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Barbarians deliver coals to Newcastle

Mark O'Neill

A slowdown in domestic demand for cars is behind the mainland's ambitious attempt to export vehicles to the US

Pit the barbarians against the barbarians.

That is what China is doing to realise its dream of becoming a global exporter in the key symbol of industrial power: cars.

Last month, the Washington law firm of former US trade representative Charlene Barshefsky signed a contract to represent Visionary Vehicles, a company that plans to import hundreds of thousands of cheap Chinese cars into the United States and repeat the success of Toyota, Honda and Hyundai.

Just a few years ago, Ms Barshefsky was on the other side of the table, bargaining with the Chinese over every detail of the agreement under which Beijing joined the World Trade Organisation.

I remember her as eloquent, energetic and well-briefed, a formidable opponent for Beijing's mandarins striving to get the best terms they could for their companies. No doubt the mandarins are delighted that she is now on their side.

The export plan will be the most severe test - in the world's most competitive market - of the ambitions of the Beijing leadership to become an automotive superpower and global manufacturing centre for cars.

It is one thing to sell Chinese-made colour televisions, mobile telephones, computer parts and other products rich countries are ready to give up. It is another to challenge them in one of their core industries - the heart of their technological strength and one of their biggest employers.

China's ambitions will be on show at the 11th Shanghai International Auto Show, which will open at a giant 130,000 square metre hall in Pudong on April 22. A show spokeswoman said that all available space had been booked by dozens of vehicle companies. Organisers expect 300,000 visitors to attend.

I attended the annual show over the last two years and was impressed by the optimism and extravagance that filled the cavernous exhibition halls.

But much has changed since last year's show. Everyone was talking of the new models foreign makers were launching for domestic consumers who were buying at a rate unmatched in the world. No one spoke about China exporting cars.

Now that demand at home has fallen to more normal levels, nationwide inventories exceed 400,000 units and the shadow of overcapacity is hanging over the industry.

China wants to export its way out of the first major down-cycle of its young vehicle industry.

In October last year, Shanghai Automobile Industry Corp (SAIC) paid US$500 million to buy the fourth biggest carmaker in South Korea and is about to acquire MG Rover, one of Britain's oldest manufacturers. With these purchases, SAIC instantly buys a place on the world list of car exporters.

In February, Chery Automobile, a state-owned firm based in Wuhu, Anhui province, announced that it would export 250,000 cars a year from 2007 to the US, to be sold by Visionary Vehicles, rising to one million by 2012. They will be priced 30 per cent cheaper than comparable models.

The industry greeted this announcement with scepticism. Set up in 1997, Chery produced only 90,000 cars last year, of which 40,000 were the QQ model. General Motors has sued Chery over the QQ, saying that it is a clone of its Chevrolet Spark.

Can Chery meet stringent US safety and emission standards, provide good after-sales service and convince American consumers to buy a Chinese car? How can it compete with Toyota, Nissan and other makers of compact cars with their decades of experience in the US market?

When you look at the quality and limited production of Chinese-made cars, Chery's forecasts are hard to believe.

Even domestic consumers prefer to buy foreign brands made at joint-venture plants rather than Chinese brands, which compete entirely on price. Chery's five models rank among the cheapest in China, selling for 19,900 to 67,400 yuan.

Last month, the Ministry of Commerce issued a report on the poor international competitiveness of Chinese carmakers. Their research and development spending is just 0.63 per cent of revenue, compared with 3.6 per cent in Japan and 3.9 per cent in the US. Also, their ability to develop new models was less than half that of South Korea, the US, Japan and Germany.

'This gap in R&D spending reflects how far behind we are and the difference in brand and product quality,' it said.

This is the present. How about five years from now?

The argument for China's becoming a vehicle superpower is that its overcapacity and low labour costs will force it to become an exporter to Europe and North America and that, determined to imitate Japan and South Korea, the government will provide whatever funds and policy are needed.

To make up for lost time, Chinese firms will acquire foreign companies, R&D expertise and tap into the global reserve of available talent, just as Chery has signed as a designer Pininfarina - one of the most famous Italian houses which created models for Ferrari, Alfa Romeo, Fiat, Lancia and Peugeot.

Chery has also set up a R&D centre and hired engineers from big US makers.

I include myself among the sceptics who do not believe in off-the-shelf technology. The global vehicle industry is the result of decades of experience and consolidation, while Chinese car companies are young, highly dependent on foreign technology and brands and have no experience in developed markets.

The domestic industry is highly fragmented, with 31 manufacturers of passenger cars alone. The highest-ranking purely Chinese company, Geely, placed only eighth last year, with sales of 97,470 - less than one week's production by Toyota.

The top seven are all joint ventures with major foreign makers that have every interest in preventing their Chinese partners from becoming global players.

That is probably why the government selected Chery as the mass exporter to the US. Although it ranked only ninth last year, it was the top firm owned entirely by the state.

The reality is that, while the barbarians may be partners in sales and distribution, China will have to rely on itself to become a vehicle superpower.

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