The streets of China are a lot busier than they used to be. In the major cities, bicycles and mopeds are having to give way to rapidly increasing numbers of new cars as the Chinese auto market finally starts to deliver the explosive growth analysts have long predicted. Familiar shapes are everywhere - from the small Daewoo Matiz up to big Audi sedans. The fruits, so it seems, of the millions that foreign automakers have ploughed into China since the government opened up the market to foreign investors in 1993. But in some cases, all is not as it seems. Mark Bursa reports.

The cars may look familiar, but in some cases the badges on them are not. Take the Matiz - GM launched it in China last year, using the Chevrolet Spark nameplate. But equally common are other "Matizes", carrying the name Chery QQ. They look almost identical - but the Chery is not a sanctioned GM product. It's a very clever pirate copy - a bootleg car.

Car piracy is a new and growing threat to the high-profile, high-risk investments of the big car companies. GM, Volkswagen, Toyota, Honda, PSA, Nissan and Hyundai have set up Government-sanctioned joint ventures with major local producers - principally the Chinese 'Big Three' of Shanghai Automotive (SAIC), First Automobile Works (FAW) and Dongfeng. But last year, nearly 10% of the Chinese car market was accounted for by cars produced by local Chinese producers with no outside input from established global car manufacturers. And in many cases, these cars bear a striking resemblance to the cars produced by the "official" joint ventures.

It gets worse. The Chinese authorities are doing nothing to discourage the growth of these ventures. Far from it - the Chinese Government last year published a draft policy for the auto industry that actively encourages local producers to build market share without the help of foreign partners. And in some cases, affiliate companies of the Chinese Big Three are backing these initiatives.

You can't blame them for hedging their bets, given the uncertainty the draft policy has created. But their Western, Japanese and Korean partners have no such luxury. Indeed, vehicle makers operating in China could lose the intellectual property rights of their designs under the new policy. The draft, leaked to the press last year, specified that 50% of all sales in China by 2010 must come from domestic companies that own 100% of the vehicle's technology.

This means foreign manufacturers could be forced to turn their technology and patents over to their local partners as a condition for remaining in business. The transferred technology then could be used against the foreign partner, as the draft policy also states that China wants its local car makers to be capable of competing in world markets.

In other industries, China has a history of 'reverse engineering' foreign technology and replicating it at a lower cost. Televisions, white goods, personal computers, mobile phones, are all now produced to reasonable quality levels by low-cost Chinese producers. But the car industry has not learned this lesson, believing cars were simply too complicated to copy effectively. But the Chinese are already doing this. And while quality is well short of Western or Japanese levels, so is the price of the cars.

Already several 100% Chinese car companies have started to emerge, including Chery, Qinchuan and Geely. While these companies are not considered major players in China, some of them are linked to the Chinese Big Three. Chery is 20% owned by SAIC - a joint venture partner in China with both GM and VW.

Daewoo Matiz

And this is where it gets complicated. In partnership with SAIC, GM last year launched the Matiz-based Chevrolet Spark, priced at $7,500. But a few months earlier, Chery had launched a new minicar called the QQ, looking like a slightly facelifted Matiz, and priced at just $6,000 -considerably cheaper than the Spark, though without many of the Spark's features, such as airbags.

GM is not alone in falling victim to alleged piracy. Toyota, Honda and Volkswagen have also been ensnared in disputes with Chinese producers. Last year, Volkswagen said parts produced by the German company had been used illegally in one of Chery's cars, a version of the old Seat Toledo sedan, assembled using a former Seat production line sold to the company by VW's Spanish subsidiary. VW received a financial settlement - but the cars are still on sale.

As well as the Chery QQ, a number of other new cars look remarkably like established Chinese-built models. Qinchuan makes the Flyer, a minicar launched in February 2002 with a price starting at less than $5,000. This is a copy of an old version of the Suzuki Alto, built legitimately in China by Jiangxi Changhe. Geely produces cars called Merrie, Ulion and Haoqing at a plant near Shanghai. These are effectively copies of the Tianjin Xiali, a version of the early '90s Daihatsu Charade produced in China under license from Daihatsu. Recently a facsimile Nissan pick-up made by a company called Great Wall went on sale.

Faced with this increasing issue, some automakers have decided to take Chinese auto makers to court over allegations of piracy. Toyota tried to block Geely's progress by bringing a lawsuit against the company for alleged intellectual property rights violations. But this was thrown out by a Beijing court last November. As with the Chery disputes with GM and VW, the case is complicated. Toyota's China-based engine-making subsidiary, Tianjin Toyota Motor Engine Company, supplies engines to Geely for use in the cars.

GM told Chery it "did not appreciate" its copying of GM's products. "We're concerned about public and media comment that the two vehicles look very similar," said Daphne Zheng, GM's China spokeswoman. "We need to look at the ramifications." The Chinese Government has stepped in, as it is eager to avoid further trade friction with Washington. "GM has been in consultation with relevant Chinese government organisations, including the Ministry of Commerce, regarding the results of our investigation," Tim Stratford, GM's vice-chairman in China, said in a statement. "We can assure you that GM continues to take all violations of its intellectual property rights very seriously."

However, GM may find taking legal action difficult, as it does not have a design patent in China for the Daewoo Matiz. GM took over the Korean patents for the car when it bought Daewoo Motor, but could not have re-filed them in China even it had wanted to, because designs must be "novel" at the time of their registration under international patent conventions - and the Matiz has been on sale worldwide for several years. This loophole effectively prevents auto makers from passing off obsolete technology as new in China. If you're going to launch a car there, it had better be your latest model.

Nevertheless, GM has caused enough of a stink over the issue for its Chinese partner, SAIC, to make noises about distancing itself from Chery. SAIC last year said it planned to dispose of its 20% stake, though this has not happened as yet. And even if it does, the damage may have been done.

Chery QQ

The current generation of Chery and Geely cars fall well short of accepted international quality levels for safety and environmental standards. Chinese engines are at best Euro I or Euro II emissions compliant, well short of the current Euro IV standard. But these are first generation cars - quality is bound to improve, and both Chery and Geely are well-funded, entrepreneurial businesses that are likely to do well in an emerging market economy such as China.

Geely is reportedly spending $60m a year in R&D, and has recently launched its first self-designed car, a small coupe rejoicing in the splendid name of the Geely Beauty Leopard. This is a big step for a firm that only built its first car in 1998, and sold a mere 200 cars that year.

Started by Li Shufu, an entrepreneur from Zhejian province, Geely first made refrigerators, before moving on to motorcycle parts. These ventures proved highly profitable, and in 1997 Li bought an ailing state maker of minivans, gaining a license to make vehicles. Last year Geely sold more than 60,000 vehicles, and turned over more than $300m.

Chery is even newer - it only built its first car in 1999 but last year sold almost as many cars as Geely - 50,000. And although they only have relatively small market shares - 3.4% for Geely and 2.9% for Chery in the first half of 2003 - these companies have played a key role in kick-starting the explosive growth in China over the past two years, largely because they make cars that ordinary Chinese citizens can afford. Geely aggressively cut its prices by 11% late last year, forcing Toyota, VW, GM, and Ford to follow suit.

They are ambitious too - Geely last year announced a plan to build 1 million cars between 2003 and 2007, using a new 300,000-unit plant under construction in Zhejiang Province. Given the pace of corporate development, it's a good bet that the cars it will be building by then won't be such obvious rip-offs. They may be suitable, even, for export to the west. Indeed, Chery has started exporting Chinese-made cars to other emerging markets, principally Middle Eastern states such as Iran. Central Europe, much of which will be part of the EU in a few weeks' time, must look a tempting next step.

How then to combat these automotive upstarts? Many analysts believe legal action against the car pirates is self-defeating. IBM's Michael Jedlicka said: "The OEMs still believe they will be able to play the Chinese market in a 'classical' way. But there may be a better way to make big money."

He believes it is better to look at ways of selling technology to the likes of Chery and Geelys, keeping a foot in their camps while effectively "legitimising" the bootlegs and allowing the companies to build their own brands in China. "Who will be the first OEM to go down the route of technology transfer to one of the Chinese OEMs in return for a relatively low royalty rate? Once such a model is in place, others will follow," Jedlicka said.

NB: Pictures of the Chery QQ appear courtesy of Pal Negyesi (www.autoindex.org)

Expert Analysis

PLDB

This new database will give you an amazing insight into over 1400 vehicles produced globally. PLDB also includes many models produced in China under joint ventures, manufactured from CKD, and little-known rebadging eg:

  • BMW and China Brilliance JV
  • CKD assembly of the Mercury Villager
  • Fujian Auto Works and China Motor of Taiwan (CMC). This JV is now known as Dongnan (South East) and draws on CMC models.
  • Brilliance and Baoding-based Zhongzin
  • JV between BAIC and HMC

and much, much more - click here for more information.