China's auto industry shifts into high gear

As General Motors emerged from bankruptcy and launched the new LaCrosse under its surviving Buick brand this summer, the car showcased a unique feature: an interior that was entirely designed in China.

The leather seats and blue ambient lighting sprang from the minds of 1,700 Chinese engineers working at a Shanghai-based technical center, a joint venture between GM and one of China's top automakers, Shanghai Automotive Industry Corporation.

"This is an example of where China drove that car," says Maryann Combs, president of the Pan Asia Technical Automotive Center. "The No. 1 selling country in the world for Buick is here."

In just 20 years, the auto industry here has leaped ahead through partnerships like these, acquiring technology from foreign companies in exchange for access to China's vast market.

The global economic crisis is accelerating the industry's already rapid advance, as foreign companies seek haven in China's still-growing market. At the same time, Chinese carmakers are looking to scoop up – at fire-sale prices – foreign technology and brands to expand their know-how and global reach, though ­integrating foreign companies could prove difficult.

"For foreign companies it is a double-edged sword," says Klaus Paur, regional director automotive for North Asia at market research firm TNS. "On the one hand, they are contributing to the rise of future competitors. At the same time, if you don't do it you won't have access to the market. Now we see Chinese manufacturers getting much more confident to go out and look for technologies and brands; to manage them by themselves."

Car sales here are surging, helped by government incentives: Vehicle sales reached 7.2 million in the first seven months of this year, up 23 percent from the same period last year. By contrast, US sales fell 32 percent during the same period, to 5.8 million, making China the world's largest car market today – despite the boost from the US Cash for Clunkers program.

People like Li Rong indicate why the market will grow. Though the sales clerk can't afford a car, she recently got her license anyway. "I want to buy a car, but now I don't have that much money. I think Ford would be quite good," she says.

Ford and other international companies have played a key role in developing China's auto industry, since Beijing requires them to take a local partner, essentially trading technology transfer for market access.

Fiat recently became the latest car company to do so by signing an agreement with Guangzhou Automobile Industry Group to set up a factory in China, which marks Fiat's return to China after earlier failures for the Italian carmaker.

China's carmakers are also looking beyond national borders. Industry giant Beijing Automotive expressed interest in the core of GM's European business, Opel, but then dropped out of the bidding.

An obscure company in western China, Sichuan Tengzhong Heavy Industrial Machinery Co., is in advanced talks with GM to buy the Hummer brand, though the deal requires final approval from Beijing. And private Chinese carmaker Geely Automobile is interested in buying Volvo from Ford Motor Co.

Whatever deals come to fruition, one issue is whether Chinese companies can successfully integrate foreign brands.

"To buy some of the technology, that's a very good way to acquire know-how," says Yale Zhang, director of Greater China for CSM Worldwide, an automotive consultant. "To buy a complete vehicle brand or company – that is very different. There's a lot more risk."

Shanghai Automotive has stumbled in its quest to build a global company despite success at home. It became the first to operate abroad after buying a majority stake in Ssangyong Motor in 2004, but the South Korean company is now in bankruptcy proceedings, and police dramatically stormed its plant to take it back from occupying workers, ending a 77-day strike last month.

Shanghai Automotive also launched its Roewe brand in 2006 based on technology purchased from Britain's now-defunct MG Rover, but has found only a niche market.

Mass exports by Chinese carmakers to developed countries will come eventually, but the biggest and most appealing market is at home, where foreign brands still dominate the high end of the market.

Chinese companies might excel at building environmentally friendly vehicles, such as hybrids or electric cars, which the government has made a priority by granting subsidies and requiring schools to train engineers in the technology. All major Chinese automakers have projects for hybrid or electric cars, some of which are already in production.

The growing market, government support, and foreign partnerships have created an environment unlike anywhere else in the world.

Says Ms. Combs of GM: "For the future, a lot of innovation and breakthrough will have the opportunity to come to market in China much more quickly."•