Blog: Dave LeggettShanghai's bitter-sweet taste

Dave Leggett | 29 April 2005

The last time I was in Shanghai (1993 I think it was) myself and my companion stood out like freaks as we walked along the riverside by the old colonial architecture of ‘The Bund’ in the late afternoon sun. It was crowded with  strollers and we were virtually the only Westerners around. There were plenty of stares, dropped jaws and fingers pointed at us.

And we got horribly ripped off in what was one of the few bars around back then. When presented with a pretty horrendous bill for a few cans of Tsingtao beer – which, I seem to remember, our newfound local ‘friend’ enjoyed very much – I gently queried the amount. But we quickly decided the wise course of action would be to just cough-up and put it down to experience.

The risks in not doing so were uncertain, but our new chum was suddenly not on his own and clearly knew the proprietor and everyone else at the bar. A big and slightly menacing looking guy joined the discussion over the tab at our table. Lots of shouting in Chinese, no-one smiling now. You didn’t have to be Inspector Clouseau to realise that we probably had many dollars and a few credit cards in our pockets. This now looked like a straightforward scam to fleece foreigners and we’d been well and truly fished in. Take the punishment and move on. Or take the uncertain consequences in this strange town, strange country.

You say to yourself, Dr Pepper-style, ‘What’s the worst that can happen?’ We paid up and left quickly, a hard but valuable lesson learnt.

Well, Shanghai is a very different place now, I gather. Westerners aren’t such rarities in China’s main commercial city these days. And I wouldn’t mind betting that there are more and better watering holes than the slightly squalid (you should have seen the state of the toilet) bar that I frequented last time.

The auto show in Shanghai last week sounds like a lively affair, with plenty of new model introductions – many of the new models developed by local companies for domestic market consumption. The Chinese strategy of gathering auto industry technology by whatever means possible seems to be bearing fruit now. Chery’s QQ (the Chevrolet Spark rip-off) is cheap as is FAW’s TJ7101U. These cars are hitting the spot with the new rafts of middle-class buyers – they were the market’s top sellers in March.

And the big Chinese firms seem very happy to develop these ‘own products’ while also making other cars in joint ventures with Western makers. They learn from those ventures. And then they can put what they learn into practice with their ‘own products’ but in a less capital-intensive way, undercutting the JV products.

How important are those Western brands in China? Will consumers be prepared to pay a premium for a JV-produced car with Western involvement over a pure domestic brand one? In a price war that looks like sticking around for a while longer, the Chinese makers are positioning themselves with cheap to build, small cars.

But there is more than one way to skin a cat. Take a look at SAIC. JVs are one way to learn. But plenty of people were surprised to hear that SAIC had already negotiated to purchase the intellectual property rights to now defunct MG Rover’s main models late last year. And the 45 model’s rights have already been sold on by SAIC to another Chinese firm. The MG Rover models can become Chinese domestics. Also, there is M&A activity. SAIC owns Korea’s SsangYong. These guys have cash reserves – or can call on cash quite easily - and could buy up other car companies or assets in the future. And they use foreign design houses and engineering firms for new designs, especially for export markets, too.

The Chinese are clearly getting there with the technology now.
As profit margins on their Chinese operations are squeezed further, the Western makers in China with long-standing JVs may increasingly ask themselves - like me in that bar twelve years ago - have we been taken for a ride?

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