Detroit auto know-how, as well as the city's cheap real estate, is a draw to Chinese investment. The amount is relatively modest, and Chinese companies aren't talking yet about making cars here. But that could change.
While the US automotive industry continues to rebound after its near collapse from the financial crisis few years back, China is quietly expanding its presence in the Detroit-based market. Encouraged by the low price of real estate and the high level of advanced engineering talent, dozens of Chinese auto companies and suppliers are opening plants and offices in and around the Motor City, where they hope to one day sell cars to US buyers.
So far, the emphasis has been on the supply chain, but automotive experts and Michigan Gov. Rick Snyder (R) hope that continued investment in the area will lead to much more, and they envision Chinese companies playing a big role in helping the city flourish after it emerges from its Chapter 9 bankruptcy restructuring, which got under way this year.
“They [the Chinese firms] want to be more global over time, so they need to look at North America. And if they’re looking at North America, this is the place to come,” Governor Snyder told reporters earlier this year.
Snyder is opening the door wide to China. In September he made his third economic development trip there in three years to court investors in all sectors, but mostly automotive. To date, he said, Chinese companies have invested about $1 billion in his state, 95 percent of which is related to the auto industry. Michigan companies exported 22 percent more goods and materials to China in 2012 than in the previous year. Although not all of the activity from China is auto-related, Snyder says he expects to see more Chinese involvement in the auto sector.
“Detroit is the value place in the United States, in Michigan, and potentially the world in terms of a great value opportunity,” Snyder said. “Come in and invest now, because there’s going to be a great upside.”
The Big Three automakers in Detroit – General Motors, Ford, and Chrysler – are already investing heavily in China. According to a report released earlier this year by the University of Windsor’s Office of Automotive and Vehicle Research, about 60 percent of total global investments in new auto plants went to China, which is the world’s largest producer and consumer of new vehicles.
Much of this has to do with buying power: For the first 11 months of this year, auto sales in China totaled nearly 20 million units, an increase of almost 14 percent over the same period last year, according to the China Association of Automobile Manufacturing in Beijing. By comparison, US auto sales reached about 16 million units through November, a 3 percent increase.
So why are the Chinese in Detroit?
“This is where the action is in terms of automotive,” says Michelle Krebs, a senior analyst for Edmunds.com, an online resource for the automotive industry based in Santa Monica, Calif., with an office in Detroit. “This is where the heart of anything to do with automotive is in terms of development, research, and production. This is where it is.”
Besides access to global auto technology talent, which is essential for companies in mainland China to tap to be competitive, the Chinese firms also get affordability in Detroit. The city’s population drain, which left acres of vacant real estate, may look dire to most, but the Chinese see opportunity, says Tom Watkins, a US-China business consultant who serves on the University of Michigan Confucius Institute Board of Advisors in Ann Arbor. (The Chinese government has funded some 440 Confucius Institutes worldwide "to promote Chinese language and culture," according to the Confucius Institute headquarters.)
Not only does Detroit's inexpensive real estate market make investment an easy choice, but investors are also eligible for various local, state, and federal tax credits for redevelopment. Today, about 50,000 Chinese live in the metropolitan area, including more than 15,000 automotive engineers. Business networks, mostly related to the auto industry, are also growing. Even within Big Three companies, Chinese worker organizations are popping up; the Ford Chinese Association boasts 650 white-collar workers, for example, making it one of the largest of its kind at the company.
“When you put all of this together, Michigan, and Detroit in particular, becomes a very good place to grow and build your business,” says Mr. Watkins.
More than 100 Chinese auto-related companies are already in operation in the Detroit area. They include:
Right now, these Chinese companies are tapping into the Detroit market to establish partnerships with the US Big Three and the area’s subsequent supply chain, and to capitalize on the advanced engineering talent pool this city attracts.
The endgame, experts say, is that the Chinese plan to build cars here and sell them to US consumers, following the guidebook of Korean and Japanese automakers, who now control roughly 40 percent of the US auto market.
So far, automotive exports from China are dim: down 7 percent to almost 900,000 units during the first 11 months of this year, compared with the same time last year, according to the China Association of Automobile Manufacturers. This represents a tiny percentage of vehicles produced there. To date, the cars that trickle outside China's borders are headed mostly to Africa and the Middle East.
However, Nigel Francis, who was appointed by Snyder in October to be Michigan's “auto czar” and who led an automotive-focused delegation to China that month, says the Chinese are in a “preparation phase” in developing relationships with all the key players – from the supply base to legislators – to eventually enter the North American market. They are also learning the engineering needs of the market to target what US consumers want and to shape an appealing brand.
“It’s unreasonable for anybody to think that the Chinese will not go international. They have the largest domestic market in the world, which means they’ll be making lots of cars,” Mr. Francis says.
Their primary challenge: regulation and politics. Unlike in mainland China, safety and environmental regulations are strict in North America and Europe. There is also the threat of political blowback: For example, Republicans in Congress complained last year that technology developed by A123 Systems could help support military applications back home.
Krebs says she does not expect any of China’s biggest companies in Michigan to build cars “anytime soon.”
“They’ve got a growing market in their own country and they’re trying to fill the need there. So there’s not a need to do that now, and North America is not going to grow nearly as much as China,” she says. “There are other ways to get into the auto industry here, and the car-making part is not the most lucrative.”