Chery looks to pick off Western car
markets By Pallavi Aiyar
WUHU, China - The word "cherry" to most of
the world invokes images of a round, red fruit.
But if one company in central China's province of
Anhui has its way, the word will soon be
inextricably linked in the global imagination with
Chinese cars; cars that, according to auto
analysts, could soon begin to make substantial
dents in world markets.
Chery Automobile
Co Ltd, a once-state-owned and now independent car
manufacturer headquartered in Wuhu, Anhui
province's capital city, is
one of the auto companies that heavyweights from
Detroit to Toyota City are keeping a particularly
close eye on.
In just seven years since
the company's first car came off the production
line in December 1999, Chery has grown to become
one of China's top auto manufacturers (ranked
fourth overall), with sales in 2006 totaling more
than 305,000 units, a jump of 62% over the
previous year. In the same year, Chery also
emerged as the country's biggest car exporter,
selling more than 51,000 cars to some 30 countries
in Southeast Asia, Africa, the Middle East and
South America.
Chery began selling cars in
Sri Lanka and Pakistan about a year ago and,
according to the general manager of Chery
International, Zhang Lin, the company is actively
eyeing the Indian market.
When
DaimlerChrysler announced a few months ago that it
planned to sell its unprofitable Chrysler unit, it
was rumored that Chery might be a buyer. Chrysler
has since been sold to a New York-based
private-equity firm, but the fact that Chery was
included in discussions regarding US auto maker's
future is indicative of how far the Chinese
company has come since it was founded more than a
decade ago.
However, for all its
successes, Chery has also been dogged by
controversy since its inception, sued for copying
designs from Western car makers including General
Motors, and accused of being unfairly bolstered by
government support and subsidies.
Moreover, previously touted plans for
entering the mature Western European and US
markets by this year have been indefinitely
delayed after a deal with Malcolm Bricklin of
Visionary Vehicles collapsed last November.
According to initial plans, five lines of
Chery-designed cars were expected to sell 250,000
units in the United States by the end of 2007. The
deal ended amid accusations of foot-dragging and
design theft on Chery's part.
Jin Yibo, a
Chery spokesperson, dismissed the accusations and
said that the company had decided to scale back
its US expansion plans since "the US is a high-end
market with high demands and standards that we in
China are still not ready to meet". Specifically,
Jin cited environmental standards, management
skills and electronic know-how as areas where
Chinese auto makers lag behind their more
developed counterparts.
Chery's story is
in many ways emblematic of China's wider economic
canvas. Ambitious and audacious, the company has
achieved much and often defied expectations. Yet
its aspirations to break into high-value developed
markets remain constrained by innovative and
technological limitations that it has yet to
overcome.
Chery also remains dependent on
government backing, which gives it access to long
lines of credit, leading some analysts to question
the company's long-term ability to stand on its
own feet.
Like Chery, China as a whole
aspires to move up the value chain and expand its
global economic reach. Although the country has
successfully transformed itself into a global
factory over the past two decades, international
attention has focused on the "Made in China"
price, given the country's deep pool of cheap
labor, rather than the "Made in China" brands. For
Chery and other Chinese auto makers, such as Geely
and Jiangling Motors, the goal is to become the
new Toyotas and Hyundais of the world, valued not
only for their price but also for design and
quality.
The idea is to move on from the
days when China merely provided the hands and feet
for the brains of the Japanese and Koreans, and
focus more on lucrative brand-building and
investing in research and development. The Chinese
government's repeated calls to building an
"innovation society" emphasize this goal. Both
Chery and the Chinese economy are on a cusp
between low-cost manufacturing reliant on foreign
technologies and more high-end, value-added brands
and products.
The debate is really whether
China and Chery will make this transition over the
next few years or the next few decades. According
to the state Xinhua news agency, Beijing's goal is
for China to comprise 10 percent of the world's
total vehicle trading volume within the next
decade, up from the 0.7 percent it currently
holds.
Last year China displaced Japan as
the world's second-largest vehicle market after
the United States. Passenger-car sales alone
increased to 3.8 million in 2006. More than 120
car models are produced locally in China, with
about 30 car manufacturers battling it out for the
market share.
The majority of these car
makers compete for the cheap-compact-auto market,
an overcrowded segment plagued by declining
profitability and excess production capacity that
have forced many car makers to look to overseas
for expansion. In 2006, Chinese auto makers
exported about 325,000 vehicles, 80% of which were
low-priced trucks and buses, the remaining 20%
overwhelmingly cheap, compact cars, popular in the
developing world. The developed-world markets
continued to elude the Chinese.
But
Dominik Declercq, China representative for the
European Automobile Manufacturers Association,
predicts that it will only take five years or so
for Chinese car makers to make the international
cut when it comes to quality, emission standards
and safety requirements. He says the access of
domestic car companies to the government's deep
pockets will enable them easily to finance higher
technological standards.
The real
challenge for these auto upstarts, Declercq says,
will be honing marketing skills, establishing
distribution and spare-parts networks, and
developing after-sales servicing. He says these
will all be necessary to create a "quality image
for Chinese cars in Western minds".
Korean
and Japanese auto companies were confronted by all
the same challenges when they set out to expand
abroad. And just as they were able to do so
despite much initial international skepticism,
Declercq believes so will their Chinese
counterparts. "There is a strong will, political
drive and generous funding to make this [Chinese
exports] happen," he concludes.
Already a
number of Chinese car majors, including Chery,
have begun to export to Eastern European markets
such as Ukraine, Poland and Russia. Declercq
believes this gives them a valuable foothold into
more developed Western European markets, in
addition to allowing them time to study and learn
before launching a full-scale entry to the more
mature Western markets.
Indeed, although
the expansion of Chinese cars into the US and
Europe has been slower in materializing than
predicted a few years ago, this could be the lull
before the storm. And given Chery's plans for
entering the Indian market, it's not only the GMs
and Toyotas that need to keep a sharp eye on
developments in China. Tata and Maruti would also
do well not to rest on their laurels.
Pallavi Aiyar is the China
correspondent for The Hindu.
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