A Lean, Green Detroit

The company leveraged its famous battery expertise to create what it says is a safer and more environmentally friendly lithium-ion phosphate battery for the new plug-in. BYD has now leaped ahead of more established international models such as Toyota's Prius and GM's Volt to bring an affordable plug-in car to the market—BYD's model is nearly half the expected cost of the Chevy Volt.

But despite the hype, officials and consumers alike acknowledge that smaller, greener homegrown vehicles are still in their infancy. It's perhaps telling that at the Shanghai show, BYD Auto officials decided to exhibit their plug-in with genuine license plates, rather than mock-ups as is typical. "The technology is so new that some Chinese worry such cars would never even get licensed," says marketing representative Jasmine Huang. "This will reassure them." Despite the reassurances, only a few dozen F3DM's have been sold, and even then, not to individuals but to government units and banks. Private purchases are expected to begin only in June. Meanwhile BYD's target date to start selling in the U.S. market has slipped from 2010 to 2011, due to the ongoing economic crisis, says export manager Henry Li.

This underscores the many challenges facing China's domestic players. At present their ability to penetrate export markets is insignificant, partly because Chinese safety standards lag behind those in Europe and the U.S. Even at home, for example, Chery's popular QQ compact suffers from a perception of being too flimsy to be safe—especially after a photo circulated on the Internet, showing a QQ wedged between two buses, squashed like a soft-drink can.

Marketing and consumer research also remain alien concepts to domestic players. At the Shanghai Auto Show, Geely unveiled nearly two dozen new models—including a blatant clone of a Rolls-Royce Phantom, down to the winged hood ornament. Company chief Li Shufu then invited visitors to fill out suggestion forms to record their reactions to the bewildering proliferation of new products. "We're trying to get opinions from all walks of life," says Li, whose firm had to delay its entry into the U.S. market due to quality-control issues.

By contrast, Ford, for example, intensively researched China's under-30 consumers who are the new Fiesta's target audience. Its findings encouraged Ford to team up with Microsoft to develop SYNC technology so that drivers can connect their cars to their MP3 players. "We spent a lot of time talking with 25-year-old Chinese women about their tastes," says John Parker, Ford's executive VP for Asia-Pacific and Africa. "They wanted styling, fuel economy—and Internet connectivity."

Chinese auto companies still have a key competitive advantage—the fact that most are run by (and favored by) China's command-and-control government. The state can tweak policy and macroeconomic levers that virtually change the game overnight—witness Beijing's swift and successful response to the financial crisis. Compared to democratic countries where policymaking can be protracted and messy (just look at America's efforts to revamp the automotive industry), Beijing has a major leg up. They can simply decide what the future will look like, and state-owned enterprises must toe the line.

Already, Chinese leaders have signaled their determination to consolidate the country's chaotic and overcrowded auto sector, and drag it up the value chain. Of 150 entities licensed to produce vehicles, just 20 of them account for 95 percent of the market. Beijing has decided that of these 20, a globally competitive "Top Ten" will emerge (a decree which will inevitably be helped along by the fact that Beijing has less pesky unions and local and regional politicians to deal with). "We even know who eight of those 10 are," says Russo, who cites industry sources saying such numbers are guidelines only.

To speed up the process, Beijing has taken the unusual step of warning Chinese auto firms to focus on getting their own affairs in order before rushing off to buy foreign automotive assets at fire-sale prices. With prestigious names such as Volvo and Hummer on the block, "the world is for sale and looking for Chinese partners," says Eduardo Morcillo, an M&A specialist with InterChina Consulting in Shanghai. But government officials have spread the word that, as tempting as distressed foreign assets might be, they're hard to digest. "Chinese buyers [would] need to learn to deal with different management techniques, labor unions and whole new ways of thinking," warned senior planning official Chen Bin in a widely quoted interview with local media. "That can be difficult." Indeed—when China's biggest carmaker SAIC bought a 49 percent share of South Korea's Ssangyong Motor back in 2004, the venture ended in tears when Korean unions resisted Chinese cost-cutting.

These days, of course, cost-cutting is the mandate in Detroit, Seoul and Shanghai, which is the closest thing to a nerve center that China's far-flung automotive industry has, thanks to SAIC's overshadowing presence. And no one does fiscal prudence better than the Chinese, who have managed to keep growing amid the recession thanks to their $2 trillion in reserves and the ability of their autocratic system to turn on a dime to deal with whatever new economic challenge is presented. Re-creating a cleaner, leaner, meaner Detroit in the Middle Kingdom is a lofty goal indeed, but if anyone can do it, it's the Chinese.

© 2009