Is Chery a victim of China’s Tiger Mom syndrome? Or just overly-ambitious?
As I wrote the blog below for auto163, the Chinese website (part of Netease) that I contribute to, I begin to wonder if Chery Auto Co. www.cheryinternational.com was a victim of the Tiger Mom syndrome. Is the central government, eager to have a national champion automotive company that can stand toe-to-toe with the Japanese and Western automakers, playing the Tiger Mom, and pushing Chery with cheap loans? Perhaps enabling is a better word.
Chery is not necessarily the best candidate for the job. It is, however, an easy mark. SAIC www.saicgroup.com doesn’t need the government’s money, for example. Anyway, I look forward to the comments I get on this blog since some of you undoubtedly have more insight than I on this matter. (Actually, some of you have already helped shape it).
Below is my blog for auto163, which should run in Chinese and English in a day or two. But you are seeing it first!
It is hard to keep up with Chery Automobile Co. these days. It appears the state-owned auto maker will finally began producing cars in a joint venture with Israel Corp. www.israelcorp.com called Quantum. Chery may also produce Subaru brand cars in a joint venture with Fuji Heavy Industries. http://www.chinadaily.com.cn/bizchina/2011-05/30/content_12603544.htm
Besides these ventures, Chery is building assembly plants in Brazil and Venezuela. And it already has a dozen overseas plants in a host of countries from Egypt to Uruguay to Thailand. http://www.chinadaily.com.cn/cndy/2011-05/31/content_12609122.htm
Meanwhile, Chery must manage the marketing and distribution of four distinct brands in the domestic market. It also aims to build three new plants in China over the next few years, adding 860,000 units of capacity to its current 900,000 unit capacity.
Makes me dizzy just thinking about it. Can Chery succeed at all these endeavors? I have my doubts.
The Quantum-Chery joint venture http://chinaautoweb.com/2010/09/chery-quantum-to-start-building-cars-in-changshu-jiangsu-in-2012/ is the most mysterious of Chery’s many businesses. The JV was established in China back in 2007 to produce high-quality cars for export to North America and Europe. But nothing happened. Though announcements about the JV came out in 2008 and 2010. Then, a few days ago, the JV sprang to life, announcing it had received approval from the central government and would built a plant in Changsha, a city near Shanghai. Given that the same announcement was made years ago, I wonder if this is for real, and if so what has changed. Why Chery unable to get permission for the JV before? What changed this year?
And why is the plant, which will reportedly have a 150,000 unit capacity, being built in Changsha instead of Wuhu? I know Changsha is throwing money at auto industry companies to grow its industrial base. But Wuhu is Chery’s hometown. One industry friend in China speculates that Israel Corp. managers didn’t want to live in Wuhu. Hey, it has a Carrefour. But probably no temple.
More importantly, what Chery executives can spare the time to manage this joint venture? They must be able to work with foreign managers, and have extremely high quality standards. I’m not saying Chery doesn’t have managers like that. But, it also needs those kinds of people to work in any joint venture with Subaru. A shortage of skilled managers will be a big problem.
Chery has a history of failed “romances” with foreign suitors. Back in 2007, Chery and Chrysler signed an agreement to manufacture cars for export to North America and Europe. http://green.autoblog.com/2007/07/03/chrysler-chery-alliance-to-be-finalized-in-beijing-tomorrow/
That fell through. It also discussed joint production with Fiat. Nothing came of that. http://www.autoblog.com/2009/03/23/chery-and-fiat-put-alliance-talks-on-hold/
To be sure, Chery is getting plenty of cheap money from the government to fund its plans. For years, the auto maker has gotten low-cost loans from the China Development Bank. It recently received a 43 billion RMB line of credit from CDB, for example. It also issued bonds to raise 1.8 billion RMB earlier this year.
But Chery’s books are not so healthy. It already has a lot of debt, according to a report the company released when it floated the bonds. It is not making much money from selling cars. In the first nine months of 2010, Chery’s automotive operations lost 975 million RMB. Also, the company has excess capacity in China when the market is slowing.
Not enough skilled management; lot’s of debt; loss-making operations; a slowing automotive market. These all make me skeptical that Chery can succeed in all its ventures.
I could be proven wrong, however. An executive at a North American supplier told me their view of Chery had gone from skeptical to positive, though he did question what markets the Quantum-Chery models would do well in given the already crowded global marketplace.
Maybe the central government is acting as Chery’s “Tiger Mom.” You know, pushing Chery to succeed so China can have a national champion on the international stage. And maybe, just maybe, after Chery builds up all these ventures, and owes all this money to the government, the government will “encourage” Chery to merge with one of China’s four largest auto groups.