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!

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