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The new motor city (cont.)

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

Because space is limited - there is no room for a real showroom or large service area - a small Chinese manufacturer can look as substantial as a more established one. Customers, mostly men but including some young couples, can view dozens of models in the course of an afternoon.

With its paltry car sales, Chile isn't China's biggest export market - six countries, including Egypt, imported more Chinese vehicles in June.

But selling in Chile gives Chinese companies valuable experience in competing against the biggest names in the auto industry; conversely, rivals are scrutinizing the Chinese carmakers' moves in Chile, readying themselves for the day the newcomers arrive on Japanese, Korean, and even American shores.

Struggling to compete

The Chinese still have a lot to learn, and rivals are not shy about pointing out their shortcomings. During a tour of the Movicenter mall, Gustavo Colossi, sales and marketing director of GM Chile, almost gleefully picks apart the offerings.

Pointing to a $16,000 pickup made by a Chinese manufacturer called Xinkai, he says, "This is a copy of Chevy's LUV pickup truck. The quality is not good. Look at the gaps in the trim."

It is no surprise that China still falls behind international standards for quality and safety. Everything is new in China: Engineering and manufacturing techniques are less developed, parts suppliers are learning on the job, and customers are less demanding.

J.D. Power surveyed the owners of 2006 model Chinese cars after 90 days of ownership and found that models from domestic manufacturers like Chery and Great Wall developed 386 problems per 100 cars - everything from water leaks to engine failures. That's nearly twice the rate for international brands like Buick and Volkswagen made in China. And it is nearly four times the average for vehicles sold in the United States.

Safety is another blind spot. A popular video posted on YouTube 16 months ago shows the front end of a Chery Amulet sedan that was pulverized, along with its dummy occupants in the front seat, during a standard European collision test. Chery disputes the test results.

That kind of performance won't endear China's cars to Western buyers, as they are discovering. In a recent statement Zheijiang Geely, another fast-rising manufacturer, said it wanted its vehicles to be safe, fuel efficient, and environmentally friendly, and added, "We do not want people to think that the China-made car will win on price alone."

Chinese bestsellers trump India

The most popular Chinese brand in Chile is Great Wall (GWLLF), which sells SUVs and commercial vehicles. Headquartered northwest of Hong Kong in Hebei province, it is tiny by global standards and produced just 67,186 vehicles last year, according to Automotive News.

But it has ambitious plans to expand overseas. Great Wall has been granted government permission to make passenger cars, and it is on a trajectory to become one of Chile's leading brands. Its bestseller in Chile is an SUV called the Hover, which is patterned on the old Isuzu Axiom and carries a price of $22,000.

Like most Chinese manufacturers, Great Wall sells cars based on older designs, loads them up with options, and undersells the competition with its lower labor costs. The Great Wall Safe SUV, which is modeled on an older Toyota 4Runner, comes equipped with a CD player and leather-wrapped steering wheel and sells for around $15,000. A similarly equipped Toyota might cost $35,000.

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