China's automakers have made substantial progress in recent years, having flown past a number of countries in terms of automobile production. Today, the country trails only the United States, whose global original equipment manufacturers (OEMs) still command the majority of sales in China.

As such, domestic OEMs in China are expanding their ambitious goals of globalization.

However, significant shortcomings could hinder the realization of the industry's significant global potential, according to new analysis from The McKinsey Quarterly.

This month's report, titled A Global Road Map for China's Automakers, cites the fact that Chinese vehicles have "languished" in recent initial-quality tests and the poor scores received in independent safety tests.

"To improve, China's automakers must adopt a focused strategy, upgrade their operational skills and product quality, and develop rigorous performance evaluation systems that promote a culture of continuous improvement from the C-suite to the shop floor," writes Paul Gao, a principal in McKinsey's Shanghai office.

Gao proposes that China's road map to global success should incorporate the following:

Focused Strategy — Automakers looking to expand globally must be focused and patient. Overly ambitious plans can divert management's attention and consequently add to operational problems and strategic oversights. From the start, Chinese auto executives should ask themselves, "Do we have sufficient scale and financial and management resources to go abroad?" For the majority, particularly OEMs selling fewer than 300,000 cars a year, the answer is probably "not yet," according to McKinsey.

Quality — OEMs should reexamine their operational processes and adopt a broader view of quality. Among some Chinese OEMs studied, quality control means visual inspections on the shop floor to spot assembly defects. Yet, in McKinsey's experience, problems that occur at that point can represent less than 10 percent of all defects. Examining a supplier's processes is crucial: Chinese OEMs should work more closely with their suppliers during the product-development and production phases to ensure that both parties have the same high-quality standards.

Organizational Strength — Chinese OEMs should consider addressing gaps in cross-functional and talent management. "Particularly in product development, difficulties associated with poor project management and coordination are common among Chinese OEMs," Gao writes. "To improve operations continuously, China's automakers must also harness the talents of their production workers. Often, this kind of collaboration calls for new performance-management schemes that support and reward it." Finally, China's automakers must be aggressive in bolstering the ranks of their senior product developers by bringing in experienced foreign managers.

The new McKinsey Quarterly report goes in-depth on what's currently holding back Chinese OEMs and provides specific suggestions for hitting the global-expansion goals.

Chinese auto executives know what's expected of them: to be seen as globally successful. The country has grown to a dominant global position in manufacturing at a rapid clip, and it is very possible that automobiles will be the next area of domination. It seems that now the question isn't how fast the Chinese manufacturing juggernaut will continue to rise, but how efficiently.

"If the country's leading OEMs focus their strategies, develop the right organizational skills, and — above all — improve the quality of their products and their operational performance," Gao concludes, "they could propel themselves to the top of the global automotive business."

Resource

A Global Road Map for China's Automakers
by Paul Gao
The McKinsey Quarterly, June 2008