Roland Berger: Chinese Cars Can Redefine Entry-Level Segment

TROY, Mich., Feb. 18, 2006 -- The manufacturer's suggested retail price (MSRP) of a Chinese vehicle imported into the United States for sale could range from $6,600 to $10,200, potentially redefining the entry-level segment of the market, according to Roland Berger Strategy Consultants.

"Our estimated low-end price range is approximately 30 percent below the lowest-cost vehicle on the market today," says Wim van Acker, managing partner of Roland Berger's North American Operations, who notes that the Chevrolet Aveo currently has an MSRP of $9,350.

Based on a Chinese-built vehicle sold in China, Roland Berger added costs required to fully modify, export and sell a similar car in the United States. High and low estimates were made for each cost element to arrive at the estimated final cost range.

Marketing and logistics costs are expected to be significant cost factors. Additional costs to convert the vehicle and make it legal for American roads were included in Roland Berger's calculations, as were legal costs. Finally, import tariffs were added, as well as warranty costs and allowances for manufacturer and dealer profits.

The first signs of Chinese importation are on the horizon, van Acker notes. Geely was the first Chinese manufacturer to exhibit at the 2006 North American International Auto Show, held in January in Detroit.

The export of low-cost vehicles, such as Geely, will enable Chinese automakers to benefit from a variety of competitive advantages already developed for the Chinese domestic market. The combination of low cost, "me too" features, and "acceptable" quality could potentially make their products highly attractive to many American customers.

Although the Chinese economy is already a giant on the international stage, Chinese firms are not yet major-league players in the global automotive industry, van Acker points out.

This situation is changing, however, as Chinese automakers look beyond their borders to expand sales abroad -- primarily because their local markets are increasingly saturated and beset by overcapacity. The North American market also presents an opportunity for them to offer more cost-competitive vehicles in multiple segments.

"The influx of direct investment in recent years from the West has turned China into a manufacturing center with high-quality capability," van Acker says. Some joint-venture automakers in China already have improved defect rates to competitive levels. For example, the average defect rate of Shanghai GM's supply base has already dropped below that of General Motors in the United States, 24 parts per million (ppm) versus 34 ppm.

Also, large automotive companies and their first tier suppliers have opened up sourcing offices in China, aiming to export low-cost components to other markets. Ford opened its China sourcing office in Shanghai in 2002, and General Motors established its purchasing office in 2003.

Currently, both are sourcing more than $1 billion from China every year. Bosch also has established its own sourcing office in China and announced plans in 2005 to procure $1.2 billion from China by 2007, notes van Acker.

"As Chinese automakers have begun to transcend their domestic market with their own brands to compete on the global stage, established automakers can no longer afford to view China as merely a supplier to the automotive industry; they must now see them as competitors," says van Acker.

Using history as a guide, Chinese cars -- just as the Japanese and Korean cars of the past -- can be highly competitive in the U.S. market if given time to improve.

"Regardless of the success or failure of the companies which offer them, the presence of a low-cost Chinese imported vehicle in the U.S. market will leave a lasting impression," van Acker adds.

Roland Berger is a leading global strategy consulting firm with more than 1,630 consultants located in 31 offices across Europe, Asia and the Americas. The company's global Automotive Competence Center of more than 100 professionals has completed more than 700 projects during the last decade.