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The lesson of Toyota for Chinese carmakers

As Toyota is recalling 8.5 million cars worldwide due to the dangerous issue of unintended acceleration, Chinese carmakers, consumers and the media are asking a simple question: what happened to a reputable carmaker that has just taken the No. 1 position in sales and to a global brand that is a synonym of quality and dependability?

In the words of Akio Toyoda, CEO of Toyota Motor Corp. in his prepared statement at the U.S. congressional hearing late last month, Toyota “pursued growth over the speed at which we were able to develop our people and our organization. I regret that this has resulted in the safety issues described in the recalls we face today.”

Despite his apology for “any accidents that Toyota drivers have experienced,” Toyoda’s statement may not be enough to answer the question of what happened. It is totally unfathomable that the world’s largest carmaker known for quality assurance could have blundered in the most basic vehicle mechanics of gasoline pedal. 

For Chinese carmakers, especially fledgling independent brands that are contemplating in selling to developed markets, Toyota’s ordeal offers a timely lesson and “wake-up call.”

For the past five years since 2006, independent Chinese carmakers have been exhibiting in leading international auto shows in Frankfurt, Geneva, Paris and Detroit with intent of marketing and selling their products into Europe and North America. Almost without exception, Chinese exhibitors at the annual North American International Auto Show such as Geely, Changfeng, Zhongxing, Brilliance and BYD declared that they would sell to North America in the “next 2-3 years.” But one after another we have seen them disappear from Cobo Center, with the only exception of BYD, who claimed last January in its 3rd appearance in Motown that it would sell its pure electric car, the e6, in late 2010.  

Lured by the size of the world’s largest automobile market plus the added PR value back home in China, a number of Chinese carmakers were too optimistic in thinking that their vehicles, better developed than the first Japanese and Korean models launched in the U.S. in the 1970s and 1980s, would easily pass U.S. safety and emissions regulations. 

Not that easy, many of them soon found out, as none of their models on display in Detroit had been designed for the North American market. And they also realized that by the time they invest to have their existing models homologated, the models themselves may be outdated.

The retreat in the initial attempts of Chinese OEMs in entering the European and North American market shows that emerging Chinese carmakers are now aware of a series of roadblocks lying in front of them. Passing safety and emission standards in the developed market may be an easy one because with the availability of world-class suppliers in China and global sourcing, OEMs should be able to overcome technical barriers in developed markets with necessary investment in R&D and good planning.

But the Toyota ordeal has unleashed the realities of the much more challenging roadblocks confronting Chinese OEMs in penetrating into developed markets: adequate networks of dealers, customer relations, aftersales services, vehicle repair and recall, public relations, crisis management, etc., etc.

Local Chinese carmakers are treating Japanese and Korean carmakers as roll models in their efforts to enter the developed market. They know that the success of Japanese and Korean makes has been based on providing customers with quality automobiles at affordable pricing. Offering cars with an attractive performance-price ratio has helped win customers for Japanese and Korean carmakers over the past three decades. But cost control and rapid expansion may very well backfire it they are achieved to the negligence of quality and safety controls.

Local Chinese carmakers may claim that their products today have a lower cost than Japanese and Korean models. But the big issue is if such low cost is achieved at the expense of basic safety standards of the vehicle products. As China still lags behind developed markets in terms of motor vehicle standards and regulations as well as in enforcement, Chinese carmakers are much more exposed to the danger of similar recalls such as Toyota faces today.

Local Chinese carmakers are only beginning to build their brand images. Many European and North American consumers still consider Chinese products as “cheap” and “no good.” And if they decide to purchase a Chinese-made car, the rational most likely will be that it is cheap and affordable. The Toyota recall is a timely example to show that the top Japanese carmaker, after many years of operations in the U.S., must deal with its brand image crisis.

Carmakers now need to consider the basics in trying to sell vehicles overseas. Granted that they are able to compete with other makes by realizing quantity sales one day in North America, would they be able to make a profit if they add up all the costs for the initial launch and operations plus the danger and cost of vehicle recall if it happens? It costs Toyota more than $2 billion to recall the 8.5 million cars in the world. But that is only a small amount if we look at the evaporation of Toyota’s market value over the past month by $28 billion. There is the danger of a serious damage to the Toyota brand.

Carmakers in China that do not command any significant market shares must have a second thought on trying to sell overseas. They must be able to provide quality vehicles in economies of scale to large numbers of Chinese consumers and offer satisfactory sales and aftersales services before venturing into Western Europe or North America.

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