though Chinese state-owned enterprises (SOEs) certify that they comply with emission norms, one cannot be sure. There is no proper governance procedure. I have seen employees of small SOEs sitting on the floor and welding motorcycle frames though these companies had very good paint shops.

While Indian bikes carry a warranty of 30,000 km, no company in China gives warranties of over 5,000 to 10,000 km. So, if you go and market two-wheeler parts in China and offer a 30,000 km guarantee, it does not mean anything to them as the rest of the vehicle would fall apart at 10,000 km or earlier! The Chinese are not going to remain this way. They are improving and realise that they need to get out of counterfeiting promote their own brands.

The commercial vehicle industry is the most protected sector in China. It is difficult for an overseas manufacturer to make a breakthrough and manufacture there. Of course, the car segment has been growing at a phenomenal rate. In the early years, the Chinese invited companies to participate in the manufacture of cars through joint ventures. VW was one of the initial entrants with the Shanghai Auto Industrial Corporation (SAIC) which assured the carmaker about $3,000-$5,000 profit per vehicle.


Today, the scenario is changing. VW’s market share, in a high growth phase, is down to 17 percent from 44 percent. About three years ago, the company planned to invest around $3 billion and has now lowered this commitment. Why? There is a structural change happening. Earlier, buying was mainly done by state-owned corporations and most cars produced were in the luxury and mid-size segments. Now, with greater purchasing power and an appreciation for mobility, it is the individual who is buying despite not having easy access to finance.

The Chinese are very clear about their aspirations. They recognise that the auto industry is the key growth driver and I have validated this view in my discussions with the Chinese Ambassador to WTO in Geneva and also with senior officials of SAIC and BAIC. Having recognised this they have a policy which they are trying to deploy. How are they going about it?


Although you can have 100 percent ownership in component manufacturing, this is not the case in cars where you must have local content. This is governed in such a way that it goes down the value chain unlike what we have in India. China has a detailed formula that assesses each and every part which makes it difficult for OEs to import parts in a big way.

The Chinese also want vehicles to be developed from the platform upwards as well as the latest technology in all aspects of car manufacturing. Take the case of two large engine makers who were asked to produce Euro IV engines. When they talked about assembly, the Chinese refused and insisted that manufacturing and R & D be done there. Companies have no choice but to do what the Chinese want despite knowing that their technologies will be proliferated.

The Chinese are clear that they would soon like 3-5 OE brands to become global. They are in acquisition mode and the aggressive way they went about buying Rover in the UK is an example. SAIC has a clear global ambition while Chery and Geely vehicles have been showcased in exhibitions.

People may say that their vehicles are death traps but that is what was said about Hyundai when it began marketing its cars in the US. We are all aware of the IPR issue of GM-DAT against Chery QQ and the case relating to Honda’s CR-V with Shuanghuan Automobile. However, the aggrieved parties lost the case. The way the law is enacted in China is very different from India. In their view, if you want to have a production base and make profits in their market while using their resources, then whatever you are doing there is their IPR.

The Chinese want 15 to 20 component makers to become global Tier-1 companies and are taking the right steps in this direction. They have attracted OEs, given them profits, shown them the domestic possibilities and the carrot that China would be making more cars than the US in the next decade.


Who can resist this temptation? These operations are obviously not totally run by expatriates but with local Chinese. The latter will be closely involved and their knowledge bank is bound to improve.

I visited some institutes that do homologation in China where they think it is nationalistic for Chinese personnel to share their learning with Chinese SOEs or entrepreneurial companies. Quality is a game which they are learning very fast even in inputs such as steel where many companies are make better quality steel.

There are SOEs, JVs and businesses of Chinese entrepreneurs which make components. Quality with them varies as it does in India but by and large all these entities are catching up in attaining higher levels. The cost of operations of a JV in China vis-à-vis India would hardly have a variance of 5-7 percent within the four walls of the company. If you do an apple-to-apple comparison, then we are comparable.

We can compete on a firm level basis but cannot replicate this with the Chinese Treasury which has huge surpluses in trade and huge FDI inflows. They have a business philosophy of putting in capacity, creating demand and working on market share while we look at bottomlines in India. But if you look at SOEs, many are dated and could be spun off. They are not very particular about quality. The support given to SOE component enterprises earlier is not seen now and they have been told to become self-supporting or face the consequences.

According to the ACMA-McKinsey study, the value of offshorable buying of parts is pegged at $700 billion of which the Indian component industry has put an aspirational 3.5 percent that translates to about $20 to $25 billion. The Chinese are pitching for $100 billion!

The graduation to supplying aggregates with the requisite parameters of delivery is something which will happen in time in India. In China, they are actually getting the OEs to do that while here we are largely doing “build to print”. The Chinese are ensuring that on a long-term basis, they are masters of their destiny and technology. Most Chinese entrepreneurs started their businesses on the basis of deferred payments with the provision that they would provide employment. Such companies have an advantage. However, India is way ahead in its class of entrepreneurs.

Indian companies must realise for themselves the differences with China and leverage on their competitive advantages. It would be foolish to evaluate the Chinese as per our measures and we must understand them in their environment. It is only then will we find ways of leveraging ourselves, know our core competencies and then compete in China. Whatever you do, you cannot ignore China.
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