China's Chery Gets Closer to Being a World Player

Even as the fate of the troubled U.S. auto giants dominates the world news, we've been hearing a lot about China's domestic auto championChery Auto, based in Wuhu, Anhui province. First the Chinese and Western media reported on Dec. 7 that Chery had won a $1.5 billion deal with Export-Import Bank of China to help its exports grow. But just a day later the headlines announced Chery was abandoning its plans to build a small car with U.S. automaker Chrysler, which, along with General Motors (GM), is flirting with bankruptcy.

So which is it? Is a now cash-flush Chery poised to take on the world, including the battered U.S. market? That would fulfill the company's longtime goal of beginning to sell its vehicles not just in developing regions including Russia and Central Asia, South America, and the Middle East but also in mature markets. Or does the demise of the Chrysler deal signal that Chery's fortunes are starting to flag overseas? Well, not surprisingly, the reality is more complicated than either of those scenarios. "Our door is always open for other opportunities to cooperate with foreign companies," said Chery's spokesman, Jin Yibo, in a statement released on Dec. 9 following the termination of the deal. (Chery also has agreements with Fiat to sell engines to the Italian company, and it has signed a memorandum of understanding to establish a joint venture to manufacture Fiat and Chery models, including Fiat's Alfa Romeo, in Wuhu.)

Despite the end of the Chrysler deal—the plan signed in July 2007 was to produce a version of Chery's A1 compact under the Dodge brand—there's no doubt the Exim Bank deal will continue to be helpful in realizing Chery's long-trumpeted aspiration of becoming an international vehicle player. Driven by sales to developing countries including Russia and Iran, exports grew 132% last year, to reach 119,800 units, making Chery China's No. 1 passenger vehicle exporter. Total sales grew by 24.8%, to 381,000 units. Total export sales were $726 million, and revenues reached $2.1 billion. This year the company predicts export sales to reach $900 million.

Slowdown Effects

The Exim financing should help Chery maintain its sales momentum, say analysts, even as other Chinese auto players have seen their exports shrink as financing for overseas deals has vanished. Case in point: No. 2 indigenous brand Geely, based in Hangzhou, Zhejiang, saw its exports in November fall to only 200 units, a dramatic drop from its monthly average of 4,000 earlier in the year. Geely's "export volume continued to be adversely affected by the worldwide shortage of funds as a result of the credit crunch across the global financial market," Geely Automobile's spokesman said in a press release on Dec. 11.

The abandonment of the Chrysler deal, however, does hint at changes in Chery's overseas strategy. The two companies had been having difficulty meeting the strict safety and emissions standards in the U.S., and Chery is likely to refocus its efforts on building market in developing nations, rather than aiming for the U.S. or Europe anytime soon. Don't count on Chery bidding for a bankrupt GM or Chrysler even at fire-sale prices either. "I don't think Chery has such strength," says Jia Xinguang, an auto industry analyst based in Beijing. Mei Songlin, general manager of research for China operations at J.D. Power & Associates, asks rhetorically: "Do they have the knowledge and experience to integrate international brands into their company?" He adds that he thinks Chery and other Chinese companies are more likely to focus on the China market.

At the same time, the billion-dollar-plus infusion will certainly be used to increase exports to the developing world. Already, Chery has eight overseas factories including in Egypt, Malaysia, and Ukraine. And on Nov. 14, Chery signed an agreement with Thai Chery Yarnyon to assemble Chery's QQ and SUV Tiggo models in Thailand and sell them across Southeast Asia. Chery also plans to expand sales in South Africa, Chile, and Egypt, and to develop its fast-growing markets in Nigeria and Lebanon, the company says. "The current crisis brings more opportunities than challenges to Chery," said Chairman Yin Tongyue on Dec. 5 in an interview with national broadcaster CCTV.

While indeed there may be new overseas opportunities ahead, the international economic slowdown will undeniably have an impact on all mainland auto companies at home. Passenger car sales fell 10.3% in November compared with the same period last year. And after seven straight years of 20%-plus market growth, overall vehicle sales are expected to grow only 5% this year, and by even less next year. Chery's overall unit sales are expected to decline by 5.4% this year, predicts J.D. Power. "So many things are happening at the same time. The consequence is the customer is becoming more cautious and more conservative on spending. A half-year ago he planned to buy a car, but now he is holding back," says J.D. Power's Mei.

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