Kelly Sims Gallagher's blog

How Beijing can save Detroit.

By Kelly Sims Gallagher

In an effort to avoid duplicating a Chrysler-like bankruptcy, General Motors and Ford are trying to sell two of their marquee assets -- Saab and Volvo. According to numerous news reports, Chinese firms are among the top bidders. In the end, however, there may not be enough good stuff in either of these two brands for the Chinese to do more than express interest.

Unbeknownst to many in the United States, China has been rapidly building a world-class automobile industry. In the early 1980s, after the Cultural Revolution, China started licensing technology and forming joint ventures with foreign firms. It issued its first Auto Industry Policy in 1994, and sales exploded right around the turn of the century. Today, China's auto industry is extending its prowess abroad -- selling cars and trucks in Brazil, Mexico, and Uruguay. Now, GM is apparently entertaining a bid for Saab from Chinese manufacturer Geely. Both Geely and another Chinese firm, Chang'An, have expressed interest in Volvo, though both have released statements denying this.

So, is China taking over the automotive world?

Not quite. The two key rationales for Chinese companies to buy Western brands are the possibility of gaining access to the U.S. car market, and more importantly, acquiring U.S. automotive technology and expertise. But if Chrysler's experience is any indication, both assets seem to be lacking. When Chrysler President Tom LeSorda tried earlier to sell Chrysler to several Chinese firms, none were apparently interested. In Saab's and Volvo's cases, it's not clear that the Chinese will end up making real offers, either.

The automotive sectors in China and the United States today could not be more different. Auto sales are declining nearly everywhere in the world except China, where April sales set records. Whereas the U.S. auto industry seems doomed to inevitable decline, China looks set for unstoppable growth. It is perhaps fitting then that while U.S. companies are dying, Chinese companies are bursting forth on the international scene, seemingly to take their place.

These apparent trends are certainly not inevitable, however, and they disguise some of the limitations in China and the remaining strengths of U.S. firms. Almost all of the Chinese auto companies aren't completely "Chinese"; they're tied up in joint ventures with foreign firms. These joint ventures were formed in the early days of the industry to allow the Chinese access to more advanced technology and know-how. Foreign firms were keen on the arrangements, which they saw as a way to penetrate the emerging Chinese car market.

But just as the Chinese became dissatisfied with licensing foreign automotive technology, it appears now that they are becoming dissatisfied with joint ventures. Chinese firms would likely retain greater profits if they had the technological capabilities to design and execute new vehicles themselves. The acquisition of foreign firms would give young and aspiring Chinese firms access to what they need -- advanced technology, know-how, and accumulated experience.

Unfortunately, U.S. firms may not have what, more specifically, Chinese firms urgently need -- technology and expertise related to fuel-efficiency and/or low pollutant-emissions. One reason Chinese sales broke a record in April is because the Chinese government's stimulus package provided big tax benefits and other subsidies for cars and light trucks with small, fuel-efficient engines. Beijing has issued fuel-efficiency standards for cars and trucks that are far more stringent than U.S. standards, and consumers who purchase cars with big engines have to pay extra fees. In other words, the Chinese government is motivating consumers to buy fuel-efficient cars, which is creating a big demand for them, which in turn is motivating firms to acquire such technologies from abroad. So the real question is, will the U.S. firms, which have spent years churning out light trucks and SUVs, end up having anything of interest for the Chinese to buy?

Alas, the Chinese may not buy GM's and Ford's assets today, but they could rescue the U.S. industry in another way: by setting an example  of good industrial policy for the United States to follow. Fuel efficiency standards in China, Japan, and even some European countries will push up demand for these sorts of cars. If U.S. firms are to remain internationally competitive, they will need to have more to offer in this regard. But Washington will also have to motivate American consumers to purchase efficient cars, whether through "feebate"-type regimes (where a fee is imposed on sales of inefficient cars, and a rebate provided to efficient ones), or through increasing the price of fuels, or imposition of standards. Bolstering smart, modern automotive technologies -- and not waiting around for bailouts from China -- are what will ultimately keep U.S. firms globally competitive over the long haul.

Kelly Sims Gallagher of the Harvard Kennedy School's Belfer Center is author of China Shifts Gears and the just-released Acting in Time on Energy Policy.

Photo: China Photos/Getty Images