Email | Print    Type Size  -  +

The new Motor City

The future of the global auto industry is already on display in Santiago and the Chinese - who else? - are making huge inroads.

By Alex Taylor III, senior editor
Last Updated: October 28, 2008: 10:03 AM ET

laddario_santiago_c.jpg
Car country: Low tariffs have the automakers flocking to Chile.
laddario_santiago_a.03.jpg
Options galore: Chinese manufacturers like Chery 'recycle' outmoded designs but load cars up with features such as power windows and air conditioning.
mag_CHI27_graphic.gif
laddario_santiago_b.jpg
Auto megamall: Selling cars in malls such as the Movicenter Automall (pictured here) allows China's Great Wall to compete head-to-head with brands like Chevrolet.

(Fortune Magazine) -- The Movicenter Automall in Santiago, Chile, looks like a global parking lot. In one corner car shoppers can find a complete range of Chevrolet-branded vehicles, from minicars to full-size pickups.

Another part of the mall features economical Toyotas, Nissans, and Hyundais. Scattered among all of them is more exotic fare: passenger cars and SUVs made by tiny Chinese manufacturers and commercial trucks from India.

After signing free-trade agreements with most major industrial countries, Chile has emerged as one of the most open car markets in the world, an automotive free-for-all where small manufacturers from developing nations can compete on a nearly level playing field with more established companies.

Distribution through malls like Movicenter is efficient, and brand-blind buyers shop features and price, not reputation or heritage. They are willing to give new models a chance, even if they can't pronounce the name.

And nobody is moving faster in Chile than the Chinese. At last count, 14 different brands of Chinese cars, trucks, and commercial vehicles were on sale in Chile - with more expected to arrive by the end of the year. They are a big hit, especially among younger, less affluent buyers who got their first exposure to Chinese brands buying motorcycles.

Starting from scratch in 2005, annual unit sales of Chinese light vehicles sold in Chile reached nearly 3,000 last year, and Michel Pardal, manager of Latin American forecasting for J.D. Power & Associates, expects that number to quadruple in 2008. That would give Chinese carmakers a share of some 5% in just three years of Chile's 270,000-vehicle market.

At the headquarters of Chile's National Automobile Association, the trade group for auto manufacturers located in a modern office building in Santiago's central business district, the admiration for the newest combatants in the Chilean auto wars is evident.

"The public has been buying Chinese products without reluctance," says Iván Silva Carmona, executive vice president of the trade group. "Their success was faster than we projected." And interest in the Chinese auto industry seems to be accelerating: Financier Warren Buffett just laid out $230 million for a stake in a Chinese maker of automotive batteries.

Chinese autos today represent little threat to established manufacturers. Their designs are derivative and dated, vehicle quality remains a foreign concept, and corporate reputations are nonexistent. Who in the West has ever heard of manufacturers with names like Yuejin, DongFeng, or Xinkai Auto?

But Chinese car companies have demonstrated that they are fast learners, energetic, and tenacious. They are rapidly upgrading the quality of their designs and making them more attractive to customers, and they are pressing to expand everywhere. Says Timothy J. Dunne, director of Asia Pacific Market Intelligence for J.D. Power: "They will probably be coming to the U.S. in the next three years, although the volumes will be very small."

A level playing field

No company is watching the Chinese in Chile more closely than GM (GM, Fortune 500), Chile's sales leader - it controls 17% of the local market - for the past 25 years. All its vehicles are sold under the Chevrolet brand, though few would be recognizable to U.S. buyers. Most are smaller cars, made in countries like Korea, Brazil, and China and carrying names like Spark, Vivant, and Captiva.

Given the condition of its business in the United States, GM is eager to squeeze out as much profit as it can. South America makes a significant contribution to GM's Latin America/Africa/Middle East region, where revenues have grown over 20% a year for the past five years.

"The advancement of the Chinese is absolutely impressive," says Julie Beamer, managing director of GM Chile & Peru. "We are taking the threat very seriously."

Why all the fuss over this small Latin American country?

What distinguishes Chile is something it doesn't have: an indigenous auto industry. The last assembly plant in the country, operated by GM, closed in July.

Most of the cars sold in Chile are made in Asia (South Korea and Japan generate more than 50% of the imports), or elsewhere in South America by American and European automakers. Since it has no homegrown business to protect, Chile's borders are open to nearly all comers. The effective tariff rate for some 90% of the vehicles sold in Chile is zero. By comparison, tariffs in Brazil have been as high as 70%.

Besides its low tariffs, Chile's unique distribution system levels the playing field for new entrants. About 16% of car sales are made through auto malls that operate more like big-box retailers than independent dealers. A dozen or more manufacturers occupy small adjacent storefronts with their inventory parked out front.

Company Price Change % Change
Facebook Inc 60.87 -0.49 -0.80%
Bank of America Corp... 16.34 -0.03 -0.18%
Microsoft Corp 39.86 0.17 0.43%
Verizon Communicatio... 46.28 -1.15 -2.42%
Micron Technology In... 26.16 -0.09 -0.34%
Data as of 4:01pm ET
Index Last Change % Change
Dow 16,501.65 0.00 0.00%
Nasdaq 4,148.34 21.37 0.52%
S&P 500 1,878.61 3.22 0.17%
Treasuries 2.69 0.00 0.07%
Data as of 11:14pm ET
More Galleries
Don't give my job to Staples Hundreds of U.S. Postal Service workers protested against experimental mini post offices at Staples. Here's why some Washington, D.C. workers don't like the deal. More
Tools to make your money grow You've started saving and built a financial base. Time for a few new strategies and tools to get your money to grow even more. From real estate to IRAs, here are some tips. More
Ready to start saving? Here's how to do it right When you are just starting out or finally starting to get serious about saving, the basics will get you far. Here are more than a dozen tips that will help you lay the base for building your net worth. More
Sponsors
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.