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Emerging carmakers put mainstays in panic

by Hiroko Nakata

Third in a series

The news that BYD Co., a Chinese car and battery maker, had taken over a factory from Japanese metal die maker Ogihara Corp. in April came as a shock to the domestic auto industry.

For decades, Japanese automakers had believed they enjoyed a competitive edge honed by their superior technology and partnerships with precision parts makers. The takeover by BYD, which was backed by U.S. billionaire Warren Buffett, was seen as a sign that Chinese firms had arrived technologically and that China was in fact becoming an economic superpower.

The acquisition is just one of several by Chinese companies who are chasing foreign auto parts makers to gain a technological edge good enough to compete on the global stage against their Japanese and Western counterparts.

Japan’s automakers have been in a decades-long competition against what are now known as the Detroit Three — General Motors Co., Ford Motor Co. and Chrysler LLC. Now they are facing challenges from the low end of the spectrum in China, and from the high end in South Korea.

The key for Japan’s automakers will likely be fuel-efficiency. Vehicles that are affordable and produce low emissions can capture large portions of the markets in China and other emerging economies if new strategies can be developed to cater to their particular needs, experts say.

Lower trade barriers will also be urgently needed, given the relatively high cost-performance of Japanese cars.

“What the Japanese makers have to do is figure out how to develop low-priced cars, like the ones sold by local Chinese makers, without damaging their brand images,” said Osamu Yasugi, a senior researcher in charge of the Chinese market at Gendai Advanced Studies Research Organization, a Tokyo-based think tank that specializes in the auto industry.

Toshiyuki Shiga, Nissan’s chief operating officer and chairman of the Japan Automobile Manufacturers Association, said he was astounded by China’s progress after returning from the Eighth China International Automobile Exhibition in Guangzhou in December.

“What I noticed in Guangzhou is that new Chinese automakers are increasingly improving their quality,” he said at a news conference in Tokyo.

He said the domestic auto industry needs to address the issue with a sense of crisis and break with the past practice of focusing solely on the development of expensive, high-quality automobiles if they are to develop a presence in emerging markets.

Nissan Motor Co. and Honda Motor Co. are already taking action. They plan to launch new brands in the next two years exclusively for the Chinese market. Nissan’s Venucia and Honda’s Everus are being developed in conjunction with their Chinese partners to be mass-produced vehicles with affordable price tags.

Although expanding rapidly in number, Chinese carmakers aren’t yet ready to enter the export market, giving the Japanese an opening to compete with them on their home turf.

Automobile sales in China have grown constantly since 2002 and passed 13 million vehicles in 2009, eclipsing the United States to become the largest car market in the world.

Japan meanwhile sold 4.6 million units the same year.

Despite the growth potential, Japanese manufacturers didn’t enter the Chinese market until 1998, when Honda became the first to produce vehicles there. Volkswagen AG of Germany has been in the Chinese market since the mid-1980s.

Currently, GM has the biggest market share in China, at 14.1 percent, followed by Volkswagen with 11.3 percent. They are followed by China’s Changan Automobile Co., Nissan, China’s First Automobile Works Group, Toyota Motor Corp., South Korea’s Hyundai Motor Co. and Honda, according to data for the January-September 2010 provided by Nissan .

Competition in China is becoming fierce.

In addition to the local companies teaming up with foreign makers, there are around 100 automobile-related manufacturers in China, some of which are acquiring foreign parts makers or luring foreign engineers with high salaries, experts said.

In 2009, China’s Geely Automobile Holdings Ltd. acquired the key operating assets of Drivetrain Systems International Pty. (DSI), an Australia-based manufacturer of transmissions.

Last January, Ningbo Yunsheng — a music box maker that expanded into the auto parts business — acquired Nikko Electric Industry, a Japanese parts maker established in 1933.

Some have just bought automakers outright. Geely acquired Sweden’s Volvo Cars from Ford in March, and Nanjing Automobile Corp. bought MG Rover of Britain in 2005.”The number of such takeovers of parts makers by Chinese firms will continue to increase,” said Koji Sako, a senior economist who tracks China and other parts of Asia at Mizuho Research Institute.

In terms of quality, parts makers are closing the gap with their developed rivals, experts say.

But Gendai’s Yasugi noted that top-level components will not necessarily translate into an equivalent assembled whole. “It may take a long time for them to fit all the pieces into a complete high-quality car,” he said.

Seiji Kuraishi, Honda’s director and chief operating officer for China, said Chinese parts are steadily improving but still have a ways to go.

“Our competitiveness depends on how we can procure high-quality parts from local makers at low cost,” he said. “But they still have a weak point. That is maintaining the quality.”

As for electric cars, which are simpler to build than their gasoline-powered peers and an area BYD has been trying to tap in recent years, everything hinges on the batteries, an area Japan still excels in.

Honda’s Kuraishi noted that while Chinese firms are jumping on the EV bandwagon, in reality, they can’t make batteries that are long-lasting, let alone a network of charging stations. “I think it will take time,” he said.

While Chinese makers may lag their Japanese counterparts in quality for the foreseeable future, South Korea’s Hyundai is already presenting a challenge.

“In the U.S. market, for example, Japanese makers can see Hyundai rapidly catching up,” said Park Kun, Gendai’s deputy senior researcher in charge of South Korea.

This is a result of Hyundai’s longtime study of Toyota’s global success and more than a decade of focusing on quality and brand improvement, Park said.

Like Toyota, Hyundai used the U.S. market to establish itself as a quality maker before moving on to other markets. Its Elantra model was awarded for having the highest initial quality in the compact segment in 2009 by J.D. Power and Associates, an auto survey and consulting firm in the U.S.

“Now, Hyundai’s quality is no less than that of Japanese makers,” Park said.

He also said Hyundai is reportedly trying to turn its Genesis model into a high-end brand to rival Toyota’s Lexus in the near future.

Hyundai’s global success has also been supported by the won’s decline against the dollar, as well as the government’s aggressive policy of concluding free-trade agreements with the U.S. and the European Union. Like its rivals, it is also using financial aid as a tool to expand its presence in Africa.

Improvements in quality and brand image have helped Hyundai acquire leading market shares in various countries in Africa, South America and Europe. It is also doing well in China.

“Including Kia Motor Corp., the Hyundai group is aggressively expanding around the world. It is a threat in the Chinese market, too,” Honda’s Kuraishi said.

Japanese businesses are particularly concerned about the FTA recently struck between Seoul and Washington because it will give South Korean carmakers an upper hand in the giant U.S. market when tariffs are abolished.

Feeling the threat, carmakers and the Japan Business Federation (Nippon Keidanren) called on the government to join the U.S.-backed Trans-Pacific Partnership, a regional free-trade regime being negotiated by nine countries.

Prime Minister Naoto Kan, afraid to be left out of the loop, had hoped to declare Japan’s intention to join the pact during the November meeting of the Asia-Pacific Economic Cooperation forum in Yokohama. But faced with strong opposition from farmers and lawmakers in both the ruling and opposition camps, Kan backed off and only said Japan will start consulting with the TPP parties.

The official decision on whether to join the pact won’t be made until June.

“Japan’s competitiveness will weaken (after trade barriers between the U.S. and South Korea are abolished),” Keidanren Chairman Hiromasa Yonekura said in December. “The Japanese government should join in talks for the FTA as early as possible.”