While the Chinese and Indians speed to catch up, the strategic moves of Japanese car manufacturers are of far more importance.

The U.S. market introduction is now on hold until 2008. Nearly every week, however, there are reports throughout the global auto industry that another Western business executive or another company is looking to invest in a Chinese auto company. Some of these reports are only rumors. Bricklin himself has a history of more misfires than hits: After his success with importing Subaru, he went bankrupt building his own Bricklin sports car in Canada in the 1970s. Then, in the mid-1980s, he peddled the ill-fated Yugo in North America, the car Consumer Reports called one of the worst it had ever tested.

The recent news that George Soros plans to front Chery’s development with a $200 million investment has put the company ahead of larger Chinese rivals, such as Shanghai Automotive Industry, which has also been eager to become a global automaker. China has been particularly aggressive about hyping its nascent auto industry and its efforts to develop domestic proprietary technology. Through its Sino-foreign joint venture assembly plants, China has already become the fourth-largest auto manufacturer in the world, ahead of South Korea and France. As with most of the sectors the government would like to expand, China mandates that foreign car companies wanting to sell vehicles in China must enter into joint ventures with Chinese companies first. In the auto industry, the Chinese partner is required to own at least 50 percent of each new venture, thus creating a built-in training ground for local hires who might someday apply their engineering and design talents to Chinese-owned car companies.

Their research and development, however, is not yet up to global standards. At the auto industry’s annual North American International Auto Show last January, a Chinese car was on display for the first time. The sedan, built by China’s fourth-largest auto company, Geely Automobile, looked like a 15-year-old Japanese car, with cheap-feeling seats, plastic trim pieces that appeared to be fragile and a utilitarian design that would not stir the soul of U.S. consumers. Do not expect Chinese automakers to challenge the world’s preeminent Asian manufacturers, Toyota and Honda, nor the potent partnership of France’s Renault and Japan’s Nissan, for well over a decade. It will take these Chinese companies longer still to have a major impact in the segment where the most profitable autos are sold: the global luxury-car market dominated by the likes of BMW and DaimlerChrysler.

TOP VIEW: Investors will be hearing more in the next few years about Chinese and Indian carmakers that hope to ride the wave of their emerging markets to become truly global players in the automobile industry. In reality, these manufacturers have much to learn about quality control and contemporary car sales; they remain at least a decade away from being globally competitive. But as growing consumer markets, China and India, in particular, will set the tone for the strategic direction of other carmakers around the world.

As South Korean auto industry executives have learned over the past 20 years of global expansion efforts, and as Toyota and Honda officials gleaned before the Koreans, the automotive business is about much more than just slapping together cars whose designs copy those of bigger, established auto companies, putting cheap price tags on the new vehicles and shipping them overseas. The Chinese and Indian auto companies have much to learn about quality, dealership development, distinctive brand design, warranty and ownership programs, marketing and consumer trends, and buyer loyalty. Though tantalizingly attractive on many levels, the auto business remains a stubbornly complicated and expensive worldwide industry to crack. According to Michael Dunne, an auto analyst based in China, it is more cost efficient to build a Honda Accord in Japan these days than in China because of continuing inefficiencies in parts production and supply there. A car today can have as many as 20,000 parts, making development and manufacturing far more complicated than many industry entrants may initially realize.

GM filed a lawsuit against the upstart Chery, claiming that its best-selling car in China, the QQ, is a direct copy of the Chevrolet Spark. Nevertheless, for all of the news of China being on the cusp of developing its own automobile industries with global clout, the cars rolling off its indigenous assembly lines resemble Yugo more than Chevy; in reality, Hyundai and other makers of economy cars will be most threatened by new exporters.

Still Made in Japan
While the Chinese and Indians speed to catch up, the strategic moves Japanese car manufacturers are making are currently of far more importance to investors. The Japanese are eager to develop products that will meet the needs of China, India, Russia and smaller, emerging consumer markets. It took Detroit long enough, but GM, at least, is finally beginning to recognize that hybrid cars and strategic mergers might be the company’s only salvation.

In June, Kirk Kerkorian, who owns nearly 10 percent of GM’s shares, said he had spoken with Renault and Nissan CEO Carlos Ghosn about the possibility of forming an alliance with GM. The tripartite would create a behemoth with control of nearly 25 percent of world car sales under the guiding hand of Ghosn, who is credited with turning around Nissan through the 1999 merger that gave Renault 44.4 percent of Nissan and Nissan a 15 percent stake in Renault, a deal that is still unique in the industry. GM and Ford have tried unsuccessfully in recent years to lure away Ghosn, who is famous for cost-cutting and for his straightforward management style that relies on results, not corporate politics. The merger of Nissan and Renault matched a French company with a flair for design innovation to a Japanese automaker with a penchant for process manufacturing, and created the fourth-largest automotive combination in the world.

A GM-Renault-Nissan partnership would put GM in a good position to keep its tenuous market lead in China and compete on a global level with Toyota—if the new company sheds the detritus of old Detroit and its gas guzzlers for the U.S. market and looks toward the global market of the future. It will have formidable competition from Toyota, which is poised to surpass GM as the largest carmaker in the world either this year or next, when its annual worldwide production reaches 9 million for the first time.

After six years of record profits and admirable sales growth, Toyota’s market capitalization is some $200 billion; more than GM and Ford combined. Toyota also has a mountain of ready cash—more than $30 billion. It is that cash horde that will make it possible for Toyota to invest in leading-edge technologies that will help it achieve its goal of growing its global market share to 15 percent by 2010 from its current 12 percent. Toyota USA Executive Vice President Jim Lentz says the company will spend an average of $22 million a day on R&D and capital expenditures over the next year, aiming its money at future products and factories.

As if Toyota’s recent success were not enough, the company and other Japanese carmakers seem poised to take advantage of another impending market shift. The Chinese government has launched a new initiative to encourage the use of hybrid vehicles. With so many different fuel-efficient technologies being tested, the technology that becomes the standard is largely dependent on the solutions the giant emerging markets of China and India choose to embrace. If China were to decide upon using hydrogen-powered vehicles, or electric ones, the rest of the world would rush to build cars accordingly. Toyota and other Japanese companies are already well ahead of their competitors in their ability to jump in with the technology these new markets demand.

The fact that Toyota became the hybrid leader with its Prius—while most other automakers were pooh-poohing the marketability and profitability of hybrids—gives the company another competitive edge among Prius owners in the West, who have expressed strong brand-loyalty in surveys. While skeptical competitors question the profitability of hybrids, Toyota officials maintain that they are making money on these vehicles. Certainly as hybrid sales continue to grow, economies of scale are kicking in and lowering costs. At the same time, Toyota engineers, marketers and dealers are gaining unprecedented hybrid experience that should hold them in good stead for future high-tech car developments, including those with fuel cells. Toyota now has hundreds of patents on hybrid technology and is racing ahead with hybrids in China as well, with hopes of selling 3,000 Priuses in China this year. While Volkswagen and GM have just begun looking into hybrid assembly ventures with Chinese partners, Toyota has a deal with one of China’s biggest carmakers, FAW, to start assembling the Prius in Changchun this December. This will mark the first time the Prius has been assembled outside of Japan.

Honda, too, will become a serious challenger in the emerging markets. The company recently boosted its research and development budget to a record level, and its engineers seem determined to create an engine that uses more than the 15 to 18 percent of the energy that is now available in a gallon of gasoline. Research continues there into how to make internal combustion engines more efficient by reducing friction losses. Meanwhile, Honda is the only automaker with a working fuel-cell car, valued at $1 million, now being driven by an American couple, Jon and Sandy Spallino of Redondo Beach, Calif., to test the real-world driving experience. (Other automakers have provided experimental fuel-cell vehicles to universities and corporations for evaluation.)

A reasonable probability exists, of course, that as automotive leaders move into China, some of the future Chinese-foreign joint-ventures will hire engineers who develop technological expertise that they eventually—in another 10 years or so—use at wholly owned Chinese manufacturing companies. Even now Bricklin is bucking for Chery to produce a hybrid gas-electric car. With his typical swagger, he predicts that Chery will develop a car that offers a better combination of speed and mileage than anything else on the road today. That, too, will take a while.

Ann Job is a veteran automotive journalist and a test driver for the Associated Press and MSN Autos.