Five Questions for GE Anderson, author of Designated Drivers – How China Plans to Dominate the Global Auto Industry

GE Anderson PhD, author of Designated Drivers – How China Plans to Dominate the Global Auto Industry –  answers 5 questions about the Chinese auto industry’s past, present and future.

I recently asked GE Anderson, author of Designated Drivers – How China Plans to Dominate the Global Auto Industry, five sets of questions about the present state and future course of Chinese-Western partnerships in the auto industry.

This installment covers the first three questions dealing with strategy, gains & trade-offs, and competitive issues.

ChinaSolved:  1. Would you describe the GM-SAIC and other Chinese-Western auto JVs to be short, medium or long term strategies for the Westerners companies? Who do you think is gaining more from the JVs – the Western or Chinese side? Have the Western companies gained anything other than sales in China? Is that likely to change going forward – and if so how?

GE Anderson:  I think it varies by JV. While I think most of the JVs will be viable only for the short- to medium-term, the SAIC-GM JV looks to be more of a long-term strategic move.

The reason I think most are short- to medium-term is that, by all appearances, they are based solely on money. For now, the foreign OEMs are making a lot of money on these JVs, as are their Chinese partners, but the Chinese are also interested in access to foreign technology, and they are being pushed by Beijing to develop their own separate Chinese brands. Though the Chinese sides of most of these JVs have not been able to replicate the R&D successes of their foreign partners, they have managed to narrow significantly the quality gap with the foreign automakers. Even if the Chinese OEMs are never able to become fully innovative, they will continue to get better and faster at copying foreign technology. Eventually I believe this will cause their foreign partners to question the worth of their Chinese partnerships.

As for SAIC-GM, these two companies continue to further intertwine themselves in many ways. Not only do they have a number of joint ventures in China sharing everything from design knowhow to electric vehicle technology, but Shanghai Auto has also bought a stake in GM’s parent company in the US. The two companies are also combining GM’s brand-recognition and engineering prowess with SAIC’s access to funds to expand production to other countries. Furthermore, people on both the SAIC and GM sides of these ventures have told me (on separate occasions) that both sides are in this for the long haul, even using the word “marriage” to describe their partnership. While no marriage is ever perfect, the two sides seem genuinely intent on working together globally, not just in China.


ChinaSolved:  2. What are the trade-offs for Western auto companies? What about the Chinese side? What are companies like Volkswagen and GM sacrificing to be in the China market? What about SAIC and FAW? What is each side gaining that they wouldn’t be able to attain if not for these partnerships?

GE Anderson:  Put simply, the Western automakers are gaining access to the world’s largest market for automobiles. In 2009 China’s market took over the global lead from the US, and it has continued to grow since. The potential the foreigners see in China is that, whereas Western countries have a vehicle density of about 700-800 vehicles per 1,000 people, China has less than 100.

The Chinese sides of these JVs are getting access to technology, though, to be clear, they have been getting access to foreign auto technology for over 30 years, and have yet to wean themselves off their dependence on foreign partners. (Much unlike the Japanese and Koreans whose automakers overwhelmingly dominate in their home markets.)

The cost to the foreigners is the fact that, though the Chinese have yet to replicate foreign success, they are gradually closing the quality gap on them. This means that the foreign automakers are essentially training their future competition not just in China, but possibly in other countries as well.

It is important to note here that China’s government has established rules to ensure that foreign automakers have to give up something for the privilege of operating in China. All foreign automakers are required to establish joint-ventures with Chinese automakers, and they are restricted to an ownership of 50 percent or less in the JV. This typically means that every action taken by the JV is either determined by the Chinese side, or subject to negotiation.


ChinaSolved:  3. Are the Western companies training their own competition? Do you feel that the Chinese automakers will ever pose a competitive threat to the Westerners within China or internationally? If not, what gives the Western firms a sustainable competitive advantage?

GE Anderson:Despite their access to foreign technologies and knowhow for the better part of three decades, Chinese automakers’ home-grown brands still occupy less than 30 percent of the market for passenger cars – and they have lost another three percent of market share year-to-date. While it would seem that the foreigners still maintain a significant advantage, the fact that the Chinese automakers are gradually closing the quality gap should be of concern. The Chinese are gradually learning how to do what their foreign counterparts do, but with a lower cost structure. (It costs far less to reverse-engineer a complex component than it does to design it from scratch.) Due to this cost advantage, some of the independent Chinese automakers have already been able to make great in-roads in Latin America, a market previously dominated by Western automakers.

The major advantage that Western firms have is their deep roots in automotive design and innovative ability. This kind of institutional advantage cannot be replicated; it must develop gradually over a long period of time, and it requires an environment that encourages and nurtures experimentation. However, the Western firms cannot rest on their laurels, because everything they bring to market will eventually be copied by someone.

The second advantage the Western firms have is brand image. This is also something that cannot be created overnight. The Chinese are only just beginning to understand the importance of brands and the image of trust and innovation they can convey to consumers. Chinese consumers, for now, still overwhelmingly believe foreign branded vehicles are superior in quality to Chinese branded vehicles, but a Brazilian driver may be happy to buy a Chery or a BYD that costs half as much as a Toyota Corolla.

One significant threat to the foreign automakers is the fact that a number of state-owned Chinese automakers have built up sufficient cash reserves that they can afford to go shopping for foreign technology. This means that not only do they own the technology that they so covet, but they also own the companies that employ the engineers who developed it. This is a significant advance over the old reverse-engineering model that Chinese automakers have used for so long. Many of these firms are also hiring foreign design talent as well, though it remains to be seen how effectively these engineers can operate within the typical Chinese command-and-control corporate structure.

Next: Answers 4 & 5: IP Theft ?!? and the future of China’s auto industry.


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