Chinese Cars: Redefining the Market

Summary: Chinese cars of doubtful quality will likely soon be sold via dealer networks spanning the U.S. and Canada. Prices will likely be incredibly low and put pressure on competing manufacturers to rethink their strategy and lower their prices.

News reports over the past several months have featured the coming "invasion" of Chinese cars to the North American market. What has gotten the attention of many car buffs is the very low prices at which each model will be sold. Prices as low as $6600 have been quoted for one model with a handful of other models also expected to retail for well under $10,000. If Chinese cars do arrive as expected, look for a massive change in the way entry level model cars are built and sold in the U.S. and Canada. Consumers stand to gain with the increased competition, although exactly what they will be getting for the price is not yet known. The Chevrolet Aveo, a compact car built by GM's Korean unit, Daewoo, is currently the lowest priced car sold in the U.S. retailing for as low as $9300 after all discounts have been applied [MSRP is currently set at $9890 for the "Special Value" models]. A 16 valve 1.6L I4 mated to a 5 speed transmission is standard and Chevy kicks in an AM/FM radio for good measure. Beyond that, the car is truly stripped. On the other hand, two Chinese automakers are preparing to enter the U.S. market, likely as soon as summer 2007. Selling 2008 model year cars, both the Geely Automobile Company and the Chery Automobile Company are working with U.S. representatives to build nationwide dealer networks. Chery, which will have to change its name after losing to General Motors in a court decision over their name [too close to Chevy], has a model currently called the "QQ" based on the Daewoo Spark which they would like to bring to the U.S. Along with as many as four other models, the cars will range in price from just under $7,000 to as high as $20,000. Geely has similarly priced cars that they plan on marketing too. So, what does this mean to the market? Plenty. Besides the Aveo, numerous other small cars are marketed in the U.S. including Toyota's Scion brand, the Honda Fit, Nissan Versa, Saturn ION, and offerings from Kia and Hyundai. Some of these vehicles come better equipped than the base Aveo, but for the most part comparably equipped entry level models with air conditioning are each retailing for about $12,000. Even after air conditioning and certain safety measures [like air bags and better fenders] are added to entry level Chinese vehicles, it is expected that comparably equipped Geely and Chery models will still retail for between $8-8500. This translates into a price drop of as much as 30% compared to competing models. Naturally, the quality of Chinese cars may be a big concern. Not noted for building much of anything that is of superb quality China, much like Japan of more than 40 years ago, must bring quality levels up. Still, for even $1000 more per vehicle an extended warranty similar to the 100,000 mile warranty offered by Hyundai and Kia could allay consumer's concerns. Simply add the cost of the warranty to the price and a $9000 fully warranted Geely could be very attractive. So, how will competing manufacturers react? By dropping their prices accordingly. Look for specially equipped Scions, Kias, and Hyundais to appear in U.S. showrooms priced below $10,000. Soon, look for Mexican built Scion fighters from Ford and Dodge also to show up and be sold at unthinkably low prices. By 2010, the base price for many entry level models in the U.S. will be below $10,000; if they are not priced accordingly then they many not sell. Long term, prices across the board for all vehicles may begin to drop, especially as Chinese manufacturers start to market vehicles that are larger and better equipped than base models. Mentioned earlier was a vehicle in the $20,000 range. This particular Chery model strongly resembles the Chrysler Pacifica and could be imported to compete against it and other crossover vehicles. Naturally, the effect on the U.S. manufacturing industry could be devastating and not just to GM, Ford, and DaimlerChrysler. Toyota, Honda, Nissan, and Hyundai all build cars here. Will they compete in price or will consumers see the sharp differences in quality and stick with the trusted brands? A revolution is coming to the auto industry -- one which is certain to completely redefine the market.