Proposed J-V in China Won't Help Chery Much After Over-Expanding

Local Automaker Needs to Fix Mistakes First Before Doing Deal With Jaguar Land Rover

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Given Chery Automobile Co.'s close ties to the Chinese government, the company has a good chance to win regulatory approval to establish a joint venture with Jaguar Land Rover in China.

Yang Jian
Yang Jian

Land Rover SUVs and Jaguar sedans are in strong demand in China, so the alliance should be able to generate sizable profits for Chery.

But the partnership alone can't help Chery much. To pull itself out of its doldrums, the Chinese automaker must rein in its reckless expansion and streamline its product lineup.

Chery, headquartered in Wuhu in east China's Anhui province, is controlled by Wuhu's municipal government. The company's first president was a senior Wuhu government official who later became vice governor of Anhui province.

After Chery was launched in 1997, the company achieved something that other state-owned automakers failed to do: It exported large numbers of its inexpensive cars to other developing countries.

That won Chery wide acclaim in China. But along the way, the company slipped into a bad habit of developing too many models too quickly. That hurt product quality and harmed its brand image. When the global economy sank into recession in 2008, Chery's exports plunged and profits evaporated. Since then, Chery has been propped up by government subsidies and state-owned bank loans. But that doesn't seem to slow the company's expansion.

Chery sells 20 models under five brands. It has four assembly plants in China with an annual production capacity of 900,000 units. Yet, sales last year were only 634,000 units.

Chery has not limited its ambitions to passenger vehicles. In the past few years, it started making buses and heavy-duty trucks.

One might argue that Chery should not distract itself with new markets, given the problems accumulating within the company. Only five of Chery's models are selling at a rate of more than 5,000 units a month. With such small sales volumes per model, it is difficult to achieve economies of scale.

Moreover, Chery's attempt to move upscale has failed catastrophically. Last year, sales of the company's Riich premium brand dropped 39% to 26,500 units.

Chery has never disclosed its debt load. But it must be a lot, given the company's expanding product lines and increasingly diversified businesses.

The Chinese automaker is working hard to get a green light from the Chinese government for its joint venture with Jaguar Land Rover.

But it has a more urgent priority. The company must spin off noncore businesses and eliminate nonperforming models. Otherwise, any profits generated by Chery's new partnership would be sucked into the financial black hole of its current operations.

Yang Jian is managing editor of Automotive News China.

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