China’s news that domestic auto makers planned to begin exporting cars to Europe and North America in the near-term was met with healthy doses of fanfare and skepticism in 2005.

While many industry watchers long had predicted the Chinese eventually will enter Western auto markets, many said the announcements were premature. Demand still was growing in China’s domestic market and only a small fraction of the country’s inhabitants owned a car. China could barely handle demand at home, they said, let alone for export.

Most agreed that while assembly capacity in China continued to climb, to the point of overcapacity in some instances, it would be some time before Chinese cars posed a major threat to North American and European auto markets.

The reasons were many, including meeting stringent safety and emissions standards and establishing dealer networks. Plus, there was the issue of first satisfying the home market.

But make no mistake, industry experts warned, China’s focus squarely was on the Western markets.

“As China has turned itself into the factory floor of the world, we’re seeing huge export growth,” Michael McKenzie, automotive institute analyst-PricewaterhouseCoopers Automotive Institute, said at an industry conference in Detroit on the country’s manufacturing prowess.

China Planned Auto Exports

Aware that many Westerners were comfortable buying electronic goods and textiles from China, the country’s auto makers were betting this ease would translate to automobiles, he said.

“(China) doesn’t want to be the low-cost manufacturer for the rest of the world forever,” agreed Charles W. Freeman III, former U.S. assistant trade representative for China and current managing director-China Alliance.

Nevertheless, the news that U.S. entrepreneur Malcolm Bricklin planned to sell cars in the U.S. built by China’s Chery Automobile Ltd. Co. by early 2007 drew a spate of media attention when it was announced at the start of 2005.

Bricklin was best known for bringing Fuji Heavy Industries Ltd.’s Subaru brand to the U.S. in the 1960s and bailing out of Yugo of America Inc. before the brand left the U.S. market in the early 1990s.

His aggressive sales goal for his Visionary Vehicles LLC – 250,000 vehicles in the first year and 1 million units by the fifth year, provoked industry skepticism.

“I think that sounds pretty ambitious,” one auto industry analyst told Ward’s at the time. “I wouldn’t say they’ll stumble, but it will be a challenge to hit those numbers.”

But Bricklin remained defiant, noting the industry initially doubted the strength of the Japanese and then South Korean auto makers. “When the Japanese came in, they couldn’t build cars fast enough, and I think now it’s going to happen again,” he told critics.

Using Hyundai Motor Co. Ltd.’s early attempts in the U.S. market as an example, Bricklin boasted Visionary would not stumble on quality.

“(Hyundai) did a great job in introduction and then got hit with the quality problem and almost was wiped out,” Bricklin said. “(The company) came back from that” and now is on the way to 1 million sales. “We think we can do it better.”

However, Bricklin’s game plan continued to change through the year, with the U.S. launch date pushed back to fourth-quarter 2007. He also decided his dealers could not make money selling cars priced below $20,000, and announced he would sell only higher-priced luxury models.

In a well-publicized move, Bricklin hired former Mitsubishi Motors North America CEO Pierre Gagnon as his president and chief financial officer. But three months later, Gagnon was out, telling Ward’s Bricklin decided to locate Visionary’s sales and distribution arm on the East Coast instead of Los Angeles – a move Gagnon felt was misguided. He and Bricklin also could not agree on contract terms, he said.

Plan to Sell In U.S. Faltered

Additionally, Visionary had trouble lining up dealers in 2005, signing just 50 of the 250 Bricklin wanted in the U.S.

A study released in the year by IBM Corp. and the University of Michigan Transportation Research Institute’s Office for the Study of Automotive Transportation (OSAT) showed little of China’s exports in 2004 were auto-related.

“People think there (are) tons of exports coming from China, but when you look at the percentage of automotive exports, including components and vehicles, it represents only 3% of China’s exports,” said Bruce Belzowski, assistant research scientist-OSAT.

Of that, a mere 0.4% represented vehicles, with the rest mostly components, the study said. “Obviously, it means there’s more opportunities for automotive exports, but it also means the perception of this huge rush of Chinese exports is not here yet,” Belzowski said.

IBM and OSAT interviewed 20 mid- and high-level Chinese executives at auto-making joint ventures in the country and found wide-ranging expectations of when exports would begin to filter out en masse.

While most interviewed expected vehicle exports to make up 5%-10% of all Chinese exports by 2010, when asked how large the percentage would be by 2015, responses ranged wildly, from 5%-60%.

Industry pundits continued to question whether Western nations were ready to buy Chinese cars, and whether Chinese auto makers could build a product that met American and European standards and tastes.

Jiangling Began European Sales

In Europe, Jiangling Motors Co. Ltd. began selling its Landwind 4-wheel-drive SUV for €17,000 ($20,421), about half the price of competitive models.

By using a loophole designed for low-volume vehicles, the 4WD model managed to avoid strict European regulatory standards. But media reviews generally were poor, with many saying the Landwind lacked the safety features, technical prowess and quality European buyers expected in their cars.

“There is a feeling that Chinese vehicle manufacturers will have to up their game to meet the standards required for the European market,” said a spokesman for Britain’s Society of Motor Manufacturers and Traders, adding initial offerings “don’t inspire much confidence.”

The German automobile club ADAC tested the Landwind for frontal crash worthiness and gave it very low marks for safety, saying the vehicle should be banned from European roads.

Landwind’s French public relations agency said 760 units were sold in the Netherlands and Germany in 2005.

The Landwind’s cool reception did not deter other Chinese auto makers from announcing European export strategies. At September’s Frankfurt auto show, four Chinese auto makers exhibited vehicles, including Geely Automobile Co. Ltd.

Geely, which already exported to some Eastern European countries, including Ukraine, planned to begin selling vehicles in Western Europe before it entered North America in two or three years.

Geely’s U.S. plans were more humble than Bricklin’s for Chery, with expectations of just 25,000 units in the first full sales year and 100,000 after five years.

Shufu Li, Geely’s founder and chairman, admited naysayers had a point when they insisted Chinese cars were not up to the standards Americans and Western Europeans had come to expect from their cars.

”We still have a lot of work to do to improve our technology and quality, and that’s what we’re doing,” Li told Ward’s. “We believe one day the American consumers will accept us.”

Other Brands Eyed Europe

Other Chinese auto makers with their sights set on Europe included Brilliance China Automotive Ltd., which was publicly held and had a joint venture with BMW AG in China.

Another was Hafei Automobile Co. Ltd., which exhibited at both the Frankfurt and Geneva shows. The auto maker planned to begin selling a small family car called the Saibao, designed by Italian firm Pininfarina SpA, in Europe in two to three years.

Brilliance was due to begin selling a luxury sedan called the Zhongua in Europe last fall, but regulatory issues delayed the car.

Built at the same vehicle assembly plant in Shenyang, Liaoning province, as the BMW 3- and 5-Series sedans, the Zhongua was designed and engineered by ItalDesign SpA and featured a 2L 4-cyl. engine built by Mitsubishi Motors Corp. Pricing was expected to start at $20,094.

Great Wall Automobile Holding Co., which exhibited at Italy’s Bologna auto show in December, said it planned to begin sales of a cross/utility vehicle, the Hover, and a pickup truck, the Deer G3, in 2006 in Europe.

The Hover was to be priced at €19,500 ($23,424) and €9,500 ($11,411) for the pickup.

Both initially would evade strict European emissions regulations in Italy, the first European country to sell the vehicles, via a permit allowing sales of 2.5L Euro III-compliant gasoline engines.

And to avoid fallout similar to the Landwind, Great Wall’s European importer, Eurasia Motor SpA, said it would stage a crash-test demonstration of the Hover and Deer G3 for Italian journalists.

"We clearly see China as a future player throughout the world, and they seem particularly set on entering the markets in Europe," said a spokesman for the European automobile manufacturers association (ACEA).

Chinese participants in the IBM/OSAT study admitted their industry was 10 to 30 years behind meeting the standards for safety, quality and technology of global auto makers such as General Motors Corp. and Toyota Motor Corp.

“Many, many of the individuals we interviewed are very excited to crack the global markets, if you will,” said Linda Ban, global industrial sector leader-IBM Institute for Business Value.

“They are anxious to do exports, but they are also pragmatic about understanding what it’s going to take to do that. And a number of them shared with us that, ‘we need to better develop our design skills; our development skills; how we package things; how we collaborate; (and) how we build (a vehicle).’”

GM Beat VW for Sales Leadership

Meanwhile, GM beat out Volkswagen AG to become the overall top-selling auto maker in China in 2005. GM’s total Chinese sales, including Shanghai General Motors Automotive Co. Ltd., reached 665,390 units, up from 492,014 in 2004.

Volkswagen’s two joint ventures in China, Shanghai VW Automotive Co. Ltd. and FAW-Volkswagen Automotive Co. Ltd., saw sales fall 19% and 10%, respectively.

Nevertheless, Shanghai VW was the No.2 best-selling auto maker in China in 2005, with sales of 287,000 units, while FAW placed third with 270,000.

Beijing Hyundai Motor Co. Ltd. overtook Guangzhou Honda Automobile Co. Ltd. for fourth place. Beijing Hyundai saw sales jump 62% to 233,668 units, while Guangzhou Honda registered a more modest 13.9% increase to 233,000 units.

Total Chinese sales of 5.9 million vehicles in 2005 helped the country surpass Japan as the No.2 global auto market.

However, China still placed third after Japan if imports were excluded.

While sales remained strong, OEM profitability slumped 40% from the previous year, partially due to stronger demand for small cars.

– with William Diem and Alan Harman