The US Auto Industry Drifts Off To China

Though practically every car sold in the US today contains Chinese-made components, the announcement that a few Chinese-made cars would arrive in Canada raised a lot of eyebrows. It would be a Honda Fit assembled in the same plant where the European version, the Jazz, has been built for years. But Chinese-designed and branded vehicles have not made it yet. Chinese automakers, of which there is a whole slew, are scrambling to improve their technologies from nice-looking but shoddy copy-and-paste models to reliable products that would be competitive in developed markets. It’s a government priority. And they’re getting there through the back door.

China’s automotive market, with new vehicle sales in the 18-million-unit range in 2011, has leapfrogged the US market with its 12 million units. Some analysts estimate that sales will reach 28 million units in 2017 (highly optimistic if the China bubble blows up before then), and no major automaker wants to miss out on the opportunity. They all have invested heavily there, though the National Development and Reform Commission is pushing foreign automakers to share more of their advanced technologies with their Chinese partners—and they all have to have Chinese partners.

The push to develop new technologies is immense. China has already outdistanced the US in published patent applications, according to a report from Thomson Reuters, though it is still lagging behind the US, Japan, and Europe in patent grants. The surge in applications is in part due to incentives that the government is offering in its amazing effort to push the country up the industrial and intellectual food chain to where products are designed from ground up in China. Targets: pharmaceuticals, technology, and … the auto industry.

Developing technologies in China is one way. Another way is to go shopping in America. And in most cases, government-owned enterprises are behind it. For example, BeijingWest Industries. The joint venture of three government-owned companies—Shougang Corp, Bao’an Investment Development Co., and Beijing Fangshan State-Owned Asset Management Co.—bought the chassis division from Delphi Automotive during the crisis in 2009. Building on Delphi’s technologies, it now develops and manufactures brake and chassis components for a variety of US and European automakers.

Delphi embodies what’s wrong with manufacturing and financial engineering in the US. In 1999, when GM spun it off, it was a mega manufacturer of automotive systems. In 2001, the company cut 11,500 jobs. In 2004, it got into hot water over its accounting practices. In 2005, six years after its IPO, it went bankrupt and closed 24 plants. In 2006, it closed another 21 plants. Throughout, GM began to source its components elsewhere, particularly in China.

Visteon, Ford’s version of Delphi, is another example. Visteon designs and manufactures automotive interiors, lighting systems, climate control systems (second largest supplier in the world), and electronics, including driver information, audio, and powertrain systems. When Ford spun it off in 2000, 80% of its revenue came from North America. In 2009, nine years after its IPO, it went bankrupt and closed numerous plants. While the “reorganized” Visteon is still a primary component supplier to Ford, it now supplies other automakers as well. Its center of gravity is shifting to its Asia Pacific Corporate Office and Innovation Center in Shanghai. And the building of its North American Corporate Office and Innovation Center in Van Buren Township, Michigan, is up for sale.

Already, Visteon is consolidating its interior systems into Yanfeng Visteon Automotive Trim Systems, its Chinese joint venture with Huayu Automotive Systems, which is a subsidiary of China’s largest automaker, Shanghai Automotive Industry Corp. (SAIC), which is owned by the Chinese government. And now analysts believe that Visteon may also merge its electronics entities into Yanfeng and sell its 50% stake to SAIC—hence, to the Chinese government.

To match quality and design standards of the best in the world and to become competitive in the US, Chinese automakers can’t rely on copying existing technologies. They must learn how to design, engineer, and manufacture vehicles from the chassis up. And to accomplish that, China is weaving a matrix of companies with state-of-the-art capabilities, both in China through its joint ventures and overseas through acquisitions.

The most visible acquisition occurred when Zhejiang Geely Holding Group bought Volvo Cars from Ford in 2010, but the most significant movements are happening in the components sector where much of the unglamorous engineering and manufacturing work takes place. Clearly, China has set out to conquer the global automotive markets, but not by trying to flood the US prematurely with Chinese-branded vehicles.

The US trade deficit with China will hit $300 billion this year. It’s politically convenient to blame China’s yuan policy. But the driver is an enduring strategy by US corporations.

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