Cars from China: Not so fast

(DETROIT) CNNMoney.com -- Chinese cars are coming. The question is: Will they turn out to be Toyotas ... or Yugos?

"The best laid plans are always a little bit more problematic in execution," said Michael Robinet, vice president, global vehicle forecasts for industry consultant CSM Worldwide. "There's been more than a handful of low-cost manufacturers trying to get into the U.S. market, but failed trying to find a dealer base."

The Chang Feng Group's pickup truck, the first Chinese-built auto displayed on the floor of the Detroit auto show.

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Still, the potential of Chinese automakers to export to the United States is one of the hotter issues in the U.S. industry right now.

DaimlerChrysler has announced it has a letter of understanding with Chinese automaker Chery to explore exporting Chinese cars here to sell under its Chrysler brand.

A survey of top auto executives around the globe by auditing firm KPMG found than 40 percent executives believe that overcapacity in the China auto industry will be a serious problem in the next five years.

And Chang Feng Group became the first Chinese automaker to display vehicles on the floor of the North American International Auto Show, although its display was on an auxiliary lower floor, away from most of the major and even minor automakers showing off some 700 vehicles.

Still, while Chang Feng executives spoke of their desire to come to the U.S. market, they gave no time frame or definite plans about when they might be selling here. And Geely, a Chinese automaker that was stuck in the lobby at the 2006 auto show, was conspicuously absent this year.

The concern about the threat from Chinese cars is natural, given market share losses by the Detroit-based Big Three to imports over the last decade.

The U.S. automakers' share of U.S. auto sales fell to 55 percent in 2006, from 73.5 percent in 1996, and Toyota Motor (Charts) passed Chrysler Group parent DaimlerChrysler (Charts) for its long-held position as the nation's No. 3 automaker.

Ford Motor (Charts) is widely expected to give up the No. 2 position in U.S. sales this year, and the traditional Big Three is likely to fall under half of U.S. sales by the end of the decade.

But industry officials and experts say that there's plenty of problems facing Chinese automakers coming here, which could make any progress capturing U.S. sales to take decades before it's significant. They point out that Korean automakers have less than 5 percent of the U.S. market even after more than 20 years here.

"I do think it will happen," said James Power IV, executive vice president for international operations for J.D. Power & Associates, about Chinese sales here. "But I don't think it'll be a tidal wave that overtakes the industry."

Power said it's taken years for the Japanese automakers to build up the reputation for quality and value that attracts U.S. buyers. And he said that Chinese manufacturers, despite their success in exporting to the U.S. market, have yet to gain that positive impression on the mind of American consumers.

"Can you name a Chinese-branded product of any type that we have in our homes and our shelves and stores today?" he asked.

Of course it's possible that Chinese automakers will simply sell cars here through their partnerships with established U.S. or Japanese automakers. But even that poses challenges.

Chrysler Group CEO Tom LaSorda said that it's not even certain that Chrysler will go ahead with plans to import cars made by Chinese automaker Chery, despite the agreement of understanding signed late last year for it to build small subcompact "B-segment" cars for Chrysler. He said much work still needs to be done between the two companies before any Chinese cars start showing up in Chrysler dealerships.

"We're still working through that," he said when asked about when the Chrysler might start selling the Chinese cars here. "It'll be at least a couple of years."

But LaSorda said while it will be a challenge for Chinese manufacturers to meet U.S. quality, safety and emission standards, he thinks they'll find a receptive American buyer once they do get here.

"The American consumer doesn't know where the components [of today's cars] are coming from," he said. "The American consumer wants a quality car. We used to worry about quality from Japan. Then we worried about quality from Korea."

General Motors (Charts), which through its partnership with Shanghai Automotive Industry, is the No. 1 automaker in China, plans to make 1.2 million cars there this year, up from 877,000 in 2006. It has seen just over 50 percent annual growth in its sales since 2000, and become the most important profit center for the struggling global automaker.

But Nick Reilly, head of GM's operations in the Asia-Pacific region, said GM has no plans to follow the course of Chrysler and import low-priced Chinese cars to the U.S. market.

"Right now we're running pretty hard to stay with the domestic market," he said. And while he said overall Chinese auto exports are expected to rise to more than 500,000 this year from about 350,000 last year, those vehicles are mostly going to South America, Southeast Asia and Eastern Europe.

"Although there is a very low labor rate in China, the cost competitiveness of the Chinese industry is not quite at world levels yet," said Reilly. "The component supply industry has a lot of catching up to do. The most sophisticated parts are still coming in from outside. For a car to be sold in China, we are very competitive manufacturing it in China. For a car to be sold in Europe or the United States, when you add the reverse duties and the logistics costs, it's not working out."

Even with the success of the Toyota, Honda Motor (Charts) and Nissan (Charts) in the U.S. market, there have been numerous failures of Japanese automakers here in the last few decades. Daihatsu had to eventually drop out of the U.S. market due to problems with its dealer network and Mitsubishi and Isuzu both struggled here as well.

"Virtually anyone can build and sell a car. Servicing one here is another thing," Robinet said.

But Robinet said as difficult as a time as the Chinese automakers might have breaking into the U.S. market, he believes the size of the Chinese market gives them the base to eventually be an major auto exporter.

"The Yugo was doomed because Yugoslavia was a pure export source," he said, referring to one of the higher profile import auto failures in the U.S. market. "China, because of their internal market, eventually will be a force in the U.S. market."

A tale of two factories