China A Decade Away From Global Auto Market

A new report by Sanford C. Bernstein & Co. says that China is close to building world-class vehicles, but it needs to spend more on research and development in order to make the cut.

China's automakers spend less than 2 percent of their earnings on research and development, says the China Association of Automobile Manufacturers, which is far behind the amount invested in research, development and engineering by companies such as General Motors, Volkswagon and Toyota. Max Warburton, an analyst at Bernstein, said that R&D is crucial to the future global success of Chinese vehicles.

“The Chinese are 80 percent of the way there, 20 percent doesn’t sound very hard, but it’s probably the most complex bits to get right,” Warburton told Bloomberg. “They’ll be spending until they make it work and eventually they’ll end up with Chinese carmakers on the world stage.”

While big-name foreign cars flood the Chinese market and expand local production, the reverse has not happened despite significant gains in the Chinese car industry. The largest obstacle for Chinese carmakers could be its ability (or lack thereof) to meet stricter federal safety regulations in the United States, Forbes reports. It also lags behind foreign car sales in China itself (though it made big gains in 2012), which prompted several companies to partner with automakers such as Toyota, Honda and Fiat.

The carmaker with the most potential to break into the global market, Warburton said, is SAIC Motor Corps, which had recently teamed up with GM and reportedly "learned a lot." Its engineers are also more advanced compared to the industry standard.

Bernstein also received a pleasant surprise when it tore down a Geely EC7, finding that the Hangzhou-based company had made significant progress in engine manufacturing, stating that it was "almost competitive" with global automakers.

The most recent foray into the U.S. market by Chinese automakers was Guangzhou Automobile Group's E-Jet, a slick hybrid on display at the Detroit Auto Show, although it was displayed in the lobby and not on the main floor. GAC has no plans to bring their cars to the U.S. anytime soon (the first two attempts by other manufacturers landed them in bankruptcy), but the auto show did have an effect in the South American market, where Chinese automakers already have a presence.

"With the economy and auto industry on the upswing here," writes Jean Halliday, a contributor to Forbes' automotive marketing section, "it isn’t a matter of if, but when."

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