Will China become a major force in the US auto industry? Or, is it really a question of “when?” How will the ‘Buy American’ provision affect the automotive sector on a global level and impact America’s relationship with China? Part 2 of my interview with automotive industry expert, Bill Russo, provides an insider’s perspective from someone who has served as an influential force in the industry for over twenty years. Put down the newspaper- to get the real story, read on:

Missed the first installment?
Link Up, Learn More: Interview with Bill Russo, Automotive Industry Expert (Part 1)

There’s been a lot of buzz regarding the potential for China to become a major player in the auto industry in the US.  I believe that Chrysler brought this conversation to the forefront. How would you rate this possibility?
The determining factor in whether a car company can compete in a market is whether they have the capacity to meet local consumer as well as regulatory requirements. There are a variety of barometers. Part of the market acceptance challenge is going to be the perceived value proposition of the Chinese brands relative to the established competition. One of the things China will struggle with initially is that the core markets of North America and Western Europe are dominated by companies that already have a lot of experience in delivering technologies and solutions that most markets understand and already accept. They also have well-known brands. Unlike China, these are mature markets that are not growing so they will have to take share away from established OEMs. Where China will probably evolve is they will start by developing the technologies in their own country and then they will target emerging growth markets first. Companies like Chery and Great Wall have already started to export Chinese-manufactured vehicles to Latin America, the Middle East, Africa, and Southeast Asian countries. So, they’re already doing it. The question you raised was when will those vehicles show up in North American and even Western European markets? Probably within the next five to ten years- but not before that. There’s a fair amount of development and brand building that still needs to be done.

China’s reputation over the past few years for supplying brand name globally-distributed products has been spotty at best. What will it take to turn China’s reputation around in the automobile manufacturing industry?
Let’s go back to one point. What I think drives a consumer in terms of buying a product is the recognition of a value proposition associated with the brand. If you look at the entrance of the Japanese into the US market, it was really driven by the first oil shock that occurred after the oil embargo in the 1970’s. Until that time, Toyota struggled to gain acceptance in the US market for decades. The company didn’t ramp up until people started to look for smaller, more fuel efficient transportation. That’s when Toyota really took off. When Toyota and Honda first entered onto the scene, they weren’t known for high quality vehicles; they were known for small, fuel-efficient cars. Over time, they converted their value proposition over to a high-quality, reliable compact vehicles and in the process, were able to expand their product offerings into new and higher-margin segments. The Koreans came into the market much later. When Hyundai and Daewoo and the other Korean brands first made their entry into the US, they followed the same trajectory as Japan did. The Koreans came in with the same kind of entry strategy- low-cost basic transportation. The Chinese will do the same thing. What I’m alluding to here is that over time you see history repeating itself when it comes to new market entrants – they generally capture entry-level consumers looking for value and attempt to grow from this base. The value proposition for new market entrants usually starts with affordability and evolves over time after the brand is accepted by consumers. The fact of the matter is, much of the content in our cars increasingly comes from China. Because a greater percentage of the total cost of a car is in the manufactured components, there has already been a significant movement of the production of supplied parts to China. A lot of the components used in cars today either are or can quickly be manufactured in China. This is purely driven by the efficiencies gained from sourcing in China. So, people are all waiting for the Chinese car to arrive. What they don’t realize is that a great deal of the Chinese car they’re waiting for is already inside the one they are currently driving.

On that note, the ‘Buy American’ provision has stirred up a lot of controversy in China. How do you think it’s going to affect the presence of the US auto industry in China?  Do you think it will impact China’s ability to become a major auto supplier in the US?
I think the risk here is that you are going to have these kinds of protectionist measures not just in the US but all over the world. When faced with politics and economics weaving together, governments try to defend their constituents by introducing protectionist measures in legislation. It doesn’t work. It doesn’t allow market forces to sort themselves out naturally.  The end result is that consumers will end up paying a lot more for their products. They’re going to be forced to pay more for goods produced in places where manufacturers and suppliers are forced to produce them. This isn’t just an auto issue. Imagine the impact on retail and consumer products in general if we suddenly have to re-source all of our global buying. “Everyday low prices” would take on a whole new meaning, one the US consumer wouldn’t comprehend.

You were Chrysler’s first Regional Vice President in China. What was the overall outlook when you began and how would you compare it with today’s climate?
The Chinese market has grown fast, but I expect a major structural realignment in the next couple of years. It has largely been a phenomenon of a large emerging market where international brands have enjoyed an opportunity to take advantage of opportunities in some highly profitable segments with relatively little competition. But, all the investment that flowed in has generated a structural problem. There is definitely an overinvestment in the Chinese auto industry today. There is much more capacity available than there is domestic demand, and the slowing of domestic demand recently has created an even larger gap. That’s going to motivate the businesses here to either export more of their capacity, their components, or their finished vehicles or they’re going to have to shut down that capacity. So, I think a lot of OEMs- both foreign and domestic companies that have invested- are faced with a “Solomon’s choice” over the next few years as to whether they continue to run these factories at low utilization, or to take out the excess capacity. I think there’s going to be a period of consolidation. At the beginning of this industry in the US, there were close to 100 branded car companies. Over time, those businesses consolidated to become the Big 3. In China, there are over 100 licensed automotive OEMs. That can’t continue- this is a market that just isn’t big enough to sustain that many licensed manufacturers. So, what will happen is the weaker OEMs will merge with the stronger OEMs. The government will also act a lot faster to correct the supply and demand imbalance – this is a top down system. The government will act in a way that constrains the capital inflow and guides consolidation towards a particular and preferred outcome. 

In comparison with the US, how do automobile advertising and branding strategies differ in China?
Because the population is so large, you can’t say that the Chinese market functions in a way that’s consistent. Luxury has its niche and there are a lot of wealthy Chinese consumers that will only shop for luxury import brands. They generally follow the model of luxury brand shopping, but this is only a very specific segment of the market. If you are in the mass market, import brands are generally positioned at the higher end of the price range, and you will find some Chinese consumers will also follow the foreign (typically “Western”) brand management approach. But, the majority of mass market consumers prefer to shop brands in the “Chinese way,” which means complete price transparency- direct competition right across the street from each other. On my first trip to China, I went to an auto shopping mall. Basically, they put all of the mass market brands together and allowed the dealers to compete right on top of each other. It was much like going to the Silk Market. The Chinese consumers enjoy this arrangement- they like to shop in a convenient way where they know that they can try to get the best price possible from whatever type of product they’re buying. In China, you have the entry level consumer who shops the Chinese brands. You also have the consumers that have “arrived” economically- these consumers are looking beyond the Chinese brands towards mass market foreign brands- for example, Volkswagen, GM, Ford, Chrysler, Toyota, Hyundai etc. Finally, you have the wealthy Chinese that will only look for imported brands- European, Japanese and American brands.

I’d like to veer off the subject a bit. You seem to have Twitter down to a science. Do you have any tips?
I recently read an article about Twitter, describing that it’s “like being a big fish in a river, and you have all these fish swimming by you that you can eat at any time, but you only need to actually eat a few times a day.” To screen the “fish,” I use this program called Twhirl, which allows you to create search arguments. Using tools like Twitter and Twhirl, I can stay on top of the latest breaking information on any topic I’m interested in. Twitter is a really cool tool- it has revolutionized the way you can access real-time information.

You’ve been in the automotive industry for 21 years. What’s next for you?
One thing that I did not have the opportunity to do in the nearly 5 years that I was with Chrysler in China is study Mandarin. I believe this is China’s century to dominate, and I’m at a point in my life where I believe that in order to participate and contribute in it, I need to have a better proficiency in the language. So, I’m studying Chinese now at Beijing Mandarin School. I feel that the most rewarding and career-defining experience I’ve had was learning how to do business with Chinese partners and the government. When foreign companies come here, they inevitably make a lot of novice mistakes due to not understanding the culture or the way the system works. Having learned a great deal from my own experiences in starting new companies and industrializing products, I am now at a point where I could make a big contribution by assisting organizations with a) formulating how they can approach the market, b) devising strategies for reaching out to organizations they could eventually partner with, and c) navigating the process of negotiating toward a result. I’m now focusing on how I can assist other organizations to benefit from these experiences.

Want to reach out to Bill Russo? You can contact him at:
Email: bill.russo@gmail.com
Twitter: http://twitter.com/billrusso
LinkedIn: http://www.linkedin.com/in/williamrusso

This is the second half of a two part interview with automotive industry expert, Bill Russo. If you missed the first installment, you can check it out here. Questions and comments are always appreciated!

Interviews automotive, Bill Russo, Buy American, cars, Chery, china, Chrysler, Great Wall, Hyundai, Interviews, Link Up Learn More, OEMs

Will China surpass the US market in auto sales? Can a Chinese-branded car company compete on a global level? As Chrysler’s first Regional Vice President in Northeast Asia with over 20 years in the automotive industry, Bill Russo has the scoop. He was also kind enough to chat with me via Skype for this illuminating Q&A. For Part 1 of a 2 part series with automotive industry expert Bill Russo, read on.

You made a leap from the US to China in 2004 to serve as Chrysler’s first Regional VP in Northeast Asia. What have you discovered about China?
You’re not going to find too many places experiencing an acceleration curve similar to what China has been enjoying. You get the feeling when arriving here that you are transported to a different point in time and feel a positive momentum and pull towards the future. In this way, China is unlike any other place in the world. The US probably experienced this when they opened up the West over a century ago or right after the Second World War when America became the dominant industrial nation. Until very recently, there has been a feeling of unbridled enthusiasm about China’s future. I still get the feeling here that tomorrow will be a better day than yesterday was. It’s contagious once you’ve experienced it.

I was reading that in December- for the first time ever-there were more cars sold in China than in the United States.
That actually occurred in January. Keep in mind that China has been the most explosive global market for the automotive industry for the past decade. A lot of the experts recently have been forecasting a slowdown- well, it’s real. GDP growth in the 4^th quarter in China slowed significantly to 6.8%, but compare this with what you’re seeing in other parts of the world. Since 2003 the overall vehicle market has more than doubled in size, from 4.56 million units to 9.67 million units. Passenger vehicle manufacturers- the companies that produce cars, SUVs, and MPVs (extract the buses, trucks, and other commercial vehicles)- saw an increase from 2.36 million units to 5.91 million units in just 5 years time. China’s automotive industry has been growing in the double digit range up until 2008. In 2008, automotive sales growth slowed to a year-over-year 8.7% increase. In January, China’s total auto sales were 735,500 units compared with the US’s 656,693 units. Forecasting is an imprecise science, but one thing that has been absolutely true since I’ve been involved in the Chinese market is that the numbers have always exceeded predictions in terms of the market growth. No one expected China to surpass US auto sales until the middle of the next decade. You have to consider that the biggest selling month in China is January. Chinese New Year is when people do a lot of their shopping, when they return to their homes and want to show “face” to their families. This is why car sales peak just prior to the holiday. So, while world leadership in January sales makes a good headline, I don’t believe that over the full calendar year, China will beat the US in total sales. But this one month has given us time to reflect on how far this country has come.

Does the slump in US auto sales play into this comparison as well?
Absolutely. Since 1994, the US has been a 15 – 17 million unit total market.  According to recent quotes from industry leaders, it looks like everyone’s expecting only a 10 – 11 million unit market this year. The forecast of only a 10 – 11 million market this year shows you how significant the economic problem is in the US. The American auto market very rapidly lost nearly 40% of its overall volume. But, it’s unlikely that the US economy will settle at this low rate forever. At some point in time the US will bounce back to being the number one market again. China will eventually surpass the US as being the largest auto market in the world on a sustainable basis.

When you state that “China will eventually surpass the US as being the largest auto market in the world,” when do you see that occurring?
Well, as I said before the forecasts on China have always been wrong. If the forecasts say “the middle of the next decade,” I’d move that up to within the next 3 years. One of the barometers that economists typically follow is GDP growth per capita – also known as purchasing power parity. The number that signals when a market has reached a level where domestic consumption can sustain an industry on an ongoing basis is US $6,000. If I go back a few years, China’s GDP per capita in 2001 was US $1,000. In 2008, it was US $5,943. This increase signals that China has arrived as a sustainable domestic consumer market. You have enough citizens and enough wealth that people can afford big ticket items like cars which can sustain growth for a long period of time.

The US is now focused on promoting the manufacturing of hybrid vehicles. Do you think that consumers are going to be willing to pay more to go green in both the US and in China? Has China become eco-conscious when it comes to vehicle manufacturing?
There’s definitely awareness of the technology in China. What China does better than some other countries- including the US- is that they try to instill on the consumer side an awareness of the urgency of the issue. The way China does that is they impose a consumption tax, so higher-fuel consuming vehicles when purchased are assessed a higher tax rate. In Europe they do it by taxing fuel, which is a similar approach. By implementing these policies, it signals to the buying public that they need to be aware of the impact of the purchase they’re making. The US assesses their regulations on the manufacturers; they use a system called corporate average fuel economy, which is fraught with problems. In China, when consumers consider their vehicle purchases, they focus on engine displacement. Engine displacement is what they regulate in China- consumption tax is based on the displacement of the engine of the vehicle that’s being purchased. I think what China will look for in the near future are lower fuel consuming technologies. Hybrid vehicles will not appeal to consumers purely on the basis of technological sophistication. What the consumer in China will look for is the total cost of ownership- is it better from a total cost of ownership standpoint to buy a hybrid vs. a conventional fuel efficient engine. I don’t think a hybrid is really what people in China are interested in. The vast majority are looking for an overall cost-effective mode of transportation. I see a movement toward clean diesel. Diesel has already been introduced successfully in some Asian markets. Consumers can clearly see the value proposition of clean diesel technology: lower fuel consumption, lower emissions and better acceleration that can offset any up-front cost for the technology. Outside of a technological “coolness factor,” the value proposition of gasoline hybrid engines are less apparent. There are two questions that will determine whether a technology like hybrid gas or clean diesel will receive market acceptance: Will they be more favorable from a tax standpoint and how will it impact the cost to operate the car? European governments encouraged people to buy diesel because it was cheaper to buy the fuel. They’re more willing to pay for the technology if they get a lower cost of operation. In China, one of things that will limit the acceptance of diesel will be the availability of clean diesel fuel.  The infrastructure isn’t there yet.

Do you see investment increases in these types of technologies in China?
One thing you can guarantee is that there’s a lot of R&D investment in a lot of directions in China. So, to answer your question-yes. I think the Chinese are really working to establish themselves on the forefront of whatever technological developments are happening in this industry. One thing is for sure- you’ve got about 25 percent of the total Chinese market that’s held by Chinese-branded vehicles. The Chinese OEMS are certainly in it and they’re here to stay. They want to make sure that they can adapt to technologies introduced by foreign OEMs. What typically happens here is that companies come to China lured by this tremendous growth market. They invest with local JV partners because they are required to. Those local partners do a variety of things to adapt or reverse engineer the technology into their own branded vehicles. China learns quickly how to develop their vehicles and component technologies with the help of foreign capital investment. Sometimes they work through the process of acquiring assets from foreign OEMs, but the whole system here is geared toward transferring critical development capacities to the local companies. Chinese OEMs will not skimp on investing in areas where future development needs to be focused.

Want to reach out to Bill Russo? You can contact him at:
Email: bill.russo@gmail.com
Twitter: http://twitter.com/billrusso
LinkedIn: http://www.linkedin.com/in/williamrusso

This is part 1 of a 2 part interview with Bill Russo.  Be sure to check back on Thursday for Part 2, which addresses automotive branding, the ‘Buy American’ provision, structural realignment and… Twitter!

Interviews automotive, branding, Chrysler, Development, hybrid vehicles, IBM, Interviews, Manufacturing, OEMs, R&D