The Great Chinese Car Casino
For the past several years, China's central government has been building World Consumer Rights Day into something of a national holiday. Every year, the country's leaders focus the state-controlled media on consumer rip-offs and corruption alike, lambasting major firms and investigating high-ranking party officials. This year's crackdown again focused heavily on foreign automakers operating in China, with CCTV accusing Volkswagen, Tata Motors, Daimler and Nissan of selling defective vehicles and overcharging consumers.
Global automakers can hardly afford to protest this latest cost of doing business in the world's most important car market, but they also can't help noticing that China's leaders are increasingly using them as political pinatas. And with both national and factional agendas driving Beijing's heavy hand, the risks of selling cars in China seem to be growing as fast as the rewards.
Though sales have been slowing, the Chinese market's high-single-digit growth rate and relatively low penetration make it the most promising playing field for global automakers. Compared to the flattening demand found in developed markets and the inconsistency of others, such as India, Russia and Brazil, China is becoming the best bet for the long-term pursuit of sales volume.
China has always leveraged its potential to extract concessions from major automakers. Its initial strategy was to force the global majors to partner with Chinese firms and encourage technology transfers in the hopes that domestic players would grow to rival the established players. Decades in, however, it's clear that Chinese automakers have not become globally competitive powerhouses: Even in their home market, they continue to lose out to their foreign partners and rivals. Unable to encourage a dynamic domestic industry, China's government has found new ways to score populist points off the overall strength of its car market.
Last year's antitrust investigations into the luxury car market showed that President Xi Jinping's emphasis on consumer protections was a convenient veil for pursuing an agenda for the auto industry as well as a substitute for meaningful political liberalization. But it's become increasingly apparent that Xi's anti-corruption campaign is also aimed at the allies of former President Jiang Zemin, whose close ties with China's largest automakers put the industry at the center of a massive power struggle within the Communist Party.
The latest "big tiger" to be caught up in Xi's anti-corruption campaign is Xu Jianyi, chairman of FAW Group, China's oldest state-owned automaker. Authorities have been investigating automakers linked to the People's Liberation Army since 2011, citing complaints of "rampant corruption"; Xu was detained for questioning last week while in Beijing for an annual meeting of the National People's Congress. Xu was reportedly close to Zhou Yongkang, who was arrested last year for a number of alleged crimes, some involving a family Audi dealer and service franchise. Both Xu and Zhou were considered part of Jiang's military-industrial faction.
Jiang began his career as one of FAW's first group of Soviet-trained engineers; later, as mayor of Shanghai, he helped guide his city's automaker, SAIC, into partnerships that made it China's largest producer. Jiang's son, Jiang Mianheng, recently stepped down from the Shanghai branch of the China Academy of Sciences, a move that has been interpreted as a sign that the Jiang family itself is now in Xi's targets.
With the circle apparently closing in on a family that is said to "own Shanghai," China's two largest indigenous automakers, FAW and SAIC -- as well as their global automaker partners -- have to be worried about the collapse of their political patron's clique. With overcapacity looming and the China Automobile Dealer Association's warning that the domestic industry is due for major consolidation over the next five years, the timing of Jiang's downfall is certainly ominous.
GM and Volkswagen are both locked into aggressive expansion into China, and they are determined to navigate China's protectionist and factional cross-currents as they battle for sales both in China and globally. Toyota, on the other hand, isn't worried enough about losing its position as a global sales leader to pursue further expansion there. The Japanese automaker is said to be re-engineering its entire production and development system as part of its secretive Toyota New Global Architecture overhaul, an effort to build more productivity and flexibility into its existing manufacturing footprint. Given the gathering -- and increasingly unpredictable -- risks involved in the world's only major growth market for cars, Toyota's more tentative approach to China may well prove to be the wiser.
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