Jason Stein
Jason Stein
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The (domestic) auto industry hits a wall in China

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SHANGHAI, China -- If you listen to the industry experts -- and in this country there are more than a few who claim to know how the future will unfold -- they'll tell you that the good times in China are over.

The industry has hit a wall -- and it's not a great outcome.

No, not for the foreign car manufacturers. They are raking in huge profits and placing vehicles in more Chinese garages every day.

It's the domestics where the real shakeout will happen.

Last week alone, Chery Automobile Co., the largest domestic Chinese passenger-vehicle maker, said it plans to drop its three subbrands and eliminate half of its models. Geely and Great Wall also are reassessing their product lineups.

What's happened to the China dream of dominating the local market with local products?

Not much.

Chinese 'don't want Chinese cars'

Talk to the foreigners on the ground, the ones, for example, in the interiors business or the turbocharging business, and they'll tell you that the locals don't want local brands anymore.

"Chinese consumers want to own a Volkswagen Passat. They don't want Chinese cars," one supplier executive told me this week. He asked not to be named because a portion of his business is still with a domestic automaker.

What will the shakeout really look like?

The experts say there will only be a handful of Chinese car companies around by 2020 -- the year everyone predicts the market will explode to 30 million units.

When you look at the current landscape, it all makes sense.

Chery is bleeding money. It launched three subbrands in 2009 and quickly introduced a variety of models under those brands at the cost of product quality. Chery's plan was to corner the market on low-end vehicles. But the market didn't respond well.

Domestic makers' woes

Bloomberg reported last week that more than nine in 10 cars in Shanghai, for example, are foreign brands.

License plate auctions -- the process of limiting car purchases by imposing quotas on registrations -- and pollution regulations are partly to blame for the domestic decline.

But it's more than that.

Whether it is the Prada shops in Shanghai's center or the gleaming dealerships that would rival a Manhattan Taj Mahal, the Chinese consumer is becoming increasingly sophisticated and aware of what's available.

Quality is also key, the supplier executive said.

One of Chery's goals, stated by the company last week, is to bring its product quality up to "global standards" by 2020. But the foreign brands are only getting better and fighting harder. Even in the so-called Tier 2 or Tier 3 cities beyond Shanghai, Guangzhou and Beijing, foreign brands are muscling their way in with cheaper subbrands.

Battle under way

The battle is well under way in a market where possibility knows no limits. And in a market where some say there will be 1 billion possible consumers by 2020, the battle is worth fighting because every automaker believes there's room for its offerings.

But, say the experts, the shakeout is coming.

You can reach Jason Stein at jstein@crain.com. -- Follow Jason on Twitter

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