Changhe Ideal

Chinese cars out to conquer world, potholes first.

By Simon Rabinovitch

QUITO (Reuters) - An embarrassed daughter is a small price to pay for a cheap Chinese car.

That was Irma Cortez's thinking as she strolled through a sleek auto showroom in the Ecuadorean capital.
A cleaning products saleswoman who needs a vehicle to reach clients, she was about to buy her first ever Chinese car,
a small Changhe that cost 25 percent less than the competition.

"My daughter is a business student and she told me not to go for a Chinese car because of the brand," the stout, middle-aged
Cortez said. "I myself have some reservations about the quality but given my economic position it makes sense."

Chinese cars have been on Quito's roads for barely a year but they are fast becoming a force in the snaking lines of traffic that
clog Ecuador's hilly capital.

China's auto makers have set their sights on becoming the next exporting powerhouse on the world's roads and they have made
emerging markets, from Latin America to Russia, their proving ground.

They have reason to be satisfied so far: China sold 612,700 cars abroad last year, up nearly 80 percent, mostly in the developing
world, according to the commerce ministry.

But like the Japanese and Korean car companies that went before them, Chinese firms are finding they have to win customers
with cut-price deals before they can establish their names.

"People don't know these cars. They just see they're Chinese and think that means they're bad," said Rafael Bader,
a commercial director at Cinascar, the biggest importer of Chinese cars in Ecuador, Colombia and Venezuela.

"It's a reality we have to confront."

Cinascar has tried to change the popular perception by waging a public relations campaign and offering extended warranties
along with prices that are 20-25 percent cheaper than competitors.

The firm has been in Ecuador for only ten months and its numbers show that it has already catapulted into 11th place by units
sold out of the country's 43 dealers.

QUALITY VS PRICE

Doubts about quality, though, are hard to shake.

The Changhe Ideal, the car Cortez was considering, had defects visible to the non-expert eye. The car's logo had seemingly
been stuck on in haste and sat at an awkward angle; some paint had come off its body; and gaps between the side panels
were clearly uneven.

To be fair, the Changhe was one of the cheapest on the lot. It is even hard to find a car that cheap in China as Chinese producers
have generally kept their best cars at home, deliberately targeting the low end of foreign markets.

Safety concerns have dogged Chinese cars in their attempts to break into the United States and Europe.
 The latest in a string of crash test failures came last year with the Brilliance BS6, billed as a premium sedan at a budget price.

"An ice cube stands a better chance of survival in the Sahara than the driver of a BS6 does in a severe front or side impact",
Car and Driver magazine said on reviewing the test results.

Brilliance Auto, BMW's partner in China, went back to the drawing board after the embarrassment and the BS6 notched up
three stars out of five in a later test, paving the way for its launch in Europe in the next few months.

Perhaps not surprisingly, Chinese automakers have had an easier time getting their wheels on the ground in developing
countries where safety and emission standards tend to be lower.

But poorer countries offer more than just the path of least resistance; analysts say they also present a vast untapped market
with enticing growth potential.

Sitting in Cinascar's Quito office, the urbane Bader spreads out his arms to show what lies in wait for auto makers who can
do things on the cheap. Up to now, cars have been out of reach for the 80 percent of Ecuadoreans who get by on low incomes,
he said.

"We are bringing opportunities for the maid who has dreamed of having a car but has had to travel on the bus," he said.

CHEAP CAR BATTLEFIELD

Chinese auto makers, though, are not the only ones trying to prise open the budget consumer segment in developing countries.

Indian motor company Tata unveiled the cheapest car in the market in January, the $2,500 Nano, dubbed the "People's Car".

Renault, Nissan and Hyundai are among those cooking up similar plans. Environmentalists have warned that a proliferation of
low-cost vehicles, along with adding to road congestion, could spell disaster for efforts to rein in carbon emissions.

China already has a formidable presence at the lowest end of the auto market. The world's second cheapest car, for the time being,
is the Chery QQ hatchback, though it is nearly twice as expensive as the Nano at $4,800.

But Chinese automakers are loath to get sucked too deeply into the pricing race to the bottom, a senior executive at Great Wall Motor,
China's largest SUV maker, said.

Cost pressures mean that competing on price alone is not a viable long-term strategy, said the executive, who declined to be named
as he is not authorized to speak to the media.

Shipping rates have soared over the past few years on a boom in seaborne trade, which in no small part has been driven by China's
rise and rise as an economic power.

Another price push is the yuan's appreciation of more than 18 percent since mid-2005 when China depegged its currency from the
U.S. dollar.

"There won't be a sudden spike in Chinese car prices overseas, but an uptrend is inevitable with a stronger yuan and rising
shipping rates," he said.

THE CHINESE ARE COMING

Cars are major status symbols for Chinese consumers who are only too willing to shell out a little extra for a fancier vehicle,
the Great Wall executive said.

That desire for a top-notch ride points to Chinese auto makers' deeper ambition: to take on American, German and Japanese
manufacturers in their own backyard.

A record five Chinese firms showed off their wares at the Detroit auto show this year. Chinese automakers only began to display
their cars at the prestigious industry fair in 2006.

Geely, one of China's most ambitious carmakers, plans to wait at least five years before entering the market in the United States
because it says there is no room for missteps in one of the world's most competitive auto markets.

"It could take years of brand-building before Chinese cars spell quality, not just cheap prices," said Huang Zherui, a Shanghai-based
analyst at CSM Worldwide, an international consultancy.

From his vantage at Cinascar's Ecuador headquarters, Bader rates their prospects more favorably.

"Japanese carmakers took 30 years. Koreans took 10 years. China will take five," he said.