China's Brilliance: Back from Disaster?
It was a devastating blow for the ambitious executives at Chinese automaker Brilliance Auto (CBAMF) . Soon after a June crash test in Germany of its sleek BS6 midsize sedan rated the car as unsafe, a humiliating film of the mangled model circled the globe on YouTube. German automotive publications slammed the BS6 as a disaster on wheels. As German automotive consumer group ADAC reported: "Given the results of the frontal crash at 64 kph [40 miles per hour], it's better not to even get into the driver's seat."
Skeptics say the Brilliance quality stumble confirms that it will take Chinese automakers 10 years to learn how to build cars that can compete in Europe and the U.S. But the rapid response of Brilliance to the quality debacle suggests it may move up the learning curve faster than anyone expects. The company, which is China's 16th-largest automaker, was founded in 1990 and had sales of $1.3 billion in 2006, largely on the strength of its minibus and auto-parts units. It had been traded on the New York Stock Exchange until July, when it de-listed its American Depositary Shares after the ADAC tests were reported.
At a Sept. 11 press conference at the Frankfurt Auto Show, a German distributor for Brilliance announced the results of a new crash test on a reengineered pre-production prototype of the BS6. It claimed the revised model should win a three-star Euro NCAP rating, an average performance within the NCAP five-star system, and up sharply from the dismal one-star rating it earned in June. "Sixty-five parts were changed. There's been a big improvement in the car's safety," says Hans-Ulrich Sachs, head of HSO Motors Europe, which aims to sell Brilliance cars in Germany. In addition, the car's pillars were reinforced to prevent deformation during a crash, the door lining was modified to improve strength, door sills were stabilized, as were parts of the floor plate, the roof pillar, and the roof skin of the vehicle.
Brilliance, BMW Group's (BMWG) joint venture partner in China, boldly chose Germany as its base for attacking the European market with its elegant-looking sedans. It unveiled its stylish models at the upmarket Geneva Auto Show in March—the first serious effort by any Chinese automaker to win a foothold in the U.S. or Europe. Brilliance was eager to get a rapid read back from the most demanding car culture in the world, especially on its €22,000 ($30,000) BS6 flagship. "We believe that if we can sell cars to the high standards of Germans, we can succeed in the rest of the world," says Chi Ye, head of global sales for Brilliance Auto.
Coming to Market
The June crash test conducted by ADAC dented Brilliance's rollout plans. But Sachs says ADAC's critique in June was not a surprise for him or Brilliance. Last November, HSO put a pre-production BS6 through a simulated European crash test and the results were subpar, indicating the car would receive only two stars. "We sent the data to Brilliance and said they need to improve quality. They initiated a reengineering project in January," says Sachs, who insists that Brilliance's cars have passed a standard European Union safety test that differs from the Euro NCAP test. NCAP tests involve a head-on crash at 64 kph (40 mph), while the EU safety test is simulated at 56 kph (35 mph)—a difference of 30% more power on impact, Sachs says.
As ADAC was announcing the failure of the BS6 in June, Brilliance was already running the revised BS6 through its quality paces. Tests were conducted at the full-scale crash-test facilities of IDIADA Automotive Technology in Tarragona, Spain. Brilliance now plans to bring the upgraded car to market in March, 2008, setting back its thrust into the European market by only six months. Brilliance's target: sales of 100,000 cars in Europe, or 0.8% of the market, within five years.
By mid-2008, Luxembourg-based HSO aims to have three models on the market: the BS6, the BS4 compact sedan, and the BC3 coupe. By yearend, Sachs hopes to add a station wagon and a small "environment-friendly" model. An SUV is targeted for 2009.
That demanding push into Europe assumes, of course, that production versions of all Brilliance cars receive three stars when tested by ADAC and other European quality associations, Sachs says. But he and Brilliance are confident they will. To ensure a better quality rating, Brilliance hired top European engineering houses to lead the reengineering effort. "We have a famous German partner," says Ye, adding that the company signed a confidentiality agreement with the engineering house.
Brilliance also has begun doing U.S. quality and crash tests on its cars, and is aiming to launch exports to the U.S. within two years. "The regulations in the U.S. are more complicated than in Europe, because they differ from state to state," says Ye. "We want to be the first Chinese company to enter the European market. Our experience in Europe can help us enter the U.S. market."
Sachs already has signed up 33 dealers in Germany, aiming for 100 by yearend, and is forecasting sales of 15,000 cars in 2008, as long as the Brilliance models meet EU standards. HSO had hoped to sell 15,000 cars this year, but now expects sales of 1,500 to 2,000. At the Frankfurt Auto show, Ye, head of overseas sales for Brilliance, met with 200 potential European dealers. Now, he is setting up importers for Spain and Portugal. "Brilliance is the icebreaker for all the other Chinese manufacturers in Europe," says Sachs, who helped open the European market to Korean automakers in the early 1990s.
Knowledge is Power
The tale of Brilliance's determination to crack the European market, despite its quality blunder, indicates just how quickly other Chinese automakers may dare to do the same—especially those who have joint ventures with Western partners in China. Auto industry experts believe the Chinese will master quality and reliability in half the time it took the Korean automakers to go up the learning curve, thanks in part to the knowledge transfer from joint ventures. "Our cooperation with BMW gave us a lot of help improving quality," says Ye.
But that cooperation goes only so far. BMW is not involved in producing Brilliance's cars. When asked at the Frankfurt Auto Show about the tech transfer that is going on between them and Brilliance, BMW's chief financial officer, Stefan Krause, just said: "That's the price of selling cars in China today."
Another reason why the Chinese may overcome quality kinks faster than expected: A globalized supplier industry allows anyone to buy design, engineering, and technology from the best in the business. Brilliance's European-looking BS6 and BS4 were designed by leading Italian styling house Giugiaro—best known as designer to Ferrari—and its chassis development and optimization was done by Porsche engineering. Brilliance developed one engine on its own and builds another under a joint venture with Mitsubishi (MITT). Finally, its production line in Shenyang was designed by BMW technicians working at Brilliance.
Ye says Brilliance will continue working to boost its crash-test rating to four stars—and eventually five—the best performance. Roughly 10% of Brilliance's sales are international, with the Middle East and Russia as leading markets. Brilliance is currently scouting for a plant site in Russia and already has an assembly plant in Egypt.
HSO Motors Europe is currently signing up European distributors, including Belgian car supermarket operator Cardoen and France's Asie Auto, which already distributes Chinese Landwind SUVs through a 100-strong network of dealers. HSO will distribute cars in Germany. Brilliance wants 700 European dealers by the end of 2008. Brilliance may have stalled this year, but it has no plans to take its foot off the accelerator to win over European buyers.
And the next strategic target is the U.S. How close is that? In July, Brilliance announced that it would be partnering with Scottsdale (Ariz.)-based distributor China Motor to launch a $20,000 vehicle—provided it doesn't fail U.S. safety and emission tests.