Should China emulate the Japanese model when it comes to auto exports (it's encapsulated in this report)? Some analysts argue that China's domestic market has so much potential for growth that it makes sense to stay close to home. But a growing contingent insists that China need to go international to support lasting growth -- and more importantly, innovation. This latter group has the better argument, I'd, um, argue.
What China really has going for it is cheap labor. This is seductive to both Chinese automakers and to established Western companies that want to build their vehicles in China and either sell them to the burgeoning Chinese middle class or export them to other global markets looking for high rates of growth.
It's about the technology, stupid
Western automakers already have an technological advantage. And the Japanese, when they first showed up in the U.S. in the 1960s and 1970s, had their own version of this -- their key differentiator was to offer fuel-efficient cars and trucks that were noticeably more reliable than what General Motors (GM), Ford (F), and Chrysler (as well as a few others, now forgotten) were selling at the time.
Through Chinese joint ventures, it won't be that difficult for, say, GM to graft its technology advantage onto the extremely favorable Chinese labor market and tap into future industry growth -- 80 percent of which is going to happen in the developing world. Chinese carmakers, such as Geely, could try to compete in this environment, but they'll be left to battle it out over the cheap, entry level market.
Go West, young brands!
Moving into the U.S. market was the best thing that ever happened to the Japanese auto industry. Within a few decades, it had massively upped its game and was beating not just the domestics, but also the pricey European luxury imports. American now feel so good about Japanese cars that they have few qualms about the country's carmakers setting up shop in the American South and producing what are essentially American cars with American labor in non-union factories.
Exposure to the U.S. forced Japan to offer vehicles that were appropriate for the hyper-competitive U.S. market. What they learned by building Accords and Camrys enabled them to build Acuras and Lexuses. Over time, it empowered Toyota (TM) to create the Prius. The U.S. wasn't exactly a growth environment when all this was happening -- it was a very mature market. But the kind of growth that the Japanese could tap into was primo growth.
There's growth, and then there's growth
Not all growth is the same. China has thrived by creating low-cost goods with cheap labor that it can then export to places that want to pay $10 rather than $50 for a shirt. Or $500 for an iPad versus $2000. But it doesn't want to apply this same model to the auto industry, which could take its economy to the next level.
If China follows this game plan, it can gain real insight into how to build the technologically sophisticated cars that Western consumers demand. The country's automakers can then bring this expertise back home and actually compete with the more established carmakers who are already familiar to Western customers and who intend to leverage that brand advantage in China.
At this point, China is running a distinct risk of being so conservative about the future of its manufacturing base that it will miss a good opportunity to open up export markets for its home-grown companies. Labor costs are important, but this story will repeat itself elsewhere, and down the road another country, or group of countries, will trump China's labor advantage. China should end this debate right now, on its own terms, while it can.