Popular Cars May Be Bypassing U.S. Market

By Joel Stonington

For years the secret to success in the automotive business was to penetrate the U.S. market. Automakers such as Toyota (TM), Honda (HMC), BMW (BMW:GR), and Mercedes-Benz (DAI) enjoyed plush revenues as their network of dealerships expanded across North America. So great was the market that automakers were willing to jump through U.S. regulatory hoops. They installed such devices as catalytic converters and introduced new models and engines—in some cases adapting right-hand-drive vehicles to offer left-hand drive. They kept production costs down and spent millions of marketing dollars to entice credit-happy American consumers.

That may no longer be the case. In the past, the main reason certain auto brands or models couldn't be found in the U.S. was that they failed to satisfy consumers, the government, or both. Now it's increasingly because there are more attractive—and accessible—markets.

In 2009, China surpassed the U.S.as the world's No.1 automotive market, according to Beijing-based China Association of Automobile Manufacturers, as millions of Chinese flexed their new-found economic muscles to buy cars. Domestic demand has been exploding and the major Chinese automakers such as Geely, Chery, and BYD are working hard to meet it. China is expected to consume about 15 million vehicles this year and as many as 20 million by 2015, according to Rebecca Lindland, an analyst at Lexington (Mass.)-based IHS Global Insight. Automakers around the world are hungrily eyeing ways to tap into hundreds of millions of potential customers in a single market.

In April, Martin Winterkorn, chief executive officer of Europe's largest automaker, Volkswagen (VOW:GR), reportedly told shareholders that he expected the Chinese car market to grow by 75 percent—and India's market to more than double—by 2018.

Do China's automakers yearn to enter the U.S. market? "Right now, obviously, the U.S. has no Chinese vehicles," says IHS's Lindland. "Because of the collapse of our economy, we aren't really the cash cow that we used to be. China has so much unmet demand and potential demand that it may be tough to make a business argument to sell cars here."

In addition to growing demand at home, Chinese automakers may also be wary of committing capital to selling in the U.S. They would need to meet U.S. environmental and safety standards just to face the risk that American consumers might reject their models as too small, underpowered, or simply cheap.

At the height of the most recent gas crisis, when a gallon of regular fuel hovered around $4, many U.S. consumers were desperate to trade in gas-guzzlers for more fuel-efficient coupes and sedans. European and Asia automakers rushed such models as the Honda Fit and Toyota Yaris to market while U.S. rivals were stuck with showrooms jammed with SUVs and pickups.

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