From the inside out: China enters the US auto market

Last week, after a long and exhausting weekend in Napa, I drove my family to SFO. The Sienna we rented has its inexplicable fuel consumption exercise mode disabled, floating among vineyards one after another.

Mercifully, the din of two healthy toddlers gave way to the tranquility of sleep and I enjoyed my first moments of quiet reflection in four days.

Of course, my thoughts drifted to cars, but not the one I was about to overtake on State Route 37. As we passed the entrance to the Sonoma Raceway, I approached the UDO (Unidentified Driving Object) and could not immediately make out what it was.

As a San Diego resident and a committed car spotter, I am accustomed to seeing out-of-market vehicles visiting from Mexico. But this one was a first on an American road for me. I gently slowed and my wife awoke, just long enough to snap a photo. It was an unassuming red blob; the Lifan X50 you see pictured here. That little, wagony-hatchy thing pulled me out of my Sears Point track-day dreams . . .

Where are the Chinese cars I wondered?

We import nearly every imaginable consumer product from China, including the iPhone used to take the X50 photo. In fact, China produces more cars than the next two largest producers, Japan and the United States, combined.

I have spent hours in the back seats of Chinese made Audis and Buicks, their quality indiscernible from their cousins here. And although car sales in China rebounded in September, the mid-year sales slump underlines the likelihood that after decades of robust, predictable growth, a new normal of market maturity may be around the corner.

We should thus expect to see Chinese manufacturers consolidate and begin pushing into new markets, be it the luxury market in China, EVs, new markets abroad, or all of the above. Certainly there are Chinese manufacturers with the resources, export experience, commitment to growth, and long-term vision to bring their cars to North America.

So why aren’t they here?

Chinese auto manufacturers have been sprinting to catch up with their Western and East Asian counterparts. But the answer is less about why there are not Chinese built cars on American roads today, and more about how they are going to get here.

There are essentially three strategies available to Chinese manufacturers who want to enter the North American passenger car market. First, they can follow the well established path of Korean and Japanese car makers before them. That is, import reliable, well contented entry level cars at highly competitive prices. Combine a strong value proposition, with a decade or more of patience, and a plan to establish production in the United States. Second, they can acquire a brand that is already for sale in North America. Third, they can chart a new path, starting from the inside out.

Reality rarely fits into neat categories and there may be as many variations on these strategies as there are Chinese car manufacturers.

In fact, the first Chinese made car sold in America is already here, but it’s not a Gonow, Great Wall, or Guangzhou. It is a Volvo S60 Inscription, built in Chengdu, Sichuan and available to test drive at your friendly Volvo dealer. The Inscription is a common S60, stretched to provide an additional 3.4 inches of rear legroom – a common modification for the Chinese market.

The stretched S60 is every bit as elegant and visually subtle as the long wheelbase versions of the BMW 7-Series and Audi A8. It provides Volvo with yet another niche product to pry customers out of other luxury nameplates.

Volvo plans to export 1,500 units to the United States in 2015 and about 5,000 annually thereafter. This niche Volvo, combined with the Chinese built Honda Fit briefly sold in Canada, may be the tip of the iceberg.

But it is very slow moving iceberg.

For those driving a 2010 or newer Jeep Grand Cherokee, Dodge Durango, or Chevrolet Malibu, there is good chance you have been opening your doors with handles produced by Yanfeng USA, a subsidiary of China’s largest auto maker, SAIC Motor Corp. The company has been making interior trim components in the United States for General Motors and Fiat Chrysler Automobiles, and may soon be supplying VW’s Chattanooga facility where the Passat is made.

Following their recent expansion into Missouri, the company now operates three production facilities in Michigan and Missouri. And Yanfeng is not stopping there nor are they alone. It is in the process of acquiring a controlling share of Johnson Controls’s interiors division, which generated $4.5 billion in revenue last year. Fuyao Glass makes windows in Ohio and sells them to GM. As of 2000, 2.4 percent of imported auto parts came from China.

Today China is responsible for 11.2 percent of imported parts, approximately two-thirds of which make their way into new vehicles. The Chinese transition into the American market, through component manufacturing, will enable the Chinese to build a foundation of capability and experience, prior to initiating full auto production. Dong Yang, a Vice-President of the China Association of Automobile Manufacturers was recently quoted regarding this strategy:

Another example can be found in the Wanxiang Group, new owner of Karma Automotive, which many will recognize by its previous moniker, Fisker. Wanxiang is investing heavily to re-launch the company that built one of the world’s first PEVs (plug-in electric vehicle). However, Karma has no intention of producing mass-market cars, or exporting cars from China. In fact, the company plans to build its cars in Moreno Valley, California and market them through a network of exotic dealers where it can reach Bentley, Ferrari, Maserati, and other car owners of their ilk.

Faraday Future is yet another American PEV maker based in California with Chinese backing, this time from billionaire Chaoying Deng. Faraday is targeting the mass-market, but it too will be an American manufacturer with Chinese financing, not an importer of Chinese manufactured vehicles.

Then there is the

Lifan Group. Lifan is on the ground in the US now and has ambitious plans for a more traditional entry into the United States. According to CEO Tony Sun, “Lifan will bring two or three value priced PEVs to the U.S., hopefully starting in 2019, and aimed directly at the Nissan Leaf.”

They will be developed at an expansive R&D center outside Los Angeles. The company will initially import Chinese built vehicles, followed by American production a few years later. Lifan sees a lucrative opportunity in the EV market and has no plans to bring internal combustion cars to the United States. These may sound like plans we have heard before from the likes of Cherry and Coda. And you may not have heard of Lifan, but it has the scale and experience to pull it off. Lifan was the first Chinese manufacturer to certify and sell its cars in Europe and has been in the United States, selling other motorized products for over a decade.

There are about a million obstacles between here and Lifan’s first sale. But no matter what happens, it will be an interesting story to follow.

Some market entry strategies will eventually deliver vehicles that clear the necessary hurdles and launch. Some of those may even earn a profit. But if you want to drive a Chinese car in the United States, you will need to satisfy yourself with a Volvo S60 Inscription, at least for now.

And what about that Lifan X50 I saw in Napa?

It turned out to be about as interesting as it looked. It was not a development mule or a prototype, but rather a vehicle being run by a Lifan partner in support of operations outside the United States. And it’s probably for the best that there are no plans to bring it here – it looked about as home in the vineyards of Northern California as it would in the suburban garages of Anywhere, U.S.A.

What do you think? A car from China?