Merely adequate: Chinese cars and trucks in the Middle East

While much Chinese investment and exports to the Middle East and Africa may be in the form of infrastructure, China’s automotive manufacturers – of both passenger cars and commercial vehicles – are making significant headway in the regions’ markets.
 
The leader so far this year is Chery, which sold a total of 57,300 units abroad, thanks in part to its forays into the Middle East and Africa. Chery has established manufacturing plants in both Iran and Egypt, and sells its vehicles across the region. Great Wall Motors (2333.HK), another Chinese brand, is selling increasing numbers of its sports utility vehicles in countries like Namibia, South Africa, Mozambique and Zambia.
 
Chery and Great Wall Motors are by no means the only companies to pursue sales in the region. Around 20 Chinese automotive companies have sold their vehicles in Egypt alone since 2003, with combined annual sales averaging 3,000-4,000 units per year.
 
Chinese vehicles’ popularity in the Middle East and Africa can be explained by their low cost. Cars made in China are not held to the same safety, emissions and quality standards as cars made in the West and Japan, which allows Chinese manufacturers to keep prices low for what customers see as adequate transportation.
 
"For a truck that’s sold in Western Europe, the customer requirement is that the truck lasts a million kilometers. The customer requirement in China is 250,000 kilometers," said Ivo Naumann, the Managing Director of consultancy Alix Partners in Shanghai. "You’re looking at a significantly lower customer quality requirements, which then of course translates into a much lower cost of the vehicle." 
 
Expansion into the Middle East and Africa is a byproduct of Chinese automotive manufacturers’ success in China’s domestic market. This is especially true for Chinese commercial vehicle manufacturers, which command 97% of the domestic market. Many firms are now looking abroad to maintain growth.
 
Last year, China produced almost half the world’s heavy and medium commercial vehicles, and five of the world’s 15 biggest truck makers are Chinese – Dong Feng (600006.SH, 0489.HK), FAW, CNHTC (000951.SZ), Foton and Shaanxi Automobile Group.
 
According to the Chinese Association of Automotive Manufacturers, total automotive exports from China reached 336,100 units in the first eight months of this year, an increase of 80% on the same period last year, when the global recession contributed to a significant drop in exports of Chinese vehicles.
 
"China has developed some commercial vehicle makers that are among the top 10 makers in the world in terms of scale. They have now started to systematically and aggressively export their product," Naumann says.
 
No place like home
 
Yet he cautions that despite the expansion, international sales still take second place to the home market. "I doubt that any of the markets in Africa have a total market size of more than a million vehicles," said Naumann. "If China continues to grow at 10%, that’s more attractive than a market where the total size is only a million vehicles."
 
If China’s automotive exports to the Middle East and Africa are driven by overlapping consumer preferences with China’s domestic market, these trade patterns may soon change.
 
China’s economic rise has been matched by a rise in the standards vehicles are expected to meet: The country is moving from "Euro III" emissions standards to stricter "Euro IV" standards this year, and will step up again in 2012 to reach the even more stringent "Euro V" standards.
 
Stricter requirements may erode Chinese manufacturers’ cost advantage, but observers say the country’s auto firms will have the edge in pricing for some time yet.
 
 "While of course customer requirements in China are moving up and emissions standards are moving up, they are still significantly behind more mature markets and they are much more closely aligned with what other emerging markets require," said Naumann.