Balance of power in global car industry moves east

Ranking high among the turn-key events of 2009 must be Rupert Murdoch’s declaration of jihad against Google and the internet aggregators, whom he publicly accused of theft.

Yet, in time, there is reason to believe 2009 will be more remembered for a very different train of events: the global car industry has just experienced the most seismic period in its 110-year (or so) history.

The hail of deals, acquisitions, disposals, bankruptcies and restructurings pockmarking the year was itself testimony to a pace of change unprecedented in this normally sedate sector. However, of more importance than the often bafflingly complex details is their outline significance. This was the year when the US definitively lost control of the global auto market; and its centre of gravity shifted to the developing world, namely China, India and Brazil.

The transition of power will not be smooth and uniform. Some seemingly symbolic deals, such as Ford’s disposal of the Volvo brand to obscure Chinese car manufacturer Geeley, or General Motors’ sale of Saab to Beijing Auto (BAIC), may come unstitched. Or they could miscarry for reasons to be touched on later. Nor should we write the Americans off. True, once-mighty GM and Chrysler are shadows of their former selves, shorn of most of their marques as the penalty of escaping bankruptcy. But Ford, once viewed as the most vulnerable of the Big Three, has been steered to early profitability under the leadership of former Boeing engineer Alan Mulally.

That said, Mulally’s achievement should not be exaggerated, inspired though it is. He has brought back coherence to an over-extended empire rather than added anything new. The imaginative corporate strategy of former Ford boss Jac Nasser – so plausible up to the early noughties – of buying higher-margin prestige brands such as Jaguar and Land Rover to spread global risk and aid technological development has been poleaxed. In its place we have a shrunken brand portfolio and an estimated $27bn (£16.66bn) of debt to manage. Ford is now the world’s fourth largest automaker; once it was the second.

So where’s the action? Let’s start with a few statistics. Last year had the dubious distinction of marking the worst fall in global new car registrations ever – a collapse of 14%. You wouldn’t have known that in China, however, where vehicle sales surged 42%. Admittedly that was on the back of massive financial incentives from the Chinese government; but even without them, growth will still top 15% a year. Very shortly China is expected to overtake the US as the world’s largest car market.

And yet Chinese car makers face a number of structural problems. Most of the 100-plus manufacturers are small, under-resourced and – notwithstanding cheap labour – incapable of turning a decent profit. The bigger ones, such as Shanghai Auto (SAIC) and BAIC, have attempted to extricate themselves from this vicious circle by joint ventures with Western manufacturers. The deal is that the Westerners (and Japanese) get preferential access to a massive market, while the Chinese buy a short cut to the technology, quality control and marketing savvy that will enable them to build the kind of higher margin vehicles capable of selling in more sophisticated world markets.

The next logical step is to scale back Western control. We can perhaps glimpse this in a re-engineered GM-SAIC joint venture, where GM recently ceded a majority share to the Chinese. Some regard this merely as the quid pro quo of setting up a new GM-SAIC venture in India, but others say it is the thin end of a wedge as far as Western and Japanese partners are concerned.

The acquisition of mature, off-the-peg, “luxury” Western brands, such as Volvo and Saab, at bargain prices (with a technology transfer thrown in) is an extrapolation of the same trend.

For now, it looks a shrewd strategy. But I wonder whether the graft will work longer term. While there is undoubtedly a thirst for bigger, more prestigious vehicles in China, in the foreseeable future the main market for these marques will remain the fastidious developed world. So long as the model range adheres to its existing brand values (and can count on a quality dealership), customers will probably keep faith. But what happens when the likes of Ford, in the case of Volvo, finally pull the technology lifeline, leaving the brands to go their own way? This is not a problem specific to luxury marques acquired by Chinese companies. Tata, the Indian conglomerate, may face exactly the same sort of dilemma with its second or third-generation model range of Jaguars and Land Rovers.

As it happens, we are about to witness a practical demonstration of whether the grafting of Western marques onto alien auto-making cultures really does work. Former British brand MG pioneered the China trend when in 2005 it was sold to Nanjing Auto, now part of SAIC. Towards the end of this year it will export its first wholly new vehicle, the MG 6 mid-range hatchback, back to Blighty (among other international markets). Have the Chinese understood the brand lineage? Will they get the price point right? We’ll have to see.

As suggested, the risks attending this type of brand strategy are considerable. For what it’s worth, I think that the two car companies with the most to gain from this new era of auto-making perestroika are Volkswagen and Hyundai. Their approach to brand strategy is very different. But that’s the subject of another column, later this year.