The uncertainty over MG Rover's future and its eventual demise earlier this year was played out in the national media at every ghastly turn. Aside from the usual soap opera stuff that we have come to expect from a company with Rover's history, the sorry affair was notable for the prominence of Chinese firms among the prospective buyers.

China's market leading Shanghai Automotive (SAIC) - which was supposed to be doing a joint venture deal to effectively rescue ailing MG Rover - eventually lost out in the post-bankruptcy bid for remaining assets to a smaller company, Nanjing Automotive.

What on earth do these Chinese companies see in MG Rover anyway, many asked?

The answer lies in their nascent global ambitions - something that applies to SAIC in particular. While Western companies get justifiably excited about the huge demand opportunities in China, Chinese domestic makers have one eye firmly on future export earnings.

The Chinese are an ambitious lot and they were never going to be content with merely being the world's major supplier for kids' plastic toys or low-cost white and black goods. The aim is to build vehicles that can find customers in world markets.

In Europe, acquiring MG Rover offered the possibility of a head start to market penetration - products off the shelf, recognised brands and a distribution network to build on. But acquiring an existing manufacturer isn't the only way in. Breaking into markets around the world with vehicles sold through locally based distributors is another strategy for the Chinese and it is already happening.

The products may be based on old designs and platforms, but the Chinese domestic players are continually adapting and refining them, as well as able to produce them at very low-cost for the domestic market (where Western makers are struggling to compete, especially at the low-end). A new wave of models is being readied for export with export strategies apparently starting to take shape.

In the US, Chery Automotive has teamed up with a well-known maverick who once sold Yugo cars there in the 1980s, Malcom Bricklin, to form 'Visionary Vehicles' which has DAS lined up as its distributor. Bricklin claims to have signed up thirty dealers already with more than 160 in the pipeline. Shipments of Chery cars from Wuhu to the US are scheduled to start in mid-2007 at the rate of 200,000 a year.

In a light vehicle market approaching seventeen million units, it's small beer perhaps (with the value-driven Korean brands mainly in the firing line initially) but as a new entrant to an already crowded and margin-starved marketplace, it's just one more headache to add to the list for Detroit.

What about Europe?

Perhaps the first point to make is that Europe is a more complex market entry proposition to the Chinese than North America. The national markets are very different in terms of market requirements and market segmentation; manufacturer shares vary widely; the cost of marketing and selling cars in fragmented Europe is much higher than in North America. And Europeans have historically tended to be more loyal to established brands than Americans have, a trait that is especially evident in upmarket segments (just look at the contrasting fortunes of Lexus in the US and in Europe).

Thus far, new-entrant activity by the Chinese makers to Europe has been limited. Chinese toes are being gently dipped in the water.

Only Jiangling Motors (a Chinese minnow) is actually selling a Chinese-made vehicle in Europe. Landwind Europe is selling its Opel Frontera-based SUV, the Landwind.

Peter Bijvelds, a Dutch car dealer and managing director of Landwind Europe, has pulled a coup in getting a group of major Opel dealers to sell the Landwind. His company, Landwind Europe, based in Brasschaat, Belgium, has a contract to sell the SUV model and other Jiangling products across Europe.

Some Opel dealers, experiencing declining sales and share over the past decade - most notably in Germany - say they're very happy to get an additional product to sell and have ample spare capacity. Changes to European Block Exemption rules also mean that Opel cannot object, provided the dealers do not use Opel infrastructure to sell the Landwind products.

Landwind volumes look low at the moment, though the pricing looks aggressive with the Landwind selling at around €15,000. Around a dozen German Opel dealer groups have been signed up, with sales targeted at 2,000 units in Germany for 2006.

Another Chinese maker, Geely, has appointed Lisbon-based auto retailer Sociedade Hispanica de Automoveis (SHA) to distribute its cars in Portugal and Spain. The Chinese manufacturer is said to be actively looking for partners in other European countries.

SAIC may be licking its wounds concerning what it has lost out on and what it is left with over MG Rover, but SAIC has the wily ex-Ford, ex-Fiat (Maserati) Martin Leach as adviser. Other SAIC strategies could unfold soon. Distribution partners may be sought for selected markets where SAIC sees a good opportunity.

But how ready are the Chinese, really, for Europe? That's where a does of realism is called for. The fanfare is perhaps a little premature. For example, at the Frankfurt Motor Show in September, Geely's mere presence with five models on its stand appeared to announce some ambitions.

But the cars on show were not for sale in Europe and many journalists were pretty unimpressed with what they saw - models sold on the Chinese domestic market only and not even homologated for European sale. Indeed, there are murmurs in the industry that the Chinese makers could be years from fully complying with European regulations and standards in areas such as emissions and crash protection.

Quality issues haven't gone away entirely, either. Chinese plants are much less automated than Western ones and are more labour intensive: people are more prone to make mistakes than machines.

Opportunities are clearly there on the distribution and dealer side to partner with Chinese domestic makers looking to export, but deals will be niche volume in character for the next few years.

How ready are they for Europe? Not very, but to be fair, and motor show stand impressions notwithstanding, they do not seem to be in a big hurry to attack Europe. The products aren't quite of international standard and they are not yet ready to go. To rush things could be fatal. 'Too much too soon' risks a repeat of the mess the Koreans got into in the US in the 1980s when rapid sales growth was utterly undermined by poor quality, resulting in tattered brand reputations.
 
For all the brave talk of export markets, Europe is a very, very problematic place for a new entrant. And remember, there is plenty of volume opportunity to keep the Chinese occupied at home as motorisation takes hold in China.

Will they come? Almost certainly, yes: that's a political given. But it won't be a sudden ground-shifting wave. More a steady drip, at least for now and the next few years, unless a seismic M&A event happens (like SAIC buying Fiat Auto). Don't rule something like that out, but my feeling is that the Chinese makers will not be attacking the European market in earnest before 2008 at the very earliest.

David Leggett

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