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.



http://knowledge.ckgsb.edu.cn/detail/two-to-tango

HBR's Review of China's Mid-Market Innovators

HBR's Morning Advantage, May 8, 2012


A glowing review of the recent article co-authored by Ed Tse, John Jullens and Bill Russo:

HOME   |   BLOGS   |   THE MAGAZINE    |   BOOKS   |   COURSES   |   STORE RSS   |   Mobile May 8, 2012 HBR's daily scouting report on provocative ideas for business By Paul Michelman Here I Am Stuck in the Middle with You The middle market has gotten a bad name in some business circles. It connotes a lack of differentiation, a dull aimlessness at a time when high-end distinctiveness and extreme value rule the day. This is the era of Prada, Zappos, and Target. Not Sears and GM. Except, that is, where it may matter the most. In China, middle-market innovators are on the come and a "game-changing disruptive force,"write Edward Tse and two co-authors in Strategy+Business. "They are rapidly reshaping the dynamics of many industries — including agriculture, construction, and healthcare — but many (global) competitors are still largely unaware that they exist.” Mid-market innovators represent the next stage in China’s economic rise, and are a “major potential threat to well-established global manufacturers, one that could jeopardize their existence." The authors say companies in capital- and scale-intensive B2B industries, in which consumer branding isn’t important, are particularly vulnerable. See the full piece for the "whys" and "what to dos." YOUT GOT A WHAT? AN 8-WEEK COURSE HERE? WHICH IS PERFECT FOR ME.  The U.S. Army's Adaptable Approach to Training and Development (Washington Post) We could all learn a thing or two from the U.S. Army's training and development methods. Last week, for example, Chief of Staff General Ray Odierno announced a sweeping overhaul of solder training aimed at creating a force that's "better equipped to deal with losses in personnel, respond to changing threats, and adapt to regions of the world that are expected to grow in importance, such as Africa." The Army is also busting long held silos between its conventional troops and Special Forces, recognizing the importance of fostering collaboration early on. Not only is the Army reacting to the new realities in which its people must operate, but it is preparing them for what's yet to come. Imagine if companies were so adaptable. "UNEMPLOYMENT DIMINISHES PEOPLE. LEISURE ENLARGES THEM." Why Retiring Makes the Unemployed Happier (Vox) Sometimes our source's summaries are better than anything we'd write. To wit, this intro from Vox: "Most people’s wellbeing is permanently affected by unemployment. This column argues that the unhappiness is due to a loss of identity, rather than daily experiences. Using German data, it shows that the long-term unemployed become happier upon entering retirement, thus changing social category, even though this does not change their daily lives." BONUS BITS The Slow-Bleed Model Anything You Want, Only $10 a Month (Bloomberg Businessweek) Grumpy Old Tycoons (Foreign Policy)  Don't Cry... at the Office (WSJ.com) At Morning Advantage, we scan the world of business ideas from beyond the walls of HBR (and sometimes from within) and recommend to you just those items we think are must reading (or viewing). How can we improve Morning Advantage? Please send your comments. POPULAR PRODUCTS Guide to Getting the Mentoring You Need Stuck in a career rut? Done right, mentoring is one of the most powerful ways to learn and to move up. But to reap those rewards, you need to pursue them with rigor and commitment. This guide will show you how. $19.95 Business Plan Development: Harvard ManageMentor Online Module Takes you step by step through the process of preparing an effective plan for a business proposal, from defining your audience and analyzing the market to developing cohesive financial and marketing plans. $39.95 ADVERTISEMENT SUBSCRIBE   |   UNSUBSCRIBE   |   MORE EMAIL NEWSLETTERS   |   PRIVACY POLICY ABOUT THIS MAILING LIST You have received this message because you subscribed to the "Harvard Business Review Morning Advantage" email from Harvard  Business Review. If at any point you wish to remove yourself from this list or change your email address, please visit the  Harvard Business Review Morning Advantage Subscriber Information Center. Copyright © 2012 Harvard Business School Publishing, an affiliate of Harvard Business School. All rights reserved. Harvard Business Publishing | 60 Harvard Way | Boston, MA 02163 Customer Service: 1-800-545-7685 (617-783-7600 outside the U.S. and Canada)

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