Chinese politics - corruption and smokescreens

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Global automakers balance on tightrope

Bloomberg | 2015/3/24



For the past several years, China's central government has been building World Consumer Rights Day into something of a national holiday.



Every year, the state-controlled media focus on consumer rip-offs and corruption, lambasting major companies and investigating high-ranking party officials.



This year's crackdown again focused heavily on foreign automakers. CCTV accused Volkswagen AG, Jaguar Land Rover, Daimler AG and Nissan Motor Corp. of selling defective vehicles and overcharging consumers.



Global automakers can hardly afford to protest this latest cost of doing business, but they also can't help noticing that China's leaders are increasingly using them as political pinatas. And with both national and factional agendas driving Beijing's heavy hand, the risks of selling cars in China seem to be growing as fast as the rewards.



Though sales have been slowing, the Chinese market's high-single-digit growth rate and relatively low penetration make it the most promising playing field for global automakers. Compared with the flattening demand in developed markets and the inconsistency of others, such as India, Russia and Brazil, China is becoming the best bet for the long-term pursuit of sales volume.



China has always used its potential to extract concessions from foreign automakers. Its initial strategy was to force them to share technology with their Chinese partners, so that domestic automakers could compete.



Decades in, however, it's clear that Chinese automakers have not become globally competitive. Even in their home market, they are losing market share to their foreign rivals.



Unable to encourage a dynamic domestic industry, China's government has found new ways to score populist points.



Last year's antitrust investigations of foreign luxury brands showed that President Xi Jinping's emphasis on consumer protections was a convenient veil for pursuing an agenda for the auto industry.



But it's become increasingly apparent that Xi's anti-corruption campaign is also aimed at the allies of former President Jiang Zemin, whose close ties with China's largest automakers put the industry at the center of a massive power struggle within the Communist Party.



The latest "big tiger" to be caught up in Xi's anti-corruption campaign is Xu Jianyi, chairman of FAW Group, China's oldest state-owned automaker. Authorities have been investigating automakers linked to the People's Liberation Army since 2011, citing complaints of "rampant corruption."



Xu was detained for questioning while in Beijing for an annual meeting of the National People's Congress. Xu was reportedly close to Zhou Yongkang, who was arrested last year for alleged crimes involving a family Audi dealer and service franchise. Xu and Zhou were considered part of Jiang's military-industrial faction.



Jiang began his career as one of FAW's first group of Soviet-trained engineers. Later, as mayor of Shanghai, he helped guide his hometown automaker, SAIC, forge partnerships that made it China's largest producer.



His son, Jiang Mianheng, recently stepped down from the Shanghai branch of the China Academy of Sciences, a move that has been interpreted as a sign that the Jiang family itself is now in Xi's cross hairs.



With the circle apparently closing in on a family that is said to "own Shanghai," China's two largest domestic automakers, FAW and SAIC -- as well as their global automaker partners -- have to be worried about the collapse of their political patron's clique.



With overcapacity looming and the China Automobile Dealer Association's warning that the domestic industry is due for major consolidation over the next five years, the timing of Jiang's downfall is certainly ominous.



General Motors and Volkswagen are locked into aggressive expansion into China, and they are determined to navigate China's protectionist and factional cross-currents as they battle for sales both in China and globally. Toyota, on the other hand, isn't worried enough about losing its position as a global sales leader to pursue further expansion there.



The Japanese automaker is said to be re-engineering its production and development system as part of its secretive Toyota New Global Architecture overhaul, an effort to improve productivity and flexibility in its assembly plants.



Given the rising -- and increasingly unpredictable -- risks involved in the world's only major growth market for cars, Toyota's more tentative approach to China may well prove to be the wiser.

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