Fiat-Chysler CEO Sergio Marchionne has carved out a reputation as offbeat, daring, even swashbuckling by the standards of the global auto industry. He enabled Fiat to take over Chrysler in 2009 — with the U.S. government footing the $6 billion bill. Reporters can’t pin him down. He chainsmokes. He wears sweaters. He’s the most interesting man in the car business. And he loses sleep at night because of…China.
And not for the reasons you might think…
China: emerging industrial juggernaut and export powerhouse. It’s only a matter of time before they leverage their vast capacities and put Detroit, Japan, and Germany out of business — with poor little Italy and Fiat thrown in for good measure.
Well, it’s not that impressive in the end. Still, here’s Marchionne is full-on Jeremiah mode, quoted by the Detroit Free Press:
In his riff on China at the centre for Automotive Research’s annual conference, Marchionne sounded an ominous warning to corporate leaders and policy makers about its coming impact on the global economy.
“The day of reckoning is inevitably coming,” he said, when China, already the world’s largest car producer, begins to export on a significant scale. He said he is already concerned by the emergence of Chinese brands in Brazil, a big market for Fiat.
“We cannot afford to be unprepared for the ascent of China, reassuring ourselves of our invincibility,” Marchionne said. “Rather, we need to work to make our industrial base more competitive.”
Yikes! But let’s talk it through. Obviously China already exports on a significant scale — it’s just that much of it is cheap stuff that ends up in Wal-Mart (WMT). This is how China Inc. operates — as a low-cost labour outsource for everyone from Apple (AAPL) to the Gap (GPS).
Cheap wheels, and small, too
It’s not as if Chinese carmakers are suddenly going to trounce Mercedes, BMW, Ford (F), Volkswagen, General Motors (GM), and their well-established ilk. Heck, most good cars built in China are produced through joint-ventures with the aforementioned Westerners.
Instead, they will do what the Japanese did when they began to move into the U.S. market in the 1960s and 1970s: They’ll build small, inexpensive cars that try to enter the market at the low end. But there may be a key difference: the Japanese shocked the Detroit Big Three with their quality. China has shown no ability to do the same.
But China still has ultra-cheap labour, which means that it can construct budget autos that can then be sent to places like…Brazil. Where Fiat has been selling small, cheap cars since the 1970s. This is what Marchionne is truly worried about — having China sweep in a replace Fiat’s cheap cars with its own even cheaper cars.
It’s probably inevitable that China will use its untapped industrial capacity and low-cost labour force to flood exports markets with cars. But it could be decades before China begins to seriously threaten the more profitable product lines of Western carmakers.
Besides, it’s not as if the GMs and VWs of the world are resting on their laurels. They’re actively trying to get China’s growing middle class — as well as growing middle classes around the world — investing in their brands.
Having written about Marchionne extensively for the past few years, I’ve learned that he always has something simple and business-like in mind when he starts to make lofty pronouncements. This is one of those times. China isn’t going to take over the automotive world. But it may threaten Fiat’s part of it.
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