China Carmakers Go Upscale in Shanghai

At the Shanghai Auto Show, local manufacturers are putting their own stamp on higher-end vehicles

There are the leggy models, the concept cars, and the hordes of automotive journalists. There are the latest vehicular offerings from General Motors (GM), Toyota (TM), DaimlerChrysler (DCX), and Rolls-Royce. So, just another auto show, like the annual confabs of Detroit, Geneva, and Tokyo? Not quite.

Instead, at the Shanghai Auto Show, which opened Apr. 22 and will run for one week, much of the attention is focused on an unprecedented lineup of higher-end Chinese-branded autos. Xian-based BYD Auto, which got its start as a cell-phone battery maker, showed off its F6, a 2.4-liter-engine luxury sedan. Geely had its Mybo sports car as well as its MVP 2.4-liter, Shanghai-manufactured version of a London black cab, which it is producing with Manganese Bronze Holdings.

Shanghai-based local champion SAIC Motor is showing off eight vehicles, including its Roewe W2 concept car, complete with models attired as English dressage-style equestrians. That W2 showcases the design and style of the next Roewe model, to be released at the end of this year. SAIC also showcased a fuel-cell car called the "Shanghai," resurrecting a brand it first launched in 1964 but then shuttered 16 years ago.

Plenty of Potholes Ahead

Meanwhile, China's most successful domestic brand, Chery (which beat out GM in March, coming in first place in domestic sales with 44,000 vehicles), showed an astonishing 40 models, including the A6 Coupe (designed with Italian company Bertone), the Shooting Sport recreational roadster, the Tiggo6 sport-utility vehicle, and several concept cars in its sprawling 2,200-square-meter booth.

Chinese-branded high-end cars? Hard to believe, but they have arrived, albeit perhaps with plenty of potholes on the road ahead. To date, Chinese carmakers have found their niche either by helping the big brands from abroad make their cars, or producing ultra-low-cost cars like Chery's QQ and Geely's Haoqing. Those cheap vehicles, aimed to appeal to lower-income first-time buyers outside China's first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen, have been known as much for their low quality and shoddy design as for their rock-bottom price. Nevertheless, that focus has worked well so far, with Chinese self-branded autos holding close to 30% of the domestic market today, compared to 10% five years ago, say auto market watchers. (The overall sedan market grew 30%, to 5.18 million vehicles last year.)

Now that's changing, particularly as Chinese makers face new competition from the likes of GM's Chevrolet brand, including the $6,500 Spark, Volkswagen's Golf, and Hyundai's Elantra, all vying for the low end of the China market. "Foreign automakers are starting to produce low-price cars, which is a very dangerous signal for the Chinese auto industry, and is driving the move towards higher end," says Beijing-based auto analyst Jia Xinguang. So "Chinese automakers are experiencing an upward trend on pricing. Geely used to produce cars priced from $2,600 to $3,900, while now they enjoy producing cars from $5,200 to $6,500. The same trend can also be seen in Chery."

From Imitation to Innovation

Geely knows all about managing on razor-thin margins. It has outsourced services like its company cafeterias to cut costs. And it has founded three universities, including Geely University in Beijing, which together enroll 30,000 students and provide the company both income from tuition and a ready source of affordable and well-trained graduates to staff its engineering, design and marketing ranks. But with average auto prices declining some 7% a year in China, moving up the quality ladder is another important way to protect margins.

"When most Chinese companies start, whether in service or manufacturing, they tend to copy. That is the easy way to start.

But if you stay with this strategy, sooner or later you will die," says Lawrence Ang, executive director of Zhejiang Geely Holding. "In order to keep up margins, a company needs to innovate. We do use reverse engineering, but we also are building up core technology," he says, citing his company's academic and research institutes as keys to this goal.

Shenyang (Liaoning)-based Brilliance Auto, which has a joint venture with BMW, is also expanding its lineup of self-branded vehicles. At the Shanghai Auto Show it presented eight self-branded vehicles, including its A1 compact hatchback. And it plans to export a $26,000 midrange vehicle, the BS6, to Northern Europe later this spring. "We will improve our technology, our brand, our marketing," says Liu Zhigang, president of Brilliance Auto. "Through all of this we will continue to improve the quality of our vehicles and move toward producing better, higher-end cars."

Long Road to Travel

To be sure, foreign brands are hardly ready to hand over the ignition keys to the China market. The Shanghai Auto Show, which has drawn 1,300 companies from around the world, highlighted that fact. GM is showing 41 vehicles from its various China joint ventures at the show, including Buick, Cadillac, Saab, and Opel models. Under its Chevrolet lineup, GM already sells its Epica sedan, Lova compact, Aveo hatchback, and Spark mini in the China market. Chevy sales surged 26% last year, a rate of growth it expects to repeat this year. "We position ourselves as a global, international brand with high quality," says Steve Betz, Chevrolet brand director in China.

"The Chinese manufacturers currently have 26% of the market—so yes, they are out there. But I personally feel their quality isn't as good as ours," says Betz. "We are seeing much more competition from Hyundai, from the Toyotas, the Hondas, of the world. Those are the types of companies that are really the competition [for Chevrolet in China]."

And despite some progress, it's clear that Chinese vehicles have a long road to travel before they raise their quality high enough to meet mature auto market standards in everything from design to emissions to safety levels. Nevertheless, as the Shanghai Auto Show demonstrates, they are leveraging their partnerships with foreign companies to improve fast. That's certainly true of SAIC, which has been producing cars with GM since 1997 and Volkswagen since 1985.

"Every country has its own style of economic development, and China has been in the industrialization stage," says Tang Dongcheng, vice-president of Dongfeng Motor, a joint venture between Hubei-province-based Dongfeng Group and Nissan. "In the Chinese auto industry we have been in infancy but now are moving toward a more mature stage. In the future, China will move forward to the high end," says Tang. The Chinese infant is growing up. Watch out, automakers of the world.

Click here for a look at some of the luxury cars making a splash in China.

Before it's here, it's on the Bloomberg Terminal.