Keller

Recent reports from China indicate that the government will set tough fuel economy standards based upon vehicle weight starting in 2005, with a further tightening in 2008. China’s standards will force each model to comply with a target fuel economy rather than using a formula that permits averaging as in the United States. The consequences to foreign auto companies operating in China are significant and include changes in their sales mix, profit potential and market share. In the short run, the scales tip in favor of the Japanese, who have hybrid cars in production, and the Europeans, who produce the most efficient and cleanest diesels. In the long run, all foreign producers might be the losers as China uses responsible regulation of fuel economy to ensure that the most up to date technology is incorporated in locally built cars. Small local Chinese auto companies will also be forced to consolidate, another goal of the central government in the quest to improve the efficiency of its industry.

Chinese consumers and the Chinese economy are the beneficiaries of the fuel economy mandates. China will join a long list of industrialized nations in setting standards that force the introduction of advanced technology into vehicles to keep energy consumption in check. China’s decision reflects the fact that it doesn’t want to encourage a population of mammoth cars that swell energy imports and worsen already terrible air quality. In addition, China recognizes that its energy policies will necessitate technology transfer that will accelerate the development of an internationally competitive industry.

Auto companies have been reluctant to share advanced technology with the Chinese because they rightfully wonder how they can protect their know-how from being copied and how they can prevent their Chinese partners from becoming their competitors after they have extracted what they need to learn. This law hastens the day when Chinese cars will be exported into global markets.

The impact of China’s policy will be more adverse on General Motors and Chrysler than it will be on Honda or Toyota. Even though GM is assembling some small cars from Daewoo, the company is making most of its profits from Buick Regal, which is ancient by anyone’s standards in terms of vehicle engineering. GM also produces Chevrolet Blazers and plans to sell Cadillac and Saab models. The Jeeps produced in Beijing will need significant improvement to meet the targets.

Even as vehicle tariffs fall in compliance with WTO rules, fuel economy standards will restrict imports of classic American light truck and luxury cars. While trade pressures are probably behind China’s recent announcement to allow the direct import of some 15,000 Cadillacs and other typically American products, in the long run GM is going to find it difficult to sell these models.

How profitable GM will be selling small cars in competition with Honda, Toyota and others remains to be seen since GM has argued time and again that it can’t improve the fuel economy of its big cars, SUVs or pickup trucks. Just as the domestic auto companies have lost the public relations battle over fuel economy in the United States, they might lose it in China as well.

The emergence of China as a major automotive power should be of great concern to European, Japanese and American auto companies. It is fascinating to see how effectively the Chinese are setting policies that are in the best interests of the country in its goal of creating a globally competitive automotive industry. China has found a way to ensure that local production is dedicated to advanced vehicles. In the process, short cut expensive and time-consuming research in fuel economy and have the technology that ensures globally competitive Chinese vehicles by the end of this decade.

Maryann Keller is a veteran auto industry analyst and author of the books “Rude Awakening: The Rise, Fall and Struggle to Recover at General Motors” and “Collision: GM, Toyota and Volkswagen and the Race to Own the 21st Century.”