China Carmakers Go Upscale in Shanghai

At the Shanghai Auto Show, local manufacturers are putting their own stamp on higher-end vehicles
There are the leggy models, the concept cars, and the hordes of automotive journalists. There are the latest vehicular offerings from General Motors (GM), Toyota ( TM), DaimlerChrysler (DCX), and Rolls-Royce. So, just another auto show, like the annual confabs of Detroit, Geneva, and Tokyo? Not quite.

Instead, at the Shanghai Auto Show, which opened Apr. 22 and will run for one week, much of the attention is focused on an unprecedented lineup of higher-end Chinese-branded autos. Xian-based BYD Auto, which got its start as a cell-phone battery maker, showed off its F6, a 2.4-liter-engine luxury sedan. Geely had its Mybo sports car as well as its MVP 2.4-liter, Shanghai-manufactured version of a London black cab, which it is producing with Manganese Bronze Holdings.

Shanghai-based local champion SAIC Motor is showing off eight vehicles, including its Roewe W2 concept car, complete with models attired as English dressage-style equestrians. That W2 showcases the design and style of the next Roewe model, to be released at the end of this year. SAIC also showcased a fuel-cell car called the "Shanghai," resurrecting a brand it first launched in 1964 but then shuttered 16 years ago.

Plenty of Potholes Ahead

Meanwhile, China's most successful domestic brand, Chery (which beat out GM in March, coming in first place in domestic sales with 44,000 vehicles), showed an astonishing 40 models, including the A6 Coupe (designed with Italian company Bertone), the Shooting Sport recreational roadster, the Tiggo6 sport-utility vehicle, and several concept cars in its sprawling 2,200-square-meter booth.

Chinese-branded high-end cars? Hard to believe, but they have arrived, albeit perhaps with plenty of potholes on the road ahead. To date, Chinese carmakers have found their niche either by helping the big brands from abroad make their cars, or producing ultra-low-cost cars like Chery's QQ and Geely's Haoqing. Those cheap vehicles, aimed to appeal to lower-income first-time buyers outside China's first-tier cities of Beijing, Shanghai, Guangzhou, and Shenzhen, have been known as much for their low quality and shoddy design as for their rock-bottom price. Nevertheless, that focus has worked well so far, with Chinese self-branded autos holding close to 30% of the domestic market today, compared to 10% five years ago, say auto market watchers. (The overall sedan market grew 30%, to 5.18 million vehicles last year.)

Now that's changing, particularly as Chinese makers face new competition from the likes of GM's Chevrolet brand, including the $6,500 Spark, Volkswagen's Golf, and Hyundai's Elantra, all vying for the low end of the China market. "Foreign automakers are starting to produce low-price cars, which is a very dangerous signal for the Chinese auto industry, and is driving the move towards higher end," says Beijing-based auto analyst Jia Xinguang. So "Chinese automakers are experiencing an upward trend on pricing. Geely used to produce cars priced from $2,600 to $3,900, while now they enjoy producing cars from $5,200 to $6,500. The same trend can also be seen in Chery."

From Imitation to Innovation

Geely knows all about managing on razor-thin margins. It has outsourced services like its company cafeterias to cut costs. And it has founded three universities, including Geely University in Beijing, which together enroll 30,000 students and provide the company both income from tuition and a ready source of affordable and well-trained graduates to staff its engineering, design and marketing ranks. But with average auto prices declining some 7% a year in China, moving up the quality ladder is another important way to protect margins.

"When most Chinese companies start, whether in service or manufacturing, they tend to copy. That is the easy way to start. But if you stay with this strategy, sooner or later you will die," says Lawrence Ang, executive director of Zhejiang Geely Holding.