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Is Chery a victim of China’s Tiger Mom syndrome? Or just overly-ambitious?

June 4, 2011

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. 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   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. called Quantum.   Chery may also produce Subaru brand cars in a joint venture with Fuji Heavy Industries.

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.

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 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.

That fell through. It also discussed joint production with Fiat. Nothing came of that.

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.

3 Comments leave one →
  1. A.S. Conn permalink
    June 5, 2011 1:05 am

    Alysha –

    Love the “Tiger Mom” analogy. Appropriate and sad.

    As to the situation you’ve described, ask yourself and your readers why ANY, failing, debt ridden Chinese manufacturer is investing all that money in property, plants and equipment overseas when they cannot get it right at home. Just does not make sense. Then, to your point on the Changsha vs. Wuhu conundrum, go read these two websites and see who is calling the shots today at better place and who was calling them at israel corp just a year ago, as the chairman of the two companies’s boards respectively…
    Note that Better Place does have what I would consider to be a very “China appropriate” idea for prevention of the potential EV fiasco in China.

    Finally, please don’t be alarmed by all of the overcapacity – we’ve all seen the headlight on this train coming for a number of years. And in part, the domestic makers are scurrying to send the stuff overseas as fast as possible to manage some of the overproduction that is already starting. The trouble is, as we learned so painfully in the U.S. market, that nothing lasts forever. Yep, China is a huge market; and yep, so is the U.S. But neither will sustain outrageous growth every day, month, year forever. There will always be breaks, breathers, lulls, and importantly, corrections. The U.S. got hit by a financial crises which when combined with simultaneous Hitchcockian fiscal and monetary meltdown nearly put the automotive industry out of business. If China and her manufacturers don’t take a lesson from what they just watched happen (learn from other’s mistakes) they WILL go out of business in the next correction. That is if “Tiger Mom” is still changing their diapers …

    A free market, fewer brands, and a good house cleaning will do wonders for China’s market. “Encouraging” Chery to “merge” with one of the “Big 4” is a very good idea.

    • June 6, 2011 1:40 am

      Glad you like it, but I must point out that Chery is not quite a “failing” company. If Chery would be a bit more focused, it would likely do okay. It does have a pretty thriving export business to developing countries, and its cars are not bad. Chery’s sales rose 27% on-year in 2010.
      It is simply overextending itself, with the government’s help. Merging with a larger company would indeed be good for Chery.

  2. June 6, 2011 8:17 am

    Insightful article, Alysha…you’ve always got such an interesting inside scoop.

    Is Chery the only one? I was chairing a panel at Diesel Emissions Asia where a Chery guy was talking about their diesel engine design division, and I couldn’t figure out why they were designing diesel passenger vehicles, as they are not generally used in China…after a little while I finally realized they are all for export.

    Indeed, people seem to be happy with their Chery cars – cheap and pretty reliable…let’s see if they can keep it up.

    BTW, congrats on your auto163 blog — I’m looking forward to hearing about the chinese response.

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