Critical Analysis Exercises (no more than 3 pages)and( at least quote 4 relative resources)

China wants to enter the U.S. car market, but a rough road lies ahead

By RUSS MITCHELL FEB 05, 2018 | 4:30 AM | SAN FRANCISCO

Germany was first. It shipped the Volkswagen Beetle to the United States in 1949. It got off to a

slow start only to be embraced by an enthusiastic American public.

Japan came next, winning U.S. customers in the 1970s with its own mass-market cars. After that,

South Korea, offered its Hyundais and Kias.

Now, it's China's turn.

Or is it?

Big, state-controlled Chinese automaker GAC Motor plans to start selling a gas-powered seven

passenger SUV priced around $40,000 in the U.S. next year. The company said more models

will follow that vehicle, called the GS8 — including all-electric cars.

But a rough road lies ahead. Chinese automakers have tried to enter the U.S. market before and

failed, crippled by sub-par quality, failure to meet tough U.S. safety standards, lack of consumer

awareness and ill-conceived import partnerships.

"Plans were hopelessly optimistic," said Bill Hampton, editor of AutoBeat Daily.

But GAC says this time is different.

"A few years ago, we were not ready enough to enter the U.S. market with our level of

technology, quality and competitiveness," GAC Motor President Yu Jun told The Times via

email. But, he said, things have changed: "We are well prepared to face the challenges in the

U.S. market."

That's a plausible assertion, said David Sargent, global quality research head for J.D. Power.

2

"Over the last 10 years, the quality of Chinese vehicles in China, as measured by Chinese

consumers, has gotten dramatically better," he said. And GAC quality "has been the best of the

Chinese brands" based on surveys of new-car owners on vehicle condition and performance.

GAC stands for Guangzhou Automobile Group. Statistics vary by source, but the company tends

to rank ninth or 10th on lists of China's biggest automakers. Located near the concentration of

Japanese auto suppliers in Southern China, GAC was an early adopter of Japanese quality

standards, analysts say.

Whether the quality proves good enough for the U.S. market is yet to be determined. Yu Zhang,

managing director of Automotive Foresight in Shanghai, calls GAC a "dark horse" in the U.S.

market with great potential.

GAC made a splash at the recent Detroit Auto Show, with a spot covering 2,400 square feet on

the main floor of the exhibition hall, a first for a Chinese car company. It was more than a token

display: six vehicles were shown.

Sexy models remain a fixture at auto shows in China, and they appeared onstage in Detroit at

GAC's appointed showtime. Two tall, slim young women in svelte red dresses stripped covers

off several GAC cars, including the Enverge electric concept car, which GAC intends to

introduce to the U.S. market following its SUV debut.

First, though, the company must establish a U.S. dealer network. In March, GAC executives will

fly to Las Vegas, where they'll glad hand potential distributors at the National Automobile

Dealers Assn. annual convention.

Dealers have been teased by Chinese automakers before, most notably in 2005, when a colorful

publicity hound named Malcolm Bricklin (best known for the Yugo) announced plans to import

five vehicles from Wuhu, China-based Chery Automobile. But quality wasn't up to snuff, too

few dealers signed up, investors dropped out and the deal died.

3

"Entering the U.S. market is like swimming in water that is too deep. We are scared of

drowning," Chery President Yin Tongyue told a Reuters reporter at the time. "We need more

time to prepare. U.S. technology and U.S. consumer habits are too different."

American car buyers tend to be brand loyal, and it has historically been difficult for newcomers

— particularly from overseas. Last year, Ford, GM and Ram pickup trucks topped the bestseller

list, followed by the Toyota Camry, the Nissan Rogue and the Honda CR-V.

The Japanese and Koreans both struggled to gain a foothold in the U.S., but now the Asian

brands, with 46.3% market share, are neck and neck with U.S. automakers, at 44.4%. European

companies account for the remaining 9.3%, according to Motor Intelligence.

But China's rise in production volume and quality has been breathtaking. A minor player as

recently as the late 1990s, when it sold about 2 million vehicles, almost all of them in China, the

country is now the world's largest automobile producer. In 2017, 25.4 million passenger vehicles

— the vast majority made by Chinese automakers — were sold in China, according to LMC

Automotive. (In the U.S., 17.2 million vehicles were sold last year from U.S., Asian and

European manufacturers.)

As state-owned car companies entered into joint ventures with U.S., European, Japanese and

Korean companies, production surged and quality improved. Meanwhile, leaner, meaner private

Chinese companies such as Geely are turning up competitive pressure.

GAC's U.S. foray will test Chinese government ambitions to become a world-class, high-quality

exporter of essential goods and services. The government's Made In China 2025 plan, released in

2015, identifies 10 key industries, motor vehicles among them, with an emphasis on electric cars

and trucks.

Incentives and mandates issued from Beijing and local governments, including polluted mega

cities such as Shanghai, have boosted electric vehicle growth.

Electrified vehicle sales expanded 53% in 2017, to 777,000 vehicles, said the China Assn. of

Automobile Manufacturers — 652,000 all-electric vehicles and 125,000 plug-in hybrids.

4

In the U.S., almost 200,000 EVs and plug-in hybrids were sold last year, according to Inside

EVs, up about 25%. While mass consumer demand for EVs remains tepid, automakers have

launched ambitious electrification plans. A bill to require zero tailpipe emissions for all new

vehicles sold in California by 2040 is in the legislative hopper.

Although EVs are rising fast in China, overall passenger vehicle sales are flattening out — up

only 2.8% in 2017, compared with a 15.5% increase the year before.

That puts pressure on Chinese automakers to expand to new markets. Success in the U.S. will

translate into more sales back in China, said Mark Wakefield of the consulting firm AlixPartners.

The idea: If U.S. customers embrace a China-made car, it must mean the quality is high.

"Competition in China is tough and getting tougher," he said. "There's a premium for a brand

that comes with a [U.S.] stamp of approval."

If GAC succeeds with a 2019 U.S. launch, it won't have the China-made market to itself.

Volvo Cars and Volvo's Chinese owner, Geely, have joined forces to create a new line of

automobiles, named Lynk & Co., designed in Sweden and manufactured in China. Lynk aims to

export a compact SUV to Europe in 2019, while plans to distribute its cars through U.S.

manufacturing plants outside China are under consideration.

Polestar, another Geely-Volvo endeavor, plans global distribution of high-end electric cars and

could bypass the need for auto dealerships through online sales.

SF Motors, an arm of China's Chongqing Sokon Industry Group and headquartered in Santa

Clara, is planning its own technology-loaded luxury car line for the global market. SF Motors'

chief innovation officer is Tesla's original founder, Martin Eberhard.

Dozens of other small Chinese or China-funded companies want in, including Byton, headed by

former BMW executives, which introduced an electric compact SUV concept car at CES in Las

Vegas last month.

Threatening all these plans is a political buzz saw on trade policy. President Trump has made

clear his distaste for imported cars.

5

But Democrats might see political gain in knocking China too. Soon after GAC Motors' Detroit

event, Senate Majority Leader Charles E. Schumer (D-N.Y.) referenced GAC's U.S. entry plan in

a speech on the Senate floor, calling China's 25% tariffs on imported cars "manifestly unfair, and

a typically unfortunate example of China's rapacious trading policies." U.S. Auto import tariffs

are set at 2.5%

"We're beginning to see a lot of bad press on China" in the U.S., said Taiwan-based Greg

Anderson of Pacific Rim Advisors. "Right now, an anti-China position is going to play well

politically."

Asked about that, GAC's Yu said, "No comment."

He's more focused on a dealer network. "That's an expensive, time-consuming and complicated

thing to do," said AutoBeat Daily's Hampton.

GAC has joint ventures with Honda, Toyota, Mitsubishi and Fiat-Chrysler.

Fiat-Chrysler dealers may be the company's best bet because it is dropping many of its sedans

and coupes to focus on SUVs and trucks. The company is behind most other major car groups in

electric car development. GAC could fill those gaps.

Meanwhile, GAC Motors plans to replace the Trumpchi brand name outside China. The phonic

similarity to the U.S. president's name "is a sheer coincidence," Yu said. "Trumpchi is similar to

'GAC Motor' in Chinese pronunciation. In Chinese, it means to deliver happiness and

auspiciousness