One More Car Company's Risky Bet on China

One more foreign car company will take the chance that the Chinese auto market, the world’s largest, will continue to expand. But car sales have not grown in the past year, and signs indicate they will not in 2012. That has not mattered. Manufacturer after manufacturer has rushed into the People’s Republic at greater and greater risk.

Jaguar will invest as much as $3 billion in local China car company Chery, according to Bloomberg. The luxury car market has flourished in China, although the growth has become more difficult. Mercedes recently cut prices of some of the autos it markets in the China by as much as 25%. It appears that BMW and Audi have made similar decisions. Jaguar will launch its joint venture into a market currently defined by large discounts.

Light truck and car sales in China grew only 2.5% last year to 18.5 million. That was the lowest level of growth since the mid-1990s. Experts on car sales in the country think volume could drop 5% in 2012.

One of the greatest problems for manufacturers that want to enter the Chinese market now is that every large auto firm in the world is already there, hoping to capitalize on the massive market and rising sales. Volkswagen and General Motors (NYSE: GM) dominate in market share. Ford (NYSE: F), Toyota (NYSE: TM), Honda (NYSE: HMC) and Nissan know their sales ambitions cannot be realized without their own substantial market share in the world’s most populous nation. Competition has become even more fierce as rising car company power Hyundai has expanded in most of the world’s largest countries. At the upper end of China’s industry, BMW, Mercedes and Audi are anxious to gain sales.

Jaguar has to have one other concern. Evidence suggests that Chinese car companies use joint ventures to gain knowledge about advanced manufacturing, design and product management. Eventually, with these newfound skills, they begin to force their partners out of the market. Shanghai Auto (SAIC) recently forced GM to alter its 50/50 joint venture so that Shanghai Auto owns 51%.

Jaguar believes, like most other car companies in China, that it needs the huge market to grow. It should be careful what it wishes for.

Douglas A. McIntyre