Nov. 23 – Following China’s recent buying spree of European and American-owned auto brands, technology and know-how, I feel a few related issues not commonly asked may be prudent to question in light of the massive amounts – albeit at “fire-sale” prices – that China has acquired these production facilities and knowledge for. As the United States belatedly loses its grip on auto manufacturing, we are without doubt witnessing the inevitable; the restructuring and re-balancing of corporate America away from such employee-heavy manufacturing industries and more towards service, innovation and design, a step long overdue. Yet it reminds me uncannily of Europe’s sale of 1940s and 1950s technology to India when Fiat and Morris, at the time two of Europe’s most powerful auto companies, sold off their cheap production lines, technology and knowhow to India. While European auto manufacturing moved on and consolidated, the technology India had purchased kept their auto sector firmly in a quaint time warp for close to forty years. The Ambassador, little more than a 1940′s Morris Oxford, is still churned out by Hindustan Motors today.
In purchasing parts of all of Rover, GM and so on has China actually been buying almighty pups under the guise of economic downturn value for money?
Three things make me feel this may be the case. Firstly, the experience of India, when it thought it was getting what to them at the time seemed a good deal – cheap, second hand technology that would allow them to turn out cheap cars for the Indian market. Yet it kept Indian innovation subsumed for decades. The vehicles were almost too popular for their own good. I am sure the officials who did the Indian acquisition deals with Fiat and Morris at the time would be amazed to see the vehicles still common on Indian roads nearly 50 years later. Only recently has India been able to show signs of recovering from what actually amounted to the purchase of a repressive technology.
Secondly is the rise of new technologies in auto manufacturing. Clearly, the combustion engine is on the way out. Inefficient, polluting, and expensive to make, it takes up about 40 percent of all components needed in a modern vehicle. That last aspect may be attractive to China as it needs to find things for its massive population to do to keep them occupied. However, surely the first two outweigh any advantages of maintaining a labor pool. As newer, greener, more efficient technologies begin to take over, and the rise of the hybrid or fully electric car appears imminent, the mega-purchasing of production lines churning out combustion engine driven behemoths seems to be an expensive gamble that flies in the face of auto evolutionary wisdom.
Thirdly, an unnoticed, yet positive thing to have come out of the global downturn is the reflection in hindsight of venture capital and private equity firms. The days of the billion dollar deal are mainly gone, and a new, more contrite Wall Street atmosphere, with lesser financial aims is appearing. Just a few days ago I was advised by a P/E firm in New York that if an Asian business “could fulfill criteria of an annual turnover of US$30 million, show a growth rate of 30 percent and a profit margin of ten percent we’d be interested in taking them to IPO in the United States.” This is good news. Finally institutional money is available and is actively seeking to fund smaller, dynamic entrepreneurs in industry. A new era will emerge from this, funding the technology we now need to deal with the global problems the world is facing today. Green is in, and polluting mass consumer industries, such as automobiles, with their heavy dependence on the combustion engine and oil, are surely on the way out. Institutional investment is now looking at getting into where the money is desperately needed to usher in a new, oil free energy environment. These businesses already exist, and with proper funding will now be able to make far greater strides towards solving problems such a battery capability than is currently the case. The process of refinement for auto away from the combustion engine is underway.
The new auto regime may well be made up of names not notably associated with the industry today. The stealthy integration of electric power into the auto industry has already begun. With more than 100 electrical component parts in an average vehicle today, powering everything from electric windows, windscreen wipers to your CD player, the number of such components in auto engineering is increasing. As the fully electric engine, funded by private capital starts to become a reality, China’s purchase of combustion heavy auto manufacturing assembly lines and R&D facilities may not look in the future to have been such a good idea.
Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and lived in China for 21 years. He is now based in Mumbai. Chris also contributes to Asia Briefing’s other titles, India Briefing, China Briefing and Vietnam Briefing.
Hi Chris
On the 1st point, remember that India was previously a “closed” market, so there wasn’t enough competitive pressure to force carmakers to improve. In contrast, the chinese marketplace is being fought over by 40? domestic chinese carmakers who compete or cooperate with all the global auto groups.
On the 2nd and 3rd points, I agree that combustion engines are on the way out, but I think there is still a minimum of 10years before we can safely say it is completely obsolete. Also, foreign companies come with more expertise than just the “engine”.
In any case, it looks to me that China will take a commanding lead in “green” vehicles given:
1) the technology leadership in electrically powered vehicles certain chinese companies already have
2) the plans to restrict the export of rare earth metals required for all sorts of “green” technologies, thereby forcing their manufacture and presumably design to sit inside China
3) explicit government support & funding
It’ll certainly be interesting to see how it all turns out in 5years time.
Thanks Andy – I would agree with those points, however it does seem China has invested in what is outdated technology in buying those manufacturers. China also isn’t in the lead as regards battery and electric technology – the US, Japan and India I think lead the way here. It will be interesting to see what the future holds. There are far more hybrid public and LPG vehicles on the streets of Delhi & Mumbai today for example than there are in Beijing and Shanghai, where taxis are still all combustion engines. In India it’s all LPG. Thanks – Chris
Hi
I have to agree with Andy on his three points I also agree to your reply Chris. I under the impression some of the LPG vehicles are a combination of LPG / Combustion.
I also feel that the Chinese infrastructure is more able to implement a electrical/ charging system for the eventual electric car.
I feel there are a lot of variables that will influence the outcome e.g Government involvement, disposable incomes, size of the market.
My feelings are China will edge it and as Andy says
“It’ll certainly be interesting to see how it all turns out in 5years time”
I like your article and you do have some good points. But as far as battery technology and electric cars, have you ever hear of a company named BYD? Do you wonder why Warren Buffett is investing in them? China will move towards anything that allows them to save money and reduce their need for importing, that is the main driver of almost every decision. Electric cars seem to fit this criteria. Also, keep in mind how they have shifted to the use of electric bikes. They are everywhere in China and this is mainly due to a matter of economics.
Hi Chris,
Very interesting and thought provoking article.
To answer your points in order:
1. I was in India again last week (Calcutta & Bangalore), it is very difficult to make comparisons between China and India. However India is far behind China in automotive technology and the state of India’s industry probably cannot be blamed on the import of old technology decades ago. Personally I would love to own an Ambassador if I lived in India, it will be a sad day when they disappear!
China are already starting exports of “Roewe” and MG cars. As far as I know the Ambassador was never exported.
The purchase of the Rover production lines and technology by SAIC/Nanjing was a great way of acquiring new models and brands at a low price (about $100 million) compared with the equivalent design and development costs.
China has already started to move on with the technology that it imported (see point 2).
2. SAIC are working on a hybrid version of the Roewe 550 and 750 now so they are well aware of the opportunity. I think they are due out next year. Apparently they are also working on all electric versions!
3. I am not sure that China Inc needs Wall Street so much these days! They are making their own investments in green technology and I think we will see lots more interesting acquisitions by Chinese companies in the West in the future.
The J D Power China survey recently found that the Roewe brand dealerships give Number One customer satisfaction!
Finally, being British (my father long ago owned a very comfortable 1966 Rover 2000), I find it fascinating that a Chinese company has made a success out of a dying UK brand, good luck to them!
Great postings here! I think China will pretty much overtake the U.S. in the car industry as well within 10 years.
I like the post pic ! Maybe Ford T modell?
Thanks guys. India seems to be cornering the market in very low cost vehicles (China is already supplying some components). Getting Indian farmers from bullock and cart to minivans and families from motorbikes to small cars is happening as we speak. – Chris
I think we will see lots more interesting acquisitions by Chinese companies in the West in the future.I am not sure that China Inc. needs Wall Street so much these days!