Chinese car brands are losing chunks of market share to the global joint ventures. Will this year's slowing market, with its tighter margins and pickier customers, soon put some Chinese car makers out of business altogether?
Don't count on it.
Understanding why the Chinese won't capitulate requires fresh thinking about market share. According to conventional wisdom, global brands account for 70% of light-vehicle sales while Chinese brands hit a ceiling at just 30%. This view holds that the Chinese, after peaking in 2008, now are in full retreat.
But this point of view is flawed because it ignores the full picture. Chinese companies manufacture some 5 million commercial trucks and buses each year.
In the commercial segment, Chinese brands totally dominate, taking a 96% market share. Foreign brands simply cannot compete on price and after-market service convenience.
When it comes to passenger vehicles, it is true that Chinese independents and the large state enterprises now account for less than 30% of the market. It is also a fact that Chinese car buyers today prefer foreign brands.
But what is often overlooked is that Chinese partners -- powerful state enterprises -- own half or more of the joint ventures that manufacture and market foreign-car nameplates in China. SAIC Motor Corp., for example, owns 51% of Shanghai GM. First Auto Works owns 60% of FAW-VW. And the municipality of Beijing owns 50% of both Beijing-Hyundai and Beijing-Benz.
From this perspective, Chinese share of the passenger vehicle market is 65% -- the conventionally measured 30%, plus half of 70% occupied by the joint ventures. Chinese ownership matters because it translates directly into massive profit and a significant influence over how the joint venture business is run on a day-to-day basis.
For example, last year SAIC reported a net profit of $3.2 billion, up 23% from the year before. The lion's share of those earnings came from its lucrative joint ventures with General Motors and Volkswagen. Much of GM and VW's profit remains in the joint venture as retained earnings.
SAIC, the parent company, reinvests its profit into new-product development. SAIC also leans on GM and VW to share their latest technologies for its Roewe sedans. Many elements of the Buick LaCrosse can be found under the hood of the next-generation Roewe.
You can begin to see that it is in SAIC's interest to keep the VW, Skoda, Buick and Chevy brands popular and profitable while it methodically improves its own Roewe and MG product lines. This perspective grows more intriguing when you consider that SAIC, FAW and Beijing Auto each recently announced plans to launch -- or relaunch -- vintage brand names like the Shanghai, the Red Flag and the Beijing.
China's powerful state enterprises -- SAIC ranks 151st on the 2011 list of global Fortune 500 companies -- gained additional leverage last year when the central government mandated formation of new joint-venture brands, or so-called baby brands.
The key element in these new joint-venture brands is that the Chinese partner will enjoy direct ownership of the brand and its products, which is not the case today.
One thing is certain: The impetus for baby brands did not come from the customer or from the foreign partner. When asked why his company had formed a new joint-venture brand in China in 2011, a German executive replied with some misgiving: "It's a legislative requirement."
Which gets right to the heart of the matter: There is no denying that foreign brands are highly popular among Chinese consumers and that the Chinese, so far, have struggled to build strong brand names.
But China remains in control because it makes the rules. Chinese brands feel some pressure today. But over the longer term, it is the still the global brands that need to worry more about keeping a place at the table.
--Michael Dunne is president of Dunne & Co., author of American Wheels, Chinese Roads: The Story of General Motors in China, and an Automotive News columnist--