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(originally published by Booz & Company)


Optimism Returns to the American Automotive Industry

Chinese OEMs and the U.S. Market — Fact vs. Fiction
by Bill Peng, John Jullens, and Bill Russo

One question facing the U.S. auto industry is the potential entry of Chinese car manufacturers into the American market. More than 50 percent of respondents to our survey said they expect China to own more than 5 percent of the American automobile market by 2020. (See Exhibit 6.) Under this thinking, China would replicate the strategy of Japanese carmakers 30 years ago and Korean manufacturers a decade ago: Establish a foothold with low prices, and then improve quality and brand perceptions. The only difference, according to this view, is that Chinese companies could accomplish this faster and more easily, because the size of their home market will give them more opportunities for domestic growth.

Is the projected level of market penetration shown in Exhibit 6 likely? Maybe, but not by 2020. The actual performance and capabilities of the leading Chinese vehicle manufacturers — as well as their readiness to compete in developed markets such as the U.S. — is overestimated, for several reasons. First, the size and scale of these Chinese companies are fairly small, especially when one separates the sales volumes of their Western joint-venture partners. In most cases, the joint venture itself far overshadows their relatively young Chinese brands. In addition, the domestic Chinese players are focused primarily on selling to first-time buyers in hypercompetitive entry-level segments, where margins are difficult to sustain. Thus, the overall profitability of these companies is typically quite low. That reduces the resources they have to expand overseas.

Furthermore, none of the leading Chinese manufacturers has yet achieved a major product or process breakthrough that could give it a significant competitive advantage. This is in sharp contrast to companies like Toyota, which built its initial position in the U.S. through its famed Toyota production system, a new and (at the time) vastly superior operating model relative to Detroit’s older mass production system.

All of this is certainly not lost on the leading Chinese manufacturers, such as Chery, Geely, Great Wall, and SAIC. These companies have all set aggressive international expansion targets of more than 500,000 units by 2015, but almost entirely in developing countries, instead of in the more mature North American and European markets. It will probably take several more years before they can consistently meet competitive product reliability and durability standards, along with U.S. roadworthiness requirements and product specifications. In fact, many Chinese manufacturers fear the potential product liability and other lawsuits common in the litigious U.S. business environment. For these reasons, even among developed markets, Europe may be a bigger priority for Chinese companies than the United States.

To crack global markets, Chinese automakers must develop world-class supply chains and supplier partnerships, offer competitive financing products, and deploy the talents of a worldwide human resources pool. That won’t happen overnight. It will also take some time for Chinese carmakers to learn to compete in markets where they don’t have the benefit of a low-paid labor force, management team, and supplier base, and without favorable subsidy policies from the central and local governments. These companies must build a retail network and brand in the U.S., which is a substantial investment.

Nevertheless, many Chinese automotive executives aspire to capture a meaningful share of the U.S. market. Some have started to evaluate potential entry strategies. For example, Great Wall, China’s leading producer of SUVs, is in discussions with several companies to establish a dealer network in the U.S., whereas BYD is testing its alternative energy models, including the all-electric e6 Premier. SAIC, China’s largest automaker, has bought a majority share in Visteon’s global interiors business with the objective of developing its supplier capability in the U.S.

Eventually, the U.S. market will see more competitors emerging from China, who will likely offer well-equipped models at very low prices, putting significant pressure on incumbent players. For suppliers, that outcome may present opportunities. Chinese manufacturers will have to rely on existing U.S. suppliers, owing to their capability advantage over Chinese suppliers. To capture those business opportunities, Tier One suppliers should begin to build close partnerships with leading vehicle brands in China, through joint ventures or by developing simultaneous engineering initiatives.

  • Bill Peng is a principal with Booz & Company based in Beijing.
  • John Jullens is a partner with Booz & Company based in Shanghai.
  • Bill Russo is a senior industry advisor with Booz & Company based in Beijing and a former vice president of Chrysler’s business in Northeast Asia.
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  1. Ben Klayman, “GM Focusing on Profits, Not Market Share: CEO,” Reuters, January 9, 2012: Describes CEO Dan Akerson’s comments at the Detroit auto show regarding GM’s renewed push on fundamentals rather than sales volume.
  2. Alan Ohnsman, “Hyundai Puts Quality Advances Ahead of 2012 U.S. Sales Goals,” Bloomberg Business Week, January 9, 2012: Describes the automaker’s willingness to sacrifice incremental sales growth and focus instead on improving its quality scores.
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