The Fraudulent Foreign Auto Industry in China -- September 26, 2020

 The Fraudulent Foreign Auto Industry in China

 By LARRY ROMANOFF – September 24, 2020

 

In the past 8 years in China, there have been about 170 auto recalls by joint venture manufacturers and foreign brands, with Mercedes, Toyota, Honda and Nissan doing most of the recalls. Out of about 9 million recalled cars, more than 7 million were Japanese; roughly one million were American and about one million European. By contrast, China's many domestic brands have had to recall products only 7 times in the past few years, recalling only about 200,000 autos. In light of these facts, it would seem that the current wisdom in the West about Chinese autos

 

 

In one year, about 19 million autos were sold in China, resulting in 80 recalls involving 2 million vehicles. In the same year 13 million autos were sold in the US, resulting in about 600 recalls involving 15 million vehicles. China has far fewer recalls compared to the US car market, though in some part this is true because foreign automakers are masters at 'misreading' China's laws and regulations, using those misunderstandings to evade consumers' claims. Japanese automakers Toyota, Honda and Nissan often exclude the Chinese market when recalling faulty models in other countries, and the Americans are known to do the same.

 

 

On their consumer day program, CCTV noted that auto recalls are common in the US, and credited the US with creating the world's first auto recall system. But they failed to perform any research and foolishly succumbed to American propaganda, thereby missing the fundamental point which is that the US government initiated these consumer protections only to avoid a popular revolution. Huge numbers of people were dying on American roads every year from cars that were fundamentally unsound, the problem reaching a crisis with Ralph Nader's book about GM's Corvair. It was only then that the recall system was legislated. The Americans didn't do it because they were morally superior or adhering to "universal standards"; they were instead forced into it because their automakers were criminally insane.

 

 

As noted above, out of about 9 million recalled cars in China, more than 7 million were Japanese. With Japanese autos becoming notorious for low quality, many Chinese car dealers and distributors have been permanently dumping these brands, especially after a consumer backlash pushed sales down by more than 60%, reducing Japan's market share from 30% to 7% in one month. One industry authority said "I have never seen so many dealers desert Japanese brands. The psychological impact on buyers and dealers is unparalleled. (Japanese) Automakers have to figure out a way to address it, otherwise it will do long-term harm."

 

 

I must say the deterioration in the quality and reliability of Japanese autos was a surprise, though perhaps it shouldn't have been. When Japan restarted its consumer manufacturing after the Second World War, all Japanese products were atrocious. Nothing worked. Things either didn't work at all, or if they did work they immediately broke. Colors ran, fabrics frayed, electronics failed or melted. Everything was cheaply-made. The early models of Japanese autos were laughable, the second generation a distinct improvement but still quite substandard. I am aware of no products not fitting this description. And it wasn't because the Japanese didn't try; they just didn't have the skills or knowhow to make good products. But they persevered and constantly improved, and one day the world awoke to realise that Japanese products were some of the best in the world, certainly far better than anything the US could produce and sometimes as good as or better than Germany.

 

 

But that was yesterday. For reasons I don't pretend to fully understand, the Japanese abandoned their respect for quality in an unusual way. They didn't follow the Americans in a downhill quest to make things more cheaply; they still made expensive parts but made them so carelessly and recklessly that manufacturing flaws emerged seemingly everywhere, while the quality control became so slipshod that flawed products were shipped from Japanese factories by the millions in so many industries. The problems first seemed to surface in electronics, with items like cameras and computers that had glaring manufacturing faults and were clearly substandard, but shipped and sold nevertheless. Astoundingly, these firms often denied the flaws in their products and in many cases stubbornly refused repair or replacement, doing substantial damage to the nation's reputation, a problem that is increasing. Japanese autos have gone from some of the best in the world to some of the worst, in less than a generation.

 

 

In 2014, Toyota issued some huge worldwide recalls involving almost 6.5 million vehicles for a host of different problems spanning about 30 different models, and in China Honda alone accounted for more than half of the total number of recalled vehicles. The major Japanese firm that produces airbags for many brands of cars, is involved in a total recall of millions of defective airbags that would likely fail when needed, yet the factory continued to ship that same model long after the problems became known. They have also attempted to dodge government safety regulations. The US Transportation Department levied a substantial fine on Toyota for failing to report safety defects in the company's cars; apparently the company intended to avoid the issue by pretending it didn't exist - a disturbing trend apparent among many Japanese manufacturers in the recent past. I would say the most sensible course of action would be to abandon Japanese products in their entirety, not only for the shoddy quality but perhaps even more for the inexplicably obstinate determination to deny obvious faults, and even more to defiantly refuse repair or compensation. This has gone far beyond a simple matter of quality control in one corporation, and appears more a kind of perverted national plan to commit industrial suicide.

 

 

As recently as seven or eight years ago, Japanese autos had some of the highest residual values in the industry, with most brands retaining about 40% of their original value after four years. That appears to be changing. It is worth noting that the more expensive brands lose their value much faster than do the basic models, brands like Mercedes and BMW, Infiniti and Lexus, losing as much as 60% of their value in only three years.

 

The figures for American brands are typically much worse - American-branded automobiles typically lose nearly 50% of their value in the first year. Here is a sample for one GM Buick model in North America:

 

 Year Retained cost % Resale Value

 

 0 (New) 100% $35,465.00

 1 48% $17,023.20

 2 40% $14,186.00

 3 32% $11,348.80

 4 26% $9,220.90

 

 

This is why so many people in North America buy used cars - they let the first owner lose 50% or 60% of his money. And this is why everyone in Canada or the US or Europe can afford to buy a car. A 10-year-old auto costs very little, but can still operate well. I bought my first car when I was 18 years old, and paid $400. Any high-school kid can work at McDonald's for the summer, and save enough money to buy a small old car of some kind. The reason North American cars lose so much of their value is that the quality has always been so low the cars became a 'throw-away' item.

 

 

•CCTV Consumer Affairs Program

 

 

Each year China's CCTV broadcasts a consumer affairs program in which it targets some of the more egregious consumer frauds occurring in the country, generally dishonest schemes by foreign companies to take advantage of uninformed Chinese consumers. The program is excellent, and very necessary. This excellent program has only one flaw, which is that it is broadcast only once a year. China needs one of these a week, to properly educate consumers about the traps waiting for them when dealing with most foreign companies. There are of course some Chinese companies that have conducted frauds or engaged in dishonest behavior, but most of the consumer frauds in China, and certainly all of the large ones, almost without exception, have been conducted by foreign companies, most of those being Jewish-American.

 

 

Most Chinese are very appreciative of these consumer programs. One consumer expert quoted in a Financial Times article said, "The Chinese government was traditionally more concerned about companies’ interests, and would cover up corporate scandals if it thought they would result in losses or damage an industry’s reputation". I don’t know if that were ever true, but it certainly is true no longer because the problems have gotten entirely out of hand. But the FT did manage to locate a dissenting voice in the person of Qiao Mu, a journalism professor at Beijing Foreign Studies University, who claimed CCTV's programs were "controversial" and that they were a bad thing because "It panders to a certain type of nationalism" and targets only foreign companies. Mr. Qiao is entitled to his opinions, but to suggest that foreign companies should be off-limits to exposure of frauds and other criminal behavior because that might inspire the wrong kind of "nationalism", is too nonsensical to bother refuting. Perhaps when a BMW dealer charges him 100,000 RMB to replace a 10 RMB auto part, he'll feel differently. And perhaps in the meantime the Beijing Foreign Studies University should re-evaluate its hiring practices.

 

 

In several of its broadcasts, CCTV focused in large part on the auto industry, the unfavorable publicity thankfully producing positive results for countless hundreds of thousands of Chinese auto buyers. The program revealed a great problem with fraudulent overcharging for repairs, especially among the so-called luxury brands, as well as foreign automakers that were knowingly selling large numbers of cars with defective major parts, strenuously avoiding recalls or free warranty repairs, and often denying the very existence of problems in spite of large numbers of customer complaints. As if this weren't bad enough, these events were concurrent with vast conspiracies to fix auto and parts prices and violate most portions of the country's anti-trust laws, these latter investigations resulting in fines of billions of RMB.

 

 

In 2015, CCTV's consumer program contained a portion on dealer honesty when finding faults and conducting repairs. I suppose it should be admitted that auto dealerships in many countries are essentially criminal enterprises, more marauding pirates than product salespeople, so it isn't surprising to find the same problems in China. CCTV and government inspectors are performing an invaluable public service in creating faults in cars, then delivering them to dealers to watch the outcome and see which dealerships charge exorbitant fees to resolve minor problems. CCTV reported that 16 of 22 dealers cheated them badly, while the government inspectors reported 7 of 12 dishonest dealerships. CCTV particularly exposed Nissan, Shanghai Volkswagen and Mercedes-Benz dealers falsely reporting or exaggerating problems with vehicles so they could charge high repair fees. Here are a few typical examples from reports in the Shanghai Daily:

 

 

•Shanghai Mercedes dealer, Shanghai Dongchi Auto Repair Co. on Zhaohua Road charged a customer almost 28,000 RMB to replace a part, when the repair should have cost about 100 RMB, according to the Shanghai Consumer Rights Protection Commission.

•A Shanghai BMW dealership, Shanghai Fande Auto Sales and Service Co., charged a customer 100,000 RMB to repair fictional problems with the gearbox of a car, when all that was wrong was a faulty heat sensor.

•CCTV reporters disconnected an ignition coil in a Nissan Teana and sent the car to a Nissan dealer in Hangzhou, who charged 1,000 RMB for what should have been a 30-second 'repair'. The service man named Ma suggested an urgent repair was necessary and was quoted as telling the customer "More serious problems will occur if it is not fixed immediately, like cold may lead to pneumonia if it is not cured".

•Another Nissan dealer in Hangzhou charged 3,000 RMB for the same 'fault', claiming to the customer that all six ignition coils and spark plugs needed replacement. Another Nissan shop in Anhui charged almost 500 RMB to replace that same disconnected ignition coil.

•Three Shanghai Volkswagen dealers in Tianjin charged 1,500, 700 and 800 RMB for the same disconnected coil in VW Passat cars. All dealers claimed all the spark plugs needed replacement.

•A Mercedes-Benz dealer in Hefei charged more than 10,000 RMB for the same disconnected ignition coil and added many other "necessities" like cleaning and replacing filters.

 

 

The CCTV program featured a segment on Jaguar Land Rover, noting the company was selling models in China with faulty gearboxes, JLR eventually having to recall nearly 40,000 expensive Range Rovers, the Western media calling this "the first casualty of a renewed state media assault on foreign automotive brands". But the company was accused mostly of refusing to respond to customer complaints, which typically involved a sudden loss of speed and reverse gear faults, the problems existing even after the gearboxes were replaced, indicating a serious basic design flaw. Land Rover stupidly denied the existence of problems and accused customers of 'driving too fast'. But CCTV proved that Land Rover was fully aware of the problem and had issued internal "confidential" notices to its engineers. Land Rover's response was the typical MNC rubbish propaganda about core values, and expressing their 'gratitude' to CCTV for publicly exposing their rubbish automobiles.

 

 

Then we had Volkswagen. I would begin by stating that VW had for several generations been a great company, producing generally small cars but of good quality accompanied by good service and a reassuring amount of honesty. No more. VW today gives all the signs of its management consisting of 50% European bankers and 50% Italian Mafia. In 2015 and 2016, VW were exposed in the US in an immense, years-long fraud of falsifying fuel economy and other data, and were projected to be liable for fines in the billions of dollars, as well as more than $10 billion in shareholder lawsuits claiming the criminality of the company's executives was responsible for the 40% drop in the stock price. China has also had its share of VW dishonesty and fraud, and I have seen nothing to convince me the situation will change.

 

 

In 2015 many Volkswagen customers in China were having apparent problems with what appeared to be serious oil leaks and with complaints of leaked oil pooling in the engine tray, a condition that would easily become a fire hazard. Customers complained that VW dealers ignored their complaints, telling owners such leaks were normal, but such leaks are not normal and are indicative of a serious flaw. It was discovered that VW had recalled almost 100,000 cars in several other countries for precisely this problem, suggesting the issue was a widespread flaw in oil seals or some such. It was only due to CCTV's consumer affairs program that this issue was brought into the public light and the company agreed to deal with it properly. VW, of course, didn't care to comment publicly on the matter.

 

 

A more serious issue occurred two years earlier, where large numbers of VW cars were plagued with a defective DSG transmission that would cause engine power failures or result in the car accelerating or decelerating while driving, a serious and potentially deadly condition. From my information, VW denied for some time the transmission was flawed, and apparently refused to face or deal with the problems. At least one owner whose car suddenly lost power and stopped on the highway claimed the dealer told him the transmission was not responsible for the power loss. Drive train defects can occur to anyone, but this one had a different flavor. I read industry reports claiming VW had manufactured hundreds of thousands of this new transmission model before realising it had a major design defect that could not be repaired, meaning the transmissions would have to be scrapped and a new model designed and manufactured. The reports claimed VW would not install this defective transmission in its cars in Europe but instead shipped them all to China for installation in autos manufactured there. If these facts are correct, this would lead one to speculate the company made a conscious decision to (1) protect its reputation in Europe and (2) avoid the losses of replacing defective transmissions by installing them in its autos in China, hoping Chinese consumers would be sufficiently inexperienced and uninformed, and could be bullied into accepting flawed merchandise.

 

 

In any case, VW strongly resisted a recall, eventually whining that it would cost hundreds of millions of dollars to replace all those transmissions. Well, that's what happens when you create a bad design and don't test it properly, there being no reason consumers should suffer for a manufacturer's mistakes. Eventually the Chinese authorities ordered VW to accept its legal obligations or endure the publicity of a forced recall. I thought that to be a surprisingly gentle response, since in most other nations, including VW's home of Germany, there would have been heavy fines for an attempt to bury a serious drive train defect. VW did offer to extend the warranty, which is a useless gesture in such a case, and it was noted that VW offered Chinese buyers a shorter warranty than it offers its customers in other countries, and further that VW regularly performs warranty repairs with used or refurbished parts - a rather dirty practice that should be both illegal and carry severe punishment.

 

 

It isn't clear if Chinese authorities were aware of the scale of this problem, but in any event the volume of customer complaints prodded CCTV to include this issue in one of their consumer affairs program, after which it became clear the transmission was indeed hopelessly defective. In the end, VW was forced to recall almost 400,000 vehicles to replace the transmissions and install rewritten software - free of charge - at a cost of up to 10,000 RMB per car, for a total of about 4 billion RMB or $600 million. The company claimed this second massive recall occurred because it "misjudged the scope of the defective units", a claim I find difficult to accept. Volkswagen was China's top selling automaker in 2014, and one would think the company would prefer to protect its reputation, but it seems not. Once again, if these facts are correct, and they appear to be, China has once again become the world's garbage can.

 

 

VW had another serious issue a year earlier with its cars in China, this time with apparently defective rear axles that could rupture under certain conditions, with potentially fatal results. Chinese authorities spent considerable time examining this problem, interviewing thousands of customers, collecting evidence of more than 10,000 malfunction events, and performing on-site inspections in many cities, as well as conducting lengthy discussions with company officials and having independent inspection companies perform tests. VW's first offer was to simply attach a small metal plate to the trailing arm of the suspension, but most owners found this unacceptable and wanted a suspension replacement. In the end, Volkswagen announced a recall of almost 600,000 Sagitar sedans and imported Beetles in China due to risks of broken rear axles. The company claimed the axles and suspensions would be perfectly safe provided the cars did not suffer any side or rear impact accidents, not entirely comforting to the owners.

 

 

After denying the problem existed, it was discovered that VW was also recalling its cars in the United States to fix the same suspension issue, for a total of more than 1 million vehicles in the two countries, so this was a bit more than nothing. As well, it seems that VW's claim of suspension problems existing only in autos that had experienced a side collision was also untrue since many customers denied that assertion, and surveys indicated that a great many autos with this same problem had never been involved in a collision of any kind. To add insult to injury, VW made yet another of those despicably arrogant and racist comments we see so often in China:

 

"It has been determined that the suspension arm broke because the driver continued to drive the car although the axle had been damaged in an accident. If you just keep driving with a bent axle the suspension arm can break. We are talking about a very severe rear-end collision after which a driver in Europe would take the car to the workshop, but in China they don't."

 

I have to say VW's accusation of Chinese drivers not having the sense to take a car to a repair shop after a severe rear-end collision, was a detestable attempt to escape responsibility by trashing Chinese people and its own customers. VW is capable of making very good cars, but it is my personal view that the company would benefit measurably from experiencing 6 months of no sales in China, to explain something to them in a way they will understand.

 

 

Commenting on these issues, one industry analyst stated, "That to some extent shows [foreign] carmakers in China are weak in voluntary recalls and shouldering social responsibility. In fact, Volkswagen's gearbox problems emerged last year, but it did not plan a recall until pressure from customers and the media grew." Another noted that in the past few years, VW has recalled many vehicles in other markets to fix faulty transmissions, and didn't insult customers by denying the existence of the problem. In the case of China above, VW reluctantly ordered a recall only after enormous pressure due to public exposure and embarrassment in the media but, and in spite of having to spend in total $700 or $800 million on recalls, still stubbornly refused to admit anything was wrong.

 

 

A couple of years ago, Mercedes-Benz enjoyed some unexpected public participation in their grand exhibition booth at the Guangzhou auto show when people unfurled large banners condemning the company's service attitude and warranty policies, with one banner proclaiming "A one-million yuan Benz only one month old, had four engine breakdowns. Refund!" A few years earlier, the furious owner of a Mercedes destroyed his car with a sledgehammer in public after a miserable year of unending problems that the company apparently refused to remedy adequately or to replace the car. Mercedes, of course, played dumb, with statements quoted in the Global Times like "We'll have to verify his claims with the after-sales department ... We don't have any information on the situation … We need to investigate … We'll contact the car owner as soon as possible."

 

 

There are two issues here, both inexplicable, symptoms of a degenerate medical condition that seems to occasionally affect all makers of expensive cars. Certainly the dealers are all sweetness and light while waiting for a prospective purchaser to hand over his money, and are even pleasant enough after the sale when facing minor warranty items. But a subtle change takes place where the dealers and the factories will adamantly refuse to even recognise, much less deal with, potentially expensive repairs, these almost inevitably related to engines and transmissions. Regardless of the high prices paid for these so-called luxury automobiles, and of the warranty guarantees, the prior claims of high quality and guarantees of service evaporate in direct proportion to the cost of a repair. In the first example above, the car undoubtedly had a bad engine that should have been replaced, but no expensive car dealer will do that without a lawsuit and a court order regardless of the bad publicity. While happy to repair small things, they will fight for years to avoid the expense of a major repair. The other item is that infrequently a car appears to have been born with a curse. In the West, we call them 'lemons'. From the first day, nothing seems to work properly. When one thing is repaired, something else immediately fails, in an unending stream of misery for the new owner. In these cases, the auto dealers and companies are even more stubborn. They know full well what they are dealing with because they have seen it countless times before, but again will fight for years while incurring large amounts of unfavorable publicity and ill will, and simply refuse to consider the customer's position. In either case, the dealer could simply replace the car with only a small loss, by repairing the car and selling it off as a 'demonstrator', but I have never known this to happen. And inevitably, the more expensive the car and the more serious the problem, the more obstinate and reluctant the dealer and the factory will be to remedy the situation.

 

 

The examples above with the two Mercedes owners are not exceptional, and are in fact rather common. The same would occur with Range Rovers, Jaguars, Ferraris, Rolls-Royce, and every other expensive marque. They will all happily repair small things but when exceptional circumstances demand the replacement of the entire suspension or drive train, the proud new owner is quickly abandoned in his misery. I know. I've been there. Especially with expensive automobiles, it is usually a bad idea to buy a "new" car in the sense of a new model when first offered for sale or an existing model with an entirely new generation of engine, transmission or suspension. These almost always have flaws that are revealed and re-engineered during the first year or two of manufacture, with subsequent years being quite trouble-free. I don't know of a useful solution to the above problems, except maybe to bring your lawyer and the police to the final signing of the purchase contract, to impress your service expectations upon the dealer. It should be noted that each of these escape attempts, such as the two above with Mercedes, are almost always illegal acts that violate the contractual warranty and would thus receive support from the courts. And finally, I believe these problems are more severe in China than in Western nations, primarily because the auto manufacturers assume correctly that their Chinese customers are often first-time purchasers with little experience in the shady practices of auto dealers and less likely to be well-informed about the behavior of a good car, less well-informed about a dealer's obligations, and much less likely to sue. Yet one more sign of contempt for the goose that's laying the golden egg.

 

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Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai's Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He can be contacted at: 2186604556@qq.com.

 

 

Larry Romanoff is one of the contributing authors to Cynthia McKinney's new COVID-19 anthology ''When China Sneezes''.

 

 

Copyright © Larry Romanoff, Moon of Shanghai, 2020