Look for new imports from India and China

Jan. 1, 2020
Inexpensive imports from China and India could remake the auto market.
India China Greg Horn Mahindra Automotive BYD Auto

Before the year is over, the first street legal India-manufactured vehicle – a diesel pickup from Mahindra Automotive – is set to hit the U.S. market.

"It will get by far the best fuel economy of any compact pickup truck," notes a spokesperson for Global Vehicles U.S.A., the Atlanta-based company that will distribute the trucks in the United States. "It will appeal to everyone from contractors and people who tow to businesspeople that need the carrying capability of a full-size pickup but don't need the size and still want fuel economy and the longevity of a diesel engine."

With an expected price just above $20,000, the Mahindra truck may not be an easy sell for diesel-wary Americans. But it's just the beginning of a range of products expected to enter the U.S. market over the next few years from new sources in India and China. Some of these products are likely to be priced well below the Mahindra truck, making them a substantial threat to traditional manufacturers.

Cars can be built in China for 20 to 30 percent less than it would cost to build the same vehicle in the United States, primarily because labor is much cheaper, notes David Zhao, automotive research analyst for Frost & Sullivan. But Zhao expects vehicles from China to be priced more than 30 percent below similar vehicles from traditional automakers. "They don't have the brand acceptance so they won't have high margins at the beginning," he predicts.

Zhao points to BYD Auto as one of the Chinese manufacturers that could enter the U.S. market as early as 2011. Since it began selling a subcompact sedan in its home market in 2007, BYD has seen sales nearly double every year. The company also has expertise in battery manufacturing and offers a plug-in hybrid electric vehicle in the Chinese market that sells for just $22,000 – almost half the $40,000 price tag expected for GM's eagerly awaited Volt model. Famed financier Warren Buffett was sufficiently impressed with BYD to invest in the company.

Other Chinese automakers that could enter the U.S. market include state-owned First Automobile Works (FAW); Chery, which planned to co-develop a small car with Chrysler until plans were scrapped late last year; and Geely, which the Wall Street Journal has referenced as a possible purchaser of Volvo. Volvo, known for its expertise in building crash-resistant cars, could be a huge asset to an emerging automaker because one of the biggest barriers such companies face in the U.S. market is the requirement to meet strict crash test standards.

Those standards could be what will save traditional manufacturers from what could otherwise be their most frightening competitive threat – the ultra low-cost Nano model, which already is offered by Indian manufacturer Tata Motors in its home market. The base price of that product is just $2,000 – although Greg Horn, vice president of industrial relations for Mitchell International, notes that over half of purchasers are buying the mid-range model that costs about $3,500. "It may not be possible to bring the Nano here," says Horn. "It wouldn't meet minimum speed or crash standards and it would be very difficult to modify it to meet those standards."

Potentially Tata could enter the U.S. market with a higher priced model, however. Horn notes, for example, that Tata has looked at licensing an economy model from Romanian manufacturer Dacia and building it in India. The product, which sells for about $8,800 in Europe, could be easily adapted to U.S. standards, Horn says.

Whatever the country of origin, Horn predicts that manufacturers that are unknown to U.S. consumers will have to price their cars below $10,000 to be successful in the U.S. market – and he envisions a steeper ramp-up for them than market entrants have experienced in the past. "Japanese companies took 25 years and Koreans cut that time in half," notes Horn. "The Chinese could have a very viable product in seven years."

Horn and Zhao have different views about how Chinese manufacturers will measure success. With strong growth in their home market, Zhao believes those manufacturers will be content just to have a presence in the United States. Horn believes the Chinese manufacturers will have to be quite aggressive in their approach to the U.S. market. He notes that all passenger cars sold in the United States for the 2012 model year require electronic stability control.

"That adds pretty significant cost, especially for a sub-$10,000 car," he says. "They would have to sell enough volume to amortize that cost across many cars. They can't come with a whimper to test the market out. They would have to sell a significant number."

There is a third possibility, however. Rather than entering the market under their own names, Horn and Zhao believe some Chinese and Indian manufacturers may opt to partner with traditional manufacturers. That approach can help address five barriers that Zhao sees for new entrants to the U.S. market, which along with crash standards include emissions standards, brand acceptance, distribution and aftermarket service. U.S. manufacturers already were making moves in that direction before the poor economy drove them to desperate measures in recent months.

GM already has used teams comprised of U.S. and Chinese employees to develop vehicles for construction and sale in China, Zhao says. Prior to its bankruptcy filing, GM submitted documents to lawmakers saying it planned to import 17,000 Chinese-made vehicles in 2011, climbing to 51,000 by 2014. After the government took a share in the company, those plans could be in jeopardy, as the government will want to keep jobs in this country. But if Chinese and Indian manufacturers begin to gain a foothold, U.S. manufacturers may be under increased pressure to move their own manufacturing to those countries.

Chinese and Indian manufacturers are likely to seek relationships similar to the one that Mahindra has with Global Vehicles for U.S. distribution of their products. The new brands most likely will be sold through dealers that already handle other models – and as Horn notes, that decision can make or break a new market entrant.

Horn points to Daihatsu as a company that did it "wrong," aligning itself with Cadillac dealers. Despite Daihatsu's reputation for durability and good engineering in other parts of the world, Horn says, "No one would come into a Cadillac dealer expecting to buy a tiny Japanese car."

If Chinese and Indian brands are successful in the United States, it may not be good news for body shops, as the size and construction of some of the vehicles is likely to increase the percentage that are deemed non-repairable after a collision. "They'll have to work with one of the thinnest gauges of steel, which is used for cost and weight saving," says Horn.

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