Opinion

David Rohde

Will “Made in America” sell in China?

By David Rohde
November 3, 2011

Update: My apologies. In the first version of this column, I confused two different Camaro models. A corrected version is below.

SHANGHAI –When the third film in Hollywood’s Transformers franchise debuted here in July, vast numbers of young Chinese flocked to movie theaters — and Chevrolet dealerships. Wealthy moviegoers wanted to buy one of the film’s half-car, half robot main characters, a bright yellow Chevrolet Camaro coupe called “Bumblebee.”

“Everyone knew Bumblebee,” said Richard Choi, the director of sales and marketing for Chevrolet in Shanghai. “I had to get the press guys to call it Camaro, not Bumblebee.”

Over the summer, Chevrolet dealers in China sold about 350 400 bright-yellow Camaros. A separate Camaro model specifically designed to look like “Bumblebee” sold 2000 units worldwide, but will not be available in China until December. nearly one-quarter of the 2,000 “Bumblebee” Camaros the company sold worldwide.

Chinese observers say Chevrolet, though, could have sold vastly more Camaros in China. Chevrolet built the specialized Camaros each Camaro in the U.S. only after it received specific orders, creating a three-month-delay in delivery that frustrated Chinese consumers.

At the same time, transportation expenses, as well as Chinese tariffs and currency manipulation, make a Camaro cost roughly twice as much to purchase in China — approximately $70,000 — as it does in the U.S.

Choi, the Chevrolet sales director, downplayed the delivery time and said the Camaro sales showed that American brands can soar in China.

“The question isn’t only about how we get more Camaros to China,” Choi said. “But also about how we get more products — like Camaro — to China that inspire and energize the Chinese market.”

Chevrolet’s “Bumblebee” experience shows the promise and perils of marketing to China’s burgeoning middle class, a strategy some economists say American firms can use to help revitalizing the U.S. economy. They argue that if the Chinese middle class begins buying more consumer goods it could play a central role in reviving the world economy. And if American firms can penetrate the lucrative Chinese market, they could create desperately needed jobs in the United States.

The track records of Chevrolet and other American firms in China show the realities of that approach. They also provide one set of answers to a central question I will repeatedly examine in this column. Does the rise of a middle class in China and other emerging market countries necessarily mean the American middle class must shrink?

Four other journalists and myself are are visiting China this week on a trip organized by the China-United States Exchange Foundation, a non-profit group run by businessmen with close ties to the Chinese government. Henry Kissinger and former Treasury Secretary Robert Rubin serve as honorary advisers to the group, which also organizes visits to China for retired American government officials and military officers. Reuters is paying the full cost of my trip.

China presents challenges for smaller firms as well. On the 21st floor of the gleaming “China Fortune” office tower in Shanghai, another American company is trying to establish its own beachhead in China’s burgeoning economy.

In a public-private partnership I wrote about last month, engineers in a Bowling Green, Kentucky shopping-mall-turned-high-tech-incubator designed a valve that reduces the air pollution spewed by diesel engines. Today, four Chinese truck manufacturers are interested in purchasing the valve to comply with tightening air pollution regulations.

“The Chinese market needs this technology,” said Houman Kashanipour, president of the American firm, PurePOWER Technologies. “We hope to take this technology around the world.”

The company, which is headquartered in Columbia, South Carolina, is taking advantage of government-supported research, manufacturing sophisticated high-end products and trying to export them to growing economies around the world. The firm has sold 10,000 valves and other devices to reduce diesel emissions to a Swiss company. It is also aggressively marketing its products in Brazil.

But its efforts here in China is stalled. PurePOWER’s parent company, the truck manufacturer Navistar, has been waiting for eighteen months for Chinese officials to approve its joint venture with a Chinese firm. Until the application is approved, PurePOWER cannot begin distribution in China.

Unlike the United States where free-market advocates deride the role of government, the Chinese state has played a central role in creating, supporting and expanding businesses here. In addition to privatization, cheap government loans and massive government-funded infrastructure projects drove China’s boom. The Chinese government also required foreign companies to create joint ventures with Chinese firms that, fairly or unfairly, allowed local companies to learn valuable manufacturing and business practices.

“China is a very big market,” said Arthur Kroeber, the managing director of the Beijing forecasting firm Dragonomics. “And the government has been successful in using that market size as a point of leverage to exact terms from foreign investors that other countries can’t get.”

At the same time, many joint ventures are highly profitable for foreign firms. Chevrolet, which launched in China six years ago, is slowly gaining market share. Last year, it sold a record 543,700 cars in China.

Overall, European and Japanese brands have stronger reputations in China than American brands, but American popular culture and marketing can also be potent. As in the United States, Apple’s magic made the iPhone a status symbol among wealthy Chinese. And brands that arrived early in China — such as Buick, Kentucky Fried Chicken and Procter and Gamble — sell well.

Those successes show that, for all the attacks from American politicians on Chinese currency manipulation, American companies can find profits in China. The trick for American officials is to find effective ways to support pioneering American companies.

From China, the “all government is bad” versus “all business is bad” political debate in the United States seems absurdly simplistic. Republicans are wrong to believe that the free market — and the free market alone – magically creates thriving companies. Democrats need to see the support of innovative businesses as a core goal of government.

And while the financial crisis caused many people in developing countries to believe China’s economic model has trounced the American model, a dizzying wealth gap continues here. Household income represents 50 percent of China’s GDP, one of the lowest rates ever recorded.

Instead of re-investing staggering profits in its infrastructure projects, the Chinese government must decrease high housing, health care, education and pension costs for average families. Chinese will spend more of their earnings — and drive global growth — when they are more secure about their future.

Americans, meanwhile, should accept that large-scale manufacturing will never return to the United States. Labor costs are rising in emerging market countries but remain exponentially lower. Companies that base low-skills manufacturing overseas but retain their design, marketing and headquarters in the U.S. — and return the lion’s share of their profits home — may be the best of a series of bad economic options for America.

Innovative firms will find ways to profit from the rise of the Chinese and emerging market middle classes. The American middle class needs more “Bumblebees” and PurePOWERS overseas, and less ideological babble in Washington.

PHOTO: A visitor looks at a Chevrolet Camaro Bumblebee from General Motors during a local automobile exhibition in Shenyang, Liaoning province July 7, 2009. REUTERS/Sheng Li

Comments
13 comments so far | RSS Comments RSS

One of those Bumblebee’s has even made it into the interior, here in Nanchang.

Posted by edgyinchina | Report as abusive
 

David, the answer to your question can be found by looking to other densely populated countries like Japan, where a middle class is already established. How many American cars (like Camaros) did we sell there vs. how many Japanese cars were sold to Americans? The answer is virtually none. And the reason is because relatively few Japanese own cars (as we know them, excluding tiny things that wouldn’t be allowed on American roads) because it’s just too damned crowded. Even Japanese companies have trouble selling into the Japanese market because the market is so stunted.

The problem is one that economists have yet to acknowledge – the inverse relationship between population density and per capita consumption. Extreme population densities that result in over-crowding drive down per capita consumption, making such markets incapable of even consuming their own productive capacity. This makes such nations utterly dependent on manufacturing for export in order to gainfully employ their bloated labor forces. A country-by-country examination reveals that extremely densely populated nations either exist in abject poverty or they are dependent on manufacturing for export for their wealth.

If China develops a western-style middle class, it can only be done on the backs of American workers, as we’ve already witnessed.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive
 

“As in the United States, Apple’s magic made the iPhone a status symbol among wealthy Chinese.”

Apple makes the iPhone and iPad at the notorious Foxconn facility in China, so there’s nothing very “American” about the production of these products. Like Americans, Chinese buyers can rest assured that the iPhone and iPad are made by abused, underpaid employees, just so the buyers can pay a bit less at the checkout line. (And to ensure that Apple boosts its quarterly profits by a few cents.)

Posted by SinoKat | Report as abusive
 

@Pete Murphy…no one wants to buy your book, quit with the shameless self-promotion.

Posted by jaham | Report as abusive
 

“Does the rise of a middle class in China and other emerging market countries necessarily mean the American middle class must shrink?”

The answer is no. When that question is asked, “yes” answers invariably come from pessimistic, zero-sum-game thinking that is contradicted by the historical record.

Posted by Bob9999 | Report as abusive
 

As long as the Chinese continue do what Mr. Rohde states regarding currency manipulation, tariffs and deliberate technology acquisition the American worker will always be at a structural economic disadvantage. Living wages in America can’t compete unless we race to the bottom and become like many other developing nations of a two-tiered income populace. Of course, our government could do something but simply lacks the will to do it since impacts those fund it. And that’s not a partisan statement, simply a fact of our representatives being paid for by the corporations/special interests that fund their never ending electioneering.

Posted by djt04 | Report as abusive
 

The article says, ‘Americans, meanwhile, should accept that large-scale manufacturing will never return to the United States. Labor costs are rising in emerging market countries but remain exponentially lower.’

A couple of important points:

1. Manufacturing output in the US is huge. Depending on whose data you believe, the US is the world’s #1 or #2 manufacturer in terms of annual output.

2. Labor costs in the US are higher than most countries, but US manufacturing productivity is also higher than most countries.

Posted by jambrytay | Report as abusive
 

The answer is clearly “no”.

If you believe in the “weapons of mass destruction” in Iraq, if you believe atheistic socialists make common cause with religious fundamentalists, if you believe in the tooth fairy, then you would believe that China would ever give another country or culture an even break. Just spend a little time and look at 3,000 years of Chinese history. Ask their neighbors, the Vietnamese, Mongolians, Koreans, Japanese, Tibetans. We are no different to them.

What foolishness! The best we can do is make China the new backer of Israel and get us off that hook while avoiding this new tooth fairy too.

At least the foolish European heritage Americans are well on the way to becoming a minority here, which ought to give everyone a better chance of prospering. China is no one’s friend and never has been. Ever.

Posted by txgadfly | Report as abusive
 

txgadfly

I don’t agree the answer is clearly ‘no’.

I did some consulting work a few years ago with a global engineering and construction company. That company employs tons of engineers, draftsmen, project managers, and other highly paid workers to design and build the airports, roads, bridges, dams and other pricey infrastructure projects that a lot of emerging economies like China are now buying. Twenty years ago, this company had very few such projects in emerging countries and a lot fewer employees.

Posted by jambrytay | Report as abusive
 

What does the US want? You’ve already had everything guys, wake up.

Posted by blackblue | Report as abusive
 

The fact that Chinese Citizens have to pay 100% premium from the domestic USA price is a demonstration that China is imposing direct or indirect barriers to US sales of goods and services in his territory. We are so far from a real free trade, looks like a lot needs to be done to favor export of US made products.

Posted by robb1 | Report as abusive
 

Chevrolet should produce All its “HOT Rods” in China and Sell it to All ASEAN countries…This would bring down the cost n thus the Selling Price…At least…The Selling Price in USA=The Selling Price in China and Asia…

Posted by SUPERLUCK | Report as abusive
 

I came across this column while I was reading his column on middle class. I think he’s made some very insightful comments with China and brands. Brands is like fashion. You can’t really tell why you want it. In China it is so very deeply rooted that everything must be ranked. Credits to the pioneers who entered China market. As David put it, true China has tariff leverage. When pioneers started joint ventures 20 years ago, auto was tariffed at 150%. China as country and joint ventures as business, they both gained significant profits. Shall we say this is a win-win? who are the losers? Those who didn’t like China’s rules, although they love to have a slice of the big pie. For profit companies – the only reason for their incorporation is FOR PROFIT. You tariffed me 150%? I had to joint venture with you? with 0.5 million annual car sales and HUGE profit margins – hell YES, just pick me! We have problems to solve here in US. Blaming a delveoping country for our own problem? So American.

Posted by desktopgg | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •