Brilliance China Automotive Holdings clinched a deal with HSO Motors Europe late last November to export 158,000 units of the mid-level Zhonghua sedan to Germany and other European Union countries over the next five years.
The first batch of 3,000 Zhonghua Zunchi (Grandeur) sedans has set sail for Germany in December. Another 15,000 units will be shipped next year for sale in other European countries.
Leading Chinese media, including the official People’s Daily, Economic Daily and China Automotive News, hail that the deal, worth $2 billion, is a “milestone” for Chinese made cars successfully entering the developed market in Europe. They say that the signing of the export agreement signifies that an independent Chinese automaker has obtained a “world pass” in selling into the mature markets. China Central Television (CCTV) staged a special one-hour program to interview Brilliance chairman Qi Yumin, who was treated like a national hero.
There is no doubt that the Zhonghua sedan is a good, safe mid-level car with original design from Italdesign Giugiaro, chassis technology from Porsche and production expertise from BMW, Brilliance’s joint-venture partner.
But contrary to the claim by both Qi and his partner, HSO Motors, that the Zhonghua sedan meets European safety and emission tests, news came that the vehicle had failed a side-impact test, according to Automotive News Europe. In addition, a front impact test resulted in only a two- (out of a possible five-) star safety rating for the vehicle.
Granted that the vehicle will be able to meet basic European safety and emissions standards after further work, the big issue for both the importer and Brilliance is if and when they can successfully homologate the Zhonghua so that it complies with all EU regulations.
The most stringent regulations that have come into effect for all new cars sold in the EU beginning in 2005 are pedestrian safety and end-of-life requirements. According to the ECE 2003/102/EC regulation, manufacturers must now invest to redesign the front end of the vehicle, including the hood, fenders, bumper fascia and under-hood components so as to reduce the risk of injury to pedestrians in the event of an impact.
Manufacturers must also comply with the new end-of-life regulations specified in ECE 2000/53/EC to ensure maximum recyclability of new vehicles. Heavy metals are banned, and codes for all materials used in the vehicle must be used. Manufacturers or importers may be liable to pay “all, or most of the cost” of shipping non-compliant vehicles back to their country of origin.
While all new vehicles are now subject to these much more stringent regulations, automobiles that were already on sale in Europe before 2005 have until 2012 to comply.
Brilliance and its partner, HSO Motors, now plan to go through the single-vehicle type approval process in order to sell the cars in Germany and the rest of Europe. Single-vehicle type approval is often used to bring in individual vehicles – such as racing, or collector’s cars – into the EU for personal use. And as such it does not have to comply with all EU regulations necessary for whole-vehicle-type approval.
“The volumes HSO Motors is projecting are absurd,” commented a European importer who is quite familiar with the EU regulations. “It is simply impossible” to sell hundreds of thousands of cars through single-vehicle type approval. Whole-vehicle type approval should be the only choice for the volume import of automobiles into Europe; but for an existing vehicle such as the Zhonghua, it may be overly expensive to homologate and pass whole-vehicle type approval.
Brilliance is not the first Chinese company that is venturing to enter the EU or North American market. Chinese companies, including Brilliance, participated last year at the Frankfurt Motor Show (IAA) for the first time in its 108-year history. Jiangling Motors Corp. showcased its Landwind SUV through Belgium-based partner, Landwind Motor Corp. Sold on a single-vehicle type approval basis in Holland and Germany, the Landwind suffered a major setback after it failed a crash test conducted by the German auto club ADAC.
Brilliance’s first European distributor, Gibraltar-based Euro Motors, displayed the Zhonghua sedan and announced that it would sell 35,000-40,000 units in 2006, half of which would be sold in Germany and France, also through single-vehicle type approval. Obviously Euro Motors and Brilliance have failed to deliver.
Geely Holding Group, the privately-owned Chinese carmaker, displayed five of its models in an effort to not only showcase its manufacturing capability but also to find partners to help the company enter the European market. Li Shufu, chairman and owner of Geely, announced that the company would target two-thirds of its future sales on the international market.
Earlier this year, Geely again made breaking news by becoming the first Chinese automaker to exhibit at the annual Detroit International Auto Show. Its independently-designed Freedom Cruiser, a 1.6L sedan, greeted visitors at the Cobo Center. Li had hoped to begin selling cars in the U.S. beginning in 2008, however, before long he had discovered that not only were his vehicles not up to U.S. standards, but he was also confronted with a host of legal, PR, financing, sales and aftersales issues, all needing to be solved before he could operate in the U.S.
The biggest fanfare about Chinese cars was created by Malcolm Bricklin when he announced two years ago that his newly-formed company, Visionary Vehicles LLC, had entered into a deal with Chery, China’s new-style State-owned carmaker, to export 250,000 cars to the U.S. in 2007. The deal evaporated late last month and the two sides parted ways.
It remains to be seen whether Brilliance and HSO Motors will have any better luck in turning their grandiose plan into reality. Their prospects will be no better than their predecessors unless they can obtain whole-vehicle type approval.
Chinese automakers have so far failed in their efforts to export to the mature markets for a very simple reason: their vehicles have been designed and calibrated to satisfy Chinese consumers and meet Chinese safety and emissions regulations, which are far less stringent than those of Europe or the U.S.
Trying to homologate an existing model sold in China for sophisticated markets such as Germany or the U.S. may be too costly, if not impossible. Hyundai tried in the late 1970s and failed. They later worked quietly for six or seven years with the homologation engineers of experienced European importers, trying to design and engineer cars from scratch with the sole purpose of meeting European standards and consumer expectations.
Hyundai was also clever in first choosing the Benelux countries where there is no national automobile industry and consumers are still very price-conscious. It later expanded into Greece, Italy and Spain before attempting Germany and France. Although Hyundai put a tremendous amount of investment into achieving its goal, in the long run it was the most cost-effective – and probably the only – way to enter the European market.
Almost without exception, attempts by Chinese domestic automakers at selling to mature markets have been driven in large part by foreign entrepreneurs who are lured by the potential profits of selling low-cost cars made in China. In-experienced Chinese automakers have been prodded into signing deals with individuals or companies that are in it for a quick profit. Many of them are neither experienced nor in the export and homologation business. They also lack the engineering, financial and management resources needed to help Chinese manufacturers operate in a completely new market.
HSO Motors, which was only recently set up for the import of Zhonghua cars, is largely a logistics company that transports cars around Europe. It remains to be seen whether HSO is able and has the resources necessary to help Brilliance homologate its Zhonghua cars to full compliance with the EU regulations. Nor are we sure whether HSO Motors is capable of creating the full sales and aftersales service infrastructure to support its ambitious goal of selling hundreds of thousands of Zhonghua marque vehicles.
The Zhonghua sedan is expected to retail between 16,000 and 20,000 euros ($20,000 to $25,000). It would be a great service and a profitable deal for Brilliance if it could provide European consumers with a well-made and affordable mid-level sedan. But until the vehicle manages to achieve whole-vehicle type approval, Brilliance must be aware of the high risks of its venture, which will affect the image of not only the Zhonghua marque but also of all cars made in China. “If it were that easy to sell cars in Europe,” said an experienced auto executive who has worked in both the U.S. and China, “everybody would be doing it.”
Learning from his setbacks in trying to sell Chery cars in the U.S., Bricklin is now taking a new approach by finding new Chinese partners who will agree to manufacture cars designed by Visionary Vehicles in the U.S. It is by no means coincidental that Geely recently set up a brand new European and American Automobile Industrial Park with the sole purpose of building vehicles for mature markets. Interestingly, the top executive who is in charge of this new venture is none other than Brilliance’s former director of R&D, Zhao Fuquan, who helped engineer the Zunchi (Grandeur) and the Junjie (Splendor) models before he joined Geely last month.
It is too soon for Brilliance to celebrate the large order it has recently signed. Brilliance should realize that other Chinese manufacturers may better understand the markets in Europe and the U.S. and are working quietly with dependable partners to launch their vehicles successfully there.