Wednesday, December 23, 2009

China's Automobile Business Purchases

With the recent purchase of Hummer and Volvo and several component manufacturers by China it shouldn't be any wonder what their strategy is - why bother developing technology when they can apply what is already there. In the case of the auto industry, it can be viewed this way - Hummer donates light truck technology to the Chinese, Volvo with its revered safety reputation gives them all the technology they need to upgrade their safety technology from the abysmal state it is in for their current cars to "state of the art" in one leap.

For the Chinese these moves are prudent and should be predictable - their history has been one of duplication, piracy, not innovation through R&D. Their main weapon of competition has been their ability to reverse engineer technology at a fraction of the cost of the original R&D and then use their manufacturing clout to undersell. However recently given the sorry state of the U.S. economy and many manufacturers - they've gone the high road and just bought the technology because its being sold off at fire sale prices.

If this much seems obvious, the question of their intentions with the technology seem to confound U.S. analysts. It appears that soley a result of our American hubris, the talking heads assume they're intentions are to compete in the U.S. market. Though it is certainly possible, its irrational at this point. Why, you might ask, is this irrational to believe? Because this year the Chinese auto market surpassed the U.S. in sales for the first time ever.

If the middle class in China continues to grow - this will become a perennial occurence. In light of this - it seems most probable that they're buying the technology to compete with U.S. automakers not on our shores, but on their own where GM, Volkswagon, Ford, and others are trying to tap into this market.

I see this as a welcome development because it means that China is focusing more on creating and serving domestic demand than on perpetuating the bulimic relationship whereby they puke up their own manufacturing all over the world in pursuit of a strictly export economy. Unfortunately for the U.S. and European car manufacturers this means there is going to be more competition in China for auto sales in the next 2-5 years than most analysts appreciate. This could spell more trouble for GM in particular as they've done a good job historically in penetrating China's auto market.

For this reason, I think China's purchasing of auto technology is just one of many emerging examples whereby they're in a position to buy technology on the cheap and leap over the innovation chasm quickly to arrive in the 21st century for competition. I'd be looking for more examples of this as it is sure to be a sign of stronger domestic demand in China as our market remains impotent.


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