Infant Industry: Why Chinese Car Brands Are Struggling to Compete

China Economic Review, June 2012

Like many Chinese, Zong Zhaoxiang wishes nothing but the best for the Chinese car industry – yet he won’t be buying a Chinese car anytime soon.

The 52-year-old chairman of a Shanghai chemical company, Zong said he expects Chinese-branded cars to have bright prospects. However, he loves the comfort, quality and image projected by his black Mercedes-Benz S-class, and he said he may buy another Mercedes-Benz model or a BMW in the future. “If Chinese-made cars were better designed and could demonstrate your status, more people might buy them,” Zong said.

Not all of Zong’s compatriots can afford a Mercedes-Benz, of course. But most of them still prefer foreign brands to domestic ones. Volkswagen and General Motors sold the greatest number of vehicles in China in 2011, the world’s largest car market, followed by Nissan, Hyundai and Kia. All domestic carmakers combined captured only about 30% of their home market, the lowest proportion of any major economy.

This is not what Beijing intended. In contrast to other “strategic” industries like telecom and banking, the auto industry has been gradually opened to foreign investment over the past two decades, as Beijing allowed foreign car makers to form joint ventures with domestic partners. But the goal was always to help Chinese manufacturers acquire the technologies and expertise necessary to build their own strong brands, an outcome that eludes the industry.

As markets in the US and Europe stagnate, the focus of the auto industry has shifted to China. This has made Beijing’s efforts to build a strong global brand and profit from its own growth boom all the more urgent. “The sun of the automobile world is clearly shining in Asia and specifically in China,” said Geoff Broderick, Asia-Pacific general manager at auto industry consultancy J.D. Power & Associates. “[China] is clearly going to be the sales leader for the foreseeable future.”

Beijing aims to help Chinese companies capture about 50-60% of the market by 2015, but that goal appears unattainable. Chinese cars are variously accused of problems with quality, safety and styling, but their biggest problem continues to be brand strength – a conundrum that can- not be solved overnight.

“China is the world’s largest market, but it doesn’t make any of the world’s leading brands,” said an employee of Guangzhou’s Chang’an Auto who asked not to be named because he is not approved as a company spokesperson. “We’re hosts, not leaders.”

Race to the Bottom

State-owned car makers – such as Shanghai Automotive Industry (Group) Corporation (SAIC), First Auto Works (FAW ) and Chang’an Automobile Group – have begun paying more attention to building their own brands, at Beijing’s urging.

It’s been an uphill battle. With shorter histories, inferior technology and smaller marketing budgets, their products are mainly confined to the low-cost segment, where profits are thinner. Meanwhile, independent Chinese carmakers such as Geely, Chery, BYD and Great Wall have introduced their own low-price models, intensifying competition.

Most Chinese brands continue to trade on the China’s traditional forte: driving down manufacturing costs and making money on high volume and thin margins. In contrast, foreign car brands charge double or more and still sell far more units, all on the strength of their brand, technology and styling.

The playing field has tipped farther towards foreign players in the past few years. First, Beijing ended a tax break on cars with engines smaller than 1.6 liters last year. “The companies with smaller vehicles tend to be Chinese-branded carmakers. So they benefited most from the stimulus and were hurt the most by the removal of the stimulus,” said Bill Russo, a senior advisor at consultancy Booz & Co and the former head of Chrysler Asia.

The policy had helped overall vehicle sales to grow 46% year-on-year in 2009 and 32% year-on-year in 2010 – unsustainable rates of expansion, Russo said.

The termination of the tax break triggered both a slowdown in overall sales and a reduction in the market share of Chinese brands in 2011. Growth in sales of domestic cars fell to a 13-year low. The beating continued in the first quarter of this year: Overall sales of passenger cars declined 1.3% annually, while sales of Chinese passenger cars slumped 8.1%.

This drop in sales has prompted car companies to cut prices aggressively. Foreign auto makers are offering discounts of 25-30%, while some domestic auto makers have reduced prices by up to 50%.

Most Chinese companies are planning aggressive expansions in the next five to 10 years that will further increase competition.

“Overall profitability is strongly under pressure with the slowdown in the market,” said Ivo Naumann, managing director at consultancy AlixPartners.

“Going forward I think [Chinese car- makers] will have a very hard time. They will not be able to expand the market share on the low end much because of competition, and they have a very hard time moving up-market, where the quality and performance of the car plays a more important role.”

Holy Grail of the premium market

For Chinese carmakers, the key to winning over more domestic buyers is strengthening and elevating their brands. As luxury car owners like Zong Zhaoxiang attest, Chinese buyers often make purchase decisions based on a car’s ability to demonstrate their status.

Since cheap public transportation is widely available in Chinese cities, most Chinese buyers view cars as a luxury purchase, rather than a necessity, said Scott Laprise, an analyst at CLSA. “You get a lot of people in China who just never want to even buy a car until they can get a BMW.”

The result is that demand in the luxury car segment in China has been “upside down” compared with other markets, auto analyst Michael Dunne writes in “American Wheels, Chinese Roads: The Story of General Motors in China.”

In the US and Germany, sales of luxury cars decrease as the car’s price goes up, as one might expect. Mercedes’ C-Class sedan, its most affordable model, sells best, followed by the E-Class, and then the flagship S-class.

Until very recently, however, this order was reversed in China: the S-class (Zong Zhaoxiang’s chosen ride) was the bestseller, followed by the E-Class and then the C-class. This changed only four years ago, when Mercedes localized production of the C- and E-Class sedans. These two models are now significantly cheaper than the S-Class because they are not subject to a 25% import duty, said Dunne. However, “China remains the No 1 S-Class market worldwide, and it still makes a powerful statement when it pulls up in front of the Portman Ritz Carlton or Shanghai Links Country Club.”

Shang Yugui, a vice president and spokesman at Chinese SUV maker Great Wall, agreed that brand is a powerful motivator. “Chinese consumers’ under- standing of cars has improved, but they’re still not very rational. Chinese consumers are not buying a car; they’re not buying its functions. They are buying face. That’s very obvious in big cities.”

Chinese brands are understandably eager to chase this demand by moving their brands up-market. But building a luxury brand is difficult and time-consuming – perhaps even impossible, said Philippe Houchois, an auto analyst at UBS.

The last brand to rise into the luxury segment was Lexus in the 1980s in North America, he said. Outside of North America, however, Lexus is often still not recognized as a premium brand. “I think brands exist or they don’t, but you don’t make new [luxury] brands anymore. They’re very historic, and it’s difficult to create new ones,” Houchois said.

Slow going

The luxury segment may be off-limits, but some Chinese companies have been able to move somewhat up-market.

SAIC successfully entered the high-end market in the last few years with the release of “Roewe,” a brand based on intellectual property acquired when British car maker MG Rover went bankrupt in 2005. Geely, a private carmaker that acquired Swedish brand Volvo in 2010, has also won market share by gathering its high-end products together under one nameplate, “Emgrand.”

Overall, however, few Chinese car- makers have been able to establish a reputation for quality and comfort. Sometimes this is merely a matter of lagging consumer perception (see chart on page 36), but often there are still quality and technology gaps between foreign and Chinese brands.

For example, many Chinese companies have yet to master the technology for building automatic transmissions (Geely is an exception, having acquired Australia’s Drivetrain Systems International, the world’s second-largest automatic trans- mission company, in 2009). Chinese car brands also tend to lag behind in terms of styling, marketing and after-sales service.

“The fact is that the quality is not yet completely there,” said Naumann of Alix- Partners. “[Chinese manufacturers] have made great progress over the last seven to eight years, but they are not yet there.”

Analysts said many Chinese companies also tend to face operational challenges. Even if a company has mastered advanced technologies, they may still have trouble designing a car as a logical package, creating an efficient business model to support it, and then fitting that car into a complementary portfolio of products.

“Improving technology is no longer the problem. The problem is now how to turn technology into a widely competitive product,” the Chang’an employee said. “How to transform first-rate technology into classic products, how to transform classic products into best-selling products – that’s not just a question of technology, but of marketing and management.”

Long road ahead

Several Chinese companies are ahead of the pack in mastering these processes. Geely and SAIC, for example, both posses strong technology and have intro- duced higher-end brands. And while the track record of SOEs like FAW, Dongfeng Motor and Guangzhou Auto have been unimpressive thus far, Scott Laprise of CLSA said he expects them to benefit in the long run from their access to foreign brands and technology they derive from their foreign joint ventures.

Many analysts are also bullish about Great Wall, an independent brand that concentrates on SUVs and pick-ups.  Laprise praises the company for its strong exports, good brand recognition, quality and cash position. State-owned carmaker Chery has also introduced some competitive models, like the Riich and the Regal, though Huaibin Lin of consultancy IHS Automotive cautioned that the company has had problems with management and cost control.

Overall, Chinese car companies are making progress. Most analysts acknowledge that it will just be a matter of time before they catch up. “The Chinese brands will clearly have the same level of quality and styling as the foreign ones do [in the future],” said Broderick of J.D. Power & Associates. “And as soon as their brand equity catches up, then I think you will see more of a growth rate of Chinese brands.”

Unfortunately, this could take a long time. Most industry people project that Chinese carmakers will need another five to 10 years to perfect their processes and technology, and perhaps more time to solidify their brand. To make the shift, Chinese car makers will need to change their focus from quantity during the boom years to quality now, said Luo Lei, deputy secretary-general of the China Automobile Dealers Association.

As a result, the market share of Chinese carmakers will probably increase only gradually in the years to come and fall far short of Beijing’s target of 50-60% market share. IHS Automotive projects Chinese manufacturers will capture 37-38% of the domestic market by 2020, up from around 30% currently.

“Some voices are still casting doubt on the development of independent brands ... Consumers just need to be a little patient – we’ll mature and progress,” said the Chang’an employee.

Spend money to make money

One factor that could speed this process is outbound acquisitions. The surest way for Chinese companies to get ahead seems to be by acquiring foreign brands and technology – as Geely did with Volvo and Drivetrain Systems International, and SAIC did with MG Rover.
“I think, left alone, nothing changes.

Chinese auto makers ... wouldn’t make much progress,” said Michael Dunne, the author of “American Wheels, Chinese Roads.” “But they have enough political will that they could start acquiring more brands. Volvo’s already there, there was an effort to buy Saab. You could see, for example, Chrysler or Dodge or Fiat or Hugo or Citroen or weaker global brands get acquired.”

Of course, that raises the question of whether these companies would qualify as “Chinese brands.” Would Beijing accept an acquired foreign brand as the domestic champion that it has been searching for? Perhaps China’s central planners can take heart in the fact that the situation swings the other way. By setting up shop in China, multinational car makers are, to a certain extent, also becoming Chinese operations. Laprise of CLSA cited the example of General Motors, which has localized management and parts production in China, and even designs half of its worldwide platforms in Shanghai. “What is GM in China? A Chinese carmaker or a foreign carmaker? I mean that philosophically,” he said. “You’re paying all these people in local salaries; you’re reinvesting a vast majority of your profits into the local entity. What is not Chinese about Shanghai GM?”
  Even Mercedes-Benz, that paramount of car quality, is localizing production of its luxury models.  Its Beijing Benz joint-venture assembles and manufactures the E-Class and C-Class in China; someday this may be joined by the flagship S-Class.

Perhaps the next time Shanghainese businessman Zong Zhaoxiang buys a Mercedes-Benz, it will be a little more “Chinese” than the last time.

Chinese OEMs and the U.S. Market – Fact vs. Fiction

May 23, 2012


extract from article titled “Optimism Returns to the American Automobile Industry” published in Strategy & Business by Booz & Company:

http://www.strategy-business.com/article/00115?gko=531e5

by Bill Peng, John Jullens, and Bill Russo

One question facing the U.S. auto industry right now is the potential entry of Chinese car manufacturers into the American market. Over 50 percent of respondents to our [recent Booz & Company] survey said they expect China to own more than 5 percent of the American automobile market by 2020, just two product cycles from now. Under this thinking, China would replicate the strategy of Japanese carmakers 30 years ago and Korean manufacturers a decade ago: establish a foothold with low prices, and then improve quality and brand perceptions. The only difference, according to this view, is that Chinese companies could accomplish this faster and more easily, based on the scope of their domestic market.

Is this level of market penetration likely? Maybe, but not by 2020. The actual performance and capabilities of the leading Chinese vehicle manufacturers—as well as their readiness to compete in developed markets such as the U.S.—is overestimated, for several reasons. First, the size and scale of these companies is fairly small, especially separating the sales volumes of their Western joint-venture partners. In most cases, the joint venture itself far overshadows the relatively young Chinese brand. In addition, the domestic market in China is geared to first-time buyers in hyper-competitive entry-level segments, where margins are difficult to sustain, so their overall profitability is typically quite low. That reduces the resources these companies have to expand overseas.

Furthermore, none of the leading Chinese manufacturers have yet achieved a major product or process breakthrough that could give it a significant competitive advantage. This is in sharp contrast to companies like Toyota, which built its initial position in the U.S. through its famed Toyota Production System, a new and—at the time—vastly superior operating model relative to Detroit’s approaches at the time of its introduction

All of this is certainly not lost on the leading Chinese manufacturers, such as Chery, Geely, Great Wall, and SAIC. These companies have all set aggressive international expansion targets of more than 500,00 units by 2015, but almost entirely in developing countries, instead of in the more mature North American and European markets. It will probably take several more years before they can consistently meet competitive product reliability and durability standards, along with U.S. homologation requirements and product specifications. In fact, many Chinese manufacturers fear the potential product liability and other lawsuits in the hyper-litigious U.S. business environment. For these reasons, even among developed markets, Europe may be a bigger priority than the U.S.

To crack global markets, Chinese automakers must develop world class global supply chains and supplier partnerships, offer competitive financing products, and deploy the talents of a global human resources pool. That won’t happen overnight. It will also take some time for Chinese carmakers to learn to compete in markets where they don’t have the benefit of a low-paid labor force, management team, and supplier base, as well as favorable subsidy policies from the central and local Chinese government. It will also be essential for these companies to build a retail network and brand in the U.S., which is a substantial investment.

Nevertheless, many Chinese automotive executives aspire to capture a meaningful share of the US market. Some have started to evaluate potential entry strategies. For example, Great Wall, China’s leading producer of SUVs, is in discussions with several companies to establish a dealer network in U.S., while BYD is testing its alternative energy models, including the all-electric e6 Premier. SAIC, China’s largest automaker, has bought a majority share in Visteon’s global interiors business with the objective of developing its supplier capability in the US.

Eventually, the U.S. market will see more new competitors emerging from China, who will likely offer well-equipped models at very low prices, putting significant pressure on incumbent players. For suppliers, that outcome may present opportunities. Chinese manufacturers will have to rely on existing U.S. suppliers, due to their capability advantage over the less competitive Chinese suppliers. To capture those business opportunities, Tier 1 suppliers should begin to build up close partnerships with leading vehicle brands in China, through joint ventures or by developing simultaneous engineering initiatives. 

Jeeps Sell for $189,750 as China Demand Offsets Tariffs

Bloomberg, May 22, 2012

A Chrysler Group LLC Jeep sport utility vehicle (SUV) sits parked under red lanterns in Beijing, China. Photographer: Keith Bedford/Bloomberg

The Jeep store in south Beijing near the Timberland and London Fog outlets carries the season’s latest offerings of branded shirts, shoes, belts and backpacks. Not for sale here: Jeep sport-utility vehicles.

Jeep gear is so popular in China that there are more than 1,500 licensed clothing outlets in the country, where only 120 auto dealers sell the brand. While Jeep has a strong image connected to an adventurous lifestyle, three decades of changing ownership have left it without local production and missing out on surging demand for SUVs in the world’s largest vehicle market.

“Our brand awareness and consideration is running way ahead of where our actual volumes are,” Mike Manley, head of the Jeep brand, said in an interview in Beijing last month. “That’s why I can’t say strongly or often enough just what an opportunity China offers for us.”


Jeep sales rose 63 percent last year to 19,013 — less than three days worth of China sales for General Motors Co. (GM), the top foreign automaker in the market. Detroit-based GM has 2,900 dealers — more than 24 times the Jeep number — that sold 2.55 million vehicles last year, mostly Buick, Chevrolet and Wuling models.


Manley, who oversees Asian business for Jeep owner Chrysler Group LLC, said he wants to increase the brand’s sales in China by expanding Chrysler’s dealer network by as much as 29 percent this year and restarting local production by early 2014.


While Ford Motor Co. (F), a late entry to China, is working just to build awareness of its brand and products, Jeep struggles to meet runaway demand.

Well-Known Brand

“It’s not that the brand isn’t known; it’s known,” said Bill Russo, a former China chief for Chrysler. “It’s not that people don’t have a positive impression; they do. It’s just that they can’t get it. They can’t get what’s available around the world here in China, not at anywhere near the price point that you get anywhere else in the world.”


The Jeep brand’s first steps into China as a consumer brand seemed promising in the early 1980s, when military versions of the off-road vehicle were widely recognized.


“It’s amusing to think that when Jeeps were first produced in China, there were few cars on the streets, only three ring roads in Beijing and no freeways from city to city,” Jim Mann, an author-in-residence at Johns Hopkins School of Advanced International Studies in Washington D.C., said in an e-mail. “The enterprise has had a series of problems, but survives, like a cat with nine lives.”

Wrote the Book

Mann wrote a 1989 book called “Beijing Jeep” that detailed the challenges then-owner American Motors Corp. faced in setting up the first U.S. auto-manufacturing partnership in China in the early 1980s. Those challenges were immense, from cultural misunderstandings with then-partner Beijing Automotive Works to the changing ownership of American Motors when purchased by Chrysler Corp. in 1987.


Chrysler itself merged with Daimler-Benz AG in 1998 before the U.S. unit, based in Auburn Hills, Michigan, was sold to Cerberus Capital Management LP in 2006.
By the time Turin, Italy-based Fiat SpA (F) took control of Chrysler and its Jeep brand in 2009 as part of the U.S. automaker’s government-backed bankruptcy reorganization, Jeep’s original manufacturing partner had become Mercedes’s partner. Jeep output in China stopped in 2006.

Lacked Investment

“Chrysler had so many challenges in dealing with the change of ownership that they really couldn’t put the investment and the attention into building up any joint venture in China,” said Russo, the former Chrysler executive, who now is president of auto consultancy Synergistics Ltd. “They really scaled back to focus on the crisis back home. Now that the boat is afloat, so to speak, everywhere else, you’ve got to sail it back to China.”


Without an assembly partner, Chrysler has been looking for one in China as required to avoid steep tariffs. Manley also runs Asian operations for Fiat, Chrysler Group’s majority owner. Fiat’s partner, Guangzhou Automobile Group, would be a natural and officials with that company have said they want to build Jeeps.


“Of the options that are out there, which is the easiest to get to? Probably with Fiat’s joint-venture partner, mainly because there’s already a good relationship,” Manley said. Still, he said, there are a number of options for Chrysler in China. “I certainly have got the teams involved in it focused on coming up with the right solution for us by the end of the first half and I like to think we can do that,” Manley said.


It will probably take at least 18 months to begin production after deciding on a partner and receiving government approvals, he said.

Higher Prices

In the meantime, he watches as imported Jeeps continue to see sales growth even though the duties push up prices. The Jeep Grand Cherokee starts at 575,900 yuan, or $91,064. In the U.S., it starts at $26,995, according to company websites. The 2012 Grand Cherokee SRT8 version costs at least 1.2 million yuan, or $189,750, compared with $54,470 in the U.S., according to Edmunds.com.


“Jeep is an asset to Chrysler that could really have a lot of upside,” Russo said. “But they now need to localize these cars. Every competitor is localizing SUVs.”


Deliveries of SUVs will probably increase 16 percent this year to 1.85 million units, the fastest-growing segment of China’s automobile industry, according to the latest forecasts from the state-backed China Association of Automobile Manufacturers. The category grew 20 percent last year, according to CAAM.


Chrysler’s limited product range also makes it harder for the company to expand its dealer network, said Russo, who is based in Beijing.


“This is why Ford is now investing pretty heavily to introduce, I think, 15 models between now and 2015,” he said. “To get your dealers to invest, they have to see an exciting range of products that they can sell in reasonable volume.”

‘Safe, Rugged Car’

In the stand-alone Jeep clothing store, the walls are decorated with black-and-white photos of military jeeps as well as modern-day Wranglers. The brand’s ruggedness image led Ding Qi, a Shanghai businessman, to buy his wife a Jeep Grand Cherokee in 2004.


“I wanted to buy her a safe, rugged car, not one of those dainty subcompacts,” he said in an interview.


They use the SUV to go on drives with a local Jeep club. This year, the club, which has 200 members, plans to take a 48- day cross-country trek from Shanghai to Tibet to Nepal and back.


“A Jeep driver is one who doesn’t give up when faced with adversity,” Ding said. “That’s the impression I get because we’ve had to deal with floods, landslides closing off roads and other obstacles, but the club members always pull together.”

‘Sense of Superiority’

Yang Yang, 35, replaced her 2004 Grand Cherokee with a Volkswagen Tiguan this year because, she said, she thought the newer Jeeps had become less rugged.
“You don’t really feel it driving in the city, but when you get into the mountains or on a riverbed, you have this sense of superiority and joy,” she said of her old Jeep. “It’s hard to describe to people who don’t drive a Jeep and I’ve not had the same feeling from other SUVs — not the Tiguan that I’m driving now.”


The vehicle’s capabilities are so spectacular that sometimes they draw a crowd, she recalled.


“I love the Jeep for its ruggedness,” she said. “I remember one time we were going deep into the mountains in Anhui province and the villagers from surrounding villages came out to watch us.”


To contact the reporters on this story: Tim Higgins in Southfield, Michigan, at thiggins21@bloomberg.net.


To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

http://www.bloomberg.com/news/2012-05-22/jeeps-sell-for-189-750-as-china-demand-offsets-tariffs.html?x=1

Some fear economic slowdown of Chinese economy

CNN, May 14, 2012


Click here to view the video at cnn.com

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Written by

Lindsey Tugman

BEIJING, China (CNN) — In move to boost liquidity and lending, China cut the amount of cash banks must set aside as reserve. This move by the Chinese Central Bank comes as a growing number of international companies are eyeing China’s one billion-plus consumers.


But after years of double-digit growth, there’s increasing concern the world’s second biggest economy is slowing down. And this comes as China is poised for a once-in-a-decade leadership change.


Mrs. Fields is hoping for sweet success in china. The American cookie chain has opened its first two shops in Beijing with its eyes set on the increasingly wealthy Chinese consumer. Mrs. Fields franchisee James Tong says, “As the standard of living improves,” he says, “the demand for sweets has also grown. People want more variety in their desserts now, whereas before they were just worried about having enough food to eat.”


The Utah-based company hopes to make China one of its biggest markets outside the U.S. But these days some businesses are wondering if china is a surefire bet.
Recent data showed the economy here is in worse shape than previously thought.


In April, everything from retail spending and investment to industrial output and imports slipped, prompting authorities over the weekend to make it easier for banks to lend in a move to offset the weakening growth. Bill Russo, CEO of Synergistics says, “They understand the rate of growth going forward is not going to be what has been in the past and they’re trying to get in out front of the slowdown in order to keep in-line with a more sustainable growth pattern going forward.”


After years of overseeing double digit growth here, the government has been on a campaign to cool the world’s second largest economy taking measures to ward off potential bubbles amid concerns of a hard landing.


Yet now some investors fear China’s leaders could become distracted from taking the right action to steer the economy. The authorities are embroiled in the country’s worst political infighting in decades ahead of a leadership transition.


Russo says, “Those actions, as well-intended as they may be, may not be perfect, and in which case they will see and make an adjustment. Again, so I think the government’s heavy intervention in the economy could have consequences that are not anticipated.”


This fueling uncertainty to an already sputtering world economy amid hopes that more Chinese will soon be “rolling in dough.”

Two to Tango

CKGSB Knowledge, May 2012

While Jaguar Land Rover and Chery Automobile stand to gain from their partnership, they must realize that just having a joint venture is not enough to succeed in the Chinese market

As you stroll down the busy streets of Beijing, it is hard not to notice the array of cars whizzing past. From frugal QQs to flashy Audi saloons, it seems every car company wants its share of the world’s largest auto market. Domestic automakers seem to have the budget market sewn up, but some of the world’s luxury marques also see profits in China. The country is now Bentley’s largest market – first quarter 2012 sales in the region are up by a whopping 84.9%. Even supercar maker Lamborghini has courted the Chinese market with the multi-million RMB limited edition Murcielago LP670-4 SV.



The newest entrant on the scene is Jaguar Land Rover (JLR) which is looking to take advantage of its decidedly British luxury branding by signing a joint venture (JV) agreement with China’s Chery Automobile. While JLR wants to build its brand in China, perhaps Chery is hoping to gain some much-needed luxury allure – maybe even hoping to follow in the footsteps of the Land Rover Evoque with Victoria Beckham-designed interiors for its future product lines.

The JLR-Chery JV has been in the pipeline for several months and comes close on the heels of Geely’s takeover of Volvo and JVs between Chinese and foreign automakers like Mercedes Benz, Volkswagen and Audi. The idea is to manufacture JLR- and JV-branded vehicles, establish a research and development facility, manufacture engines and sell vehicles produced by the JV company.

A Win-Win Deal

In a joint statement, JLR CEO Ralf Speth and Chairman and CEO of Chery Automobile Company Ltd Yin Tongyao said: “Demand for Jaguar and Land Rover vehicles continues to increase significantly in China and we believe that JLR and Chery can jointly realize the potential of these iconic brands in the world’s largest car market.” No further details were divulged, but sources suggest that the deal is worth around RMB 17.5 billion. There is an initial planned production capacity of 50,000 units, to be staffed by 5,000 people.

It is pretty clear that JLR wants to develop its brand within China, which is already its fastest-growing market for saloons and SUVs. In the past JLR used to import vehicles, but to become a major force in China, local production is the only option and that cannot happen without a JV.

Chery appears to be looking for a way to move up the automotive value chain. The hope is that some of JLR’s luxury appeal, quality production and proven technologies will benefit Chery’s branding and product development in the future as it tries to establish itself as a big player in the domestic automobile market.

Professor Teng Bingsheng, Associate Professor of Strategic Management at CKGSB, has been studying strategic alliances for a while now. “Chery is one of the only remaining Chinese state-owned car companies that have not previously agreed (to) a joint venture,” he says. “The trend has been pretty clear: without a big-brand foreign partner and the accompanying expertise and technology they can provide, it is hard for any Chinese automakers to really make big strides.”

With demand and supply reaching equilibrium in China, companies like Chery require the increased competitive advantages that are potentially available through a JV with an established foreign auto brand.

“Chery has been able to grow on its own over the last 10 to 15 years, as its position in the lower end of the car market, which has grown faster than the higher end market, has allowed it to become quite successful,” says Professor Teng. However, the market is now reaching an equilibrium. As growth slows and competition becomes stiffer, companies like Chery are going to find it harder to compete.

Overcoming Red Tape

Despite its obvious advantages for JLR and Chery, there are a number of issues that still need to be resolved. Most notably, although the deal has been announced, approval from Chinese regulators is still required. This means it could be a year or more before any action can be taken.

But there’s a bigger issue at play here. China’s National Development and Reform Commission (NDRC) has been reluctant in the last couple of years to grant further approvals for automotive JVs, with a growing sense that the market is already overinvested and cannot bear further deals.

“Concerns regarding approval are realistic given that even after Geely’s outright purchase of Volvo two years ago, they have not yet received approval to begin production within China, says Professor Teng.

Bill Russo, a China auto industry expert and President and Founder of automotive consulting firm Synergistics, adds, “Geely found out earlier this year that to produce vehicles in the new facilities that they intend to build, the two parties – Volvo and Geely – need to form their own JV. This is somewhat unusual given that Geely already owns Volvo, but it is consistent with how China has previously allowed foreign-branded auto companies to access the market.”

Although Geely’s takeover of Volvo is very different from the JLR-Chery JV, the problems of approval remain. As Chery is state-owned, it does have an advantage over Geely and that might speed up the process to a degree.

Lack of Experience?

Chery may see JLR as an ideal partner for its future plans, but question marks still remain regarding how a luxury car manufacturer and a value brand such as Chery can really cooperate for mutual benefit – particularly given Chery’s lack of experience in working within such a JV. There is a realization that even if Chery believes they are fully capable of handling this – without adequate government and industry support – the deal could fall through. China’s diesel car king Hawtai is a good example of this – its JV with Hyundai came apart in 2010 and its rescue bid for Saab fell through.

“This may be Chery’s first ‘marriage’ in terms of a JV with a foreign automaker, but it isn’t their first ‘date’ by any means. Chery has tried to do deals with Fiat and Chrysler before, but couldn’t quite make it. Their intentions have been clear for a while,” says Russo.

In each of these cases, Chery was not to blame for the failure. The Fiat deal did not receive approval, and in the case of Chrysler, it was the restructuring of the company during the US auto crisis that caused this deal to fizzle out, despite a promising start.

Whilst Chery has yet to prove itself in terms of working with a foreign partner, Russo does believe that the companies can overcome challenges associated with being from different market segments, and that this could even prove beneficial.

“You want a company that has already proven itself, and Chery has proven that it can build a large automotive business. Furthermore, JLR has many of the capabilities Chery does not yet possess, particularly in terms of making high-end products.” says Russo.

Both of these companies seem to have complementary abilities, and now it is really down to the commitment of the parties to make this ‘marriage’ work.

Late Entry?

While there are some clear advantages for JLR as they look to develop within China, it could be said that they are entering the market too late. Other brands like Audi and Mercedes Benz are already well-established and the overall car market in China is beginning to slow somewhat. Vehicle sales in China rose a scant 2.5% in 2011, the slowest growth in over a decade. The market is becoming saturated, and JLR will have to act quickly to gain any ground.

“They will need to catch up quickly…. Other brands are already embedded in the luxury segment, so to be successful JLR will need to be creative in the way that they tackle the market,” says Professor Teng.

Although Russo believes that China’s auto market is overinvested in terms of the number of companies in the market, he still sees the potential for JLR’s Land Rover products, particularly as the SUV segment is one of the fastest growing in the country.

“In terms of the chronology of events, JLR is entering the market late. However, given the stage of market development, particularly in terms of premium SUVs, there are very few established, localized premium makers producing premium SUVs in China,” he says.

Not an Instant Solution

“Joint ventures will potentially help Chinese companies to look beyond the domestic market, but it is a long shot and will take significant time,” says Professor Teng. For example, SAIC, China’s largest automaker by volume, has had JVs in place for over 20 years, but it has taken the purchase and resurrection of the MG brand in the UK for it to see any traction outside of the domestic market. Whilst SAIC saw sales top nearly 4 million in China in 2011, MG Motor UK started 2012 with 107 sales in January in the UK, 103 in February and a new record of 236 cars sold in March – the best one-month performance since the company was formed in 2009. This is something to build upon certainly, but shows how slow the progress can be.

Although JVs can be mutually beneficial, they are not a fast-track to success in China’s auto market, or an automatic gateway to international markets for domestic brands. Right now it is still all about the domestic market and its maturation from increased volumes to greater product differentiation and sophistication. This is a challenge for both partners in any JV, but with the right cooperation and mix of expertise, there is still room for growth in the market.



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