When my wife and I pulled into the parking lot of a restaurant in the Bahamas, the last thing we expected to see was something “Made in China.” But there it was—bigger than life—a brand new, red, Chery QQ!

Tangible evidence that China’s automotive business is now becoming integrated into the global markets is increasingly apparent. The deal which Chery cut with Chrysler will only accelerate its development as a bona fide global competitor. (See previous posting: “China’s Auto Industry Takes A New Turn with Chery and Chrysler.”)

Yet, for every bit of positive news, skeptics can point to evidence that the quality of vehicles produced in China is a long way from that required in more developed markets. Chery failed Russian crash tests, as noted in a recent post, and is the third Chinese car company to strike out abroad. China Brilliance, which happens to have a joint venture with BMW, is another of China’s assemblers interested in selling its cars overseas. The company’s plan is to position its BS6 model in Europe as a premium style import sedan, at a budget price. However, the sedan failed miserably in crash tests using Euro NCAP guidelines in June, marking it as unsuitable for the European market. The failure of the B6 follows the experience of Jiangling Motors’ Landwind SUV, which failed the same test in even more spectacular fashion in late 2005. These well publicized failures are taken by many as still more evidence that China is a long way from prime time in autos. Recent headlines on defective tires, toys, food and toothpaste from China aren’t helping them to change their minds.

Despite all of the negatives, however, the trend is clear—–China’s exports of trucks, buses and passenger cars continue to score dramatic increases. Exports of trucks, buses and passenger cars is already a $5 billion business for Chinese companies.

In 2004, China exported only 78 thousand vehicles. This number more than doubled to over 172 thousand units in 2005, and doubled yet again to over 340 thousand vehicles in 2006.  For the first six months of this year, China exported over 240 thousand vehicles, a 71% increase over the same period last year. Exports are nearly equally divided between passenger cars and commercial vehicles such as trucks and buses. It is likely that China will export over 500,000 vehicles in 2007, about the same number that the entire China auto industry produced as recently as 1990.

Who is buying these vehicles? Not surprisingly, buyers in the Middle East, Southeast Asia and less developed parts of the world such as Africa. To these buyers, price is a key consideration. A foreign made heavy duty truck, even one that is made in China, may cost as much as RMB 800,000. Yet, you can buy a perfectly functional Chinese made heavy duty truck for as little as RMB 200,000. Beyond the initial price tag, maintenance costs are also lower. Not only are the working parts simpler, but trucks designed and manufactured to operate under harsh conditions in China are more suitable for less developed parts of the world with similar operating environments. (This is yet another example of a “disruptive technology” at work, which Professor Clayton Christiansen of the Harvard Business School so aptly describes in his book, “The Innovator’s Solution.” See previous post: “China as One Massive Disruptor.”) The fact is that many buyers simply don’t need all of the features found on the more sophisticated vehicles produced in developed markets, and won’t pay for them. This creates a huge opening for companies from countries like China to make simpler, more affordable products which they are only too happy to buy.

China’s vehicle exports won’t stop with Third World countries, however. As Professor Christiansen explains, once a “disruptive technology” takes hold in a previously unserved market, it begins working its way up to the lower reaches of the established markets, and then ultimately takes on, and defeats, even the strongest of the established players. Just as the Japanese car companies took on the Americans in their home market by first selling cheap cars to their less demanding customers, and then moved up to sell the Lexus to their most demanding, so too the Chinese assemblers will, step by step, take on the global industry.

That is why the Chery deal with Chrysler and  the flow of advanced engine technology into China are so significant. The two biggest impediments to selling in developed markets are safety related issues and emissions technology. Chrysler will help Chery solve the first, and a multitude of companies anxious to access the China market are helping to solve the second. If the Japanese and then the Koreans could do it, there is absolutely no reason why the Chinese won’t also be successful. The global auto industry is now at the beginning of yet another changing of the guard.