China cars: Double standards

FROM THE ECONOMIST INTELLIGENCE UNIT
April 16th 2009
China is the world's second largest car producer, yet its cars are supposedly still not safe enough for western markets. What is going on?

China has overtaken the US as the world’s largest new vehicle market, and is already the world’s second-largest producer of cars. Yet this size appears to mean nothing abroad, with Chinese car-makers not even registering in the world’s dominant three markets of North America, western Europe and Japan. Now, one Chinese car-maker’s renewed – and once again failed – attempts to pass European safety standards are leading to accusations of foul play from certain motoring groups.

A total of 1.1m new vehicles were sold in China in March 2009, a monthly record and far outnumbering the 857,735 sold in the depressed US market. This is now the third month running that China has outsold the US, making it the world’s largest new vehicle market, while it is second only to the US in terms of production. Yet the profile of Chinese car-makers abroad is still spectacularly low, with Chinese brands woefully under-represented in all corners of the world apart from the handful that are very slowly starting to appear in Russia, the Ukraine and a few other Eastern European and South American markets.

Of course, the Chinese market itself is not dominated by domestic players. Germany’s Volkswagen Group is by far the largest seller of cars in China, followed by various Japanese, Korean and US car-making groups, including General Motors, Toyota, Honda, Nissan and Hyundai. If Chinese consumers themselves prefer to buy established, foreign brands with their attractive designs and more sophisticated technologies then what hope do the Chinese manufacturers have in penetrating the sophisticated home markets of their older and more established rivals?

The marriage of Chinese carmakers to Western counterparts was supposed to address some of these issues, by allowing local car-makers to tap into the technological expertise of their more experienced partners. Germany's Volkswagen hooked up with First Automotive Works (FAW) and Shanghai Auto (SAIC), which is also a joint venture partner of GM of the US. Japan's Honda and PSA of France have both joined forces with Dongfeng, while Germany's BMW is in bed with Brilliance Auto. There are countless other Chinese/western car and commercial vehicle making alliances. Yet in reality, the Western brands have benefited more from these alliances in terms of their access to the vast Chinese market than has happened the other way round.

Playing Fair?

Branding and perception issues aside, one of the biggest challenges that Chinese car-makers have is matching the stringent safety standards insisted upon by US, European and Japanese authorities. So far, they have failed miserably in this area. This was exemplified best by the experience of Chinese car-maker Brilliance Auto, which in 2007 was forced to put its European export plans on hold after one of its cars allegedly recorded the worst crash test results in the history of one European motoring association.

The treatment that Brilliance has received ADAC – which is Germany's and Europe’s largest consumer motoring body - has been questioned, however. The video of the disastrous crash test, which was supposedly carried out under Euro-NCAP conditions found its way onto YouTube, thereby ensuring global damage of the Brilliance brand and obliteration of the name in Europe. A subsequent test carried out in Spain which gave the same Brilliance BS6 car three Euro NCAP stars, as opposed to the one star it received in Germany, attracted nowhere near as much attention.

More recently, ADAC subjected another Brilliance car – the new BS4 – to more Euro NCAP style testing. Yet again, the car failed miserably, gaining no stars whatsoever this time, despite the fact that the BS4’s safety credentials were significantly improved on those of the BS6 which was originally tested.

As acknowledged by ADAC, however, the conditions of the new test were somewhat unfair. Although the BS4 was introduced in October 2008 when the old Euro NCAP rules were in place, the car was tested under the brand new, and considerably more stringent Euro NCAP rules. Under the old rating system, the car would have been awarded three stars, the same as a number of other European best-sellers including several Audi, Fiat and VW models.

ADAC’s treatment of Brilliance has led some to criticise it of foul play, even including one leading German business magazine. A lack of electronic stability control (ESC – or sometimes referred to as ESP) on the car, which seemed to automatically disqualify the BS4 from gaining any stars in ADAC’s eyes was judged as particularly unfair. The new Euro NCAP rules actually state that a car without ESP cannot be awarded the full five stars, no matter how well it performs on other tests but not that it should fail outright. More to the point, ESP is not even mandatory yet in the EU, although it is likely to made so in the future.

The fact that the tests were not carried out by Euro NCAP itself raises more questions. Indeed, Brilliance does not feature anywhere on Euro NCAP’s website, leading to suspicions about the accuracy of ADAC’s interpretation of Euro NCAP style testing. Perhaps most ironic of all is that Euro NCAP is not even an official standard, and there is no legal need for a car to pass its tests before it can be sold in Europe.

It is clear that the road into western Europe, not to mention the other difficult-to-crack markets of the US and Japan, is going to be a long and arduous one for Chinese car-makers, and indeed for manufacturers from other emerging markets. National motoring groups such as ADAC with their own agenda and keen to protect the interests of their domestic industries will not be making it any easier. As always, politics are at play here just as much as genuine safety concerns.

On the upside, the initial positive press that other non-established brands and cars have so far gained – notably India’s Tata Nano – suggests that new brands from emerging markets do have a chance of success if the process is managed well. Brilliance itself is not giving up, with the head of its European importer – himself a former VW board member - recently talking up the brand’s imminent European success, not least as it prepares a whole range of models to compete in Europe. With the recession and credit crunch tightening up purse strings in all markets, this could pose an opportunity for lower-cost emerging market brands to strike. But before they do so, they must be armed with a full set of ammunition, ready to fight off their adversaries