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DaimlerChrysler and Chery sign win-win agreement

Chrysler Group president and CEO Tom LaSorda confirmed on January 4 that his company, the American unit of DaimlerChrysler, had reached an agreement in principle with Chery Automobile to distribute Chery-made small vehicles in the North American Free Trade Agreement (NAFTA) region, European region and possibly other global markets.


 


Chrysler Group had talked to several European and Asian potential partners for a small vehicle for world markets before coming to a preliminary agreement with Chery.


 


According to the agreement, Chrysler Group designers will work with Chery on the new small vehicles, which are based on a yet-to-be announced Chery platform, to create unique Chrysler Group styling ques. DaimlerChrysler engineers will also work closely with Chery to ensure that these new vehicles meet all applicable safety and emissions standards in markets where they are sold.


 


The vehicles will be sold under Chrysler Group brands, which include Dodge, Chrysler and Jeep. But exactly which brands were not revealed.


 


The letter of intent was signed by DaimlerChrysler AG chairman Dieter Zetsche late last year. We are still going through the contract approval process, which will require the approval of both the DaimlerChrysler supervisory board and Chinese authorities. Other than that, we are not disclosing details of the contract process,” said Dave Elshoff, business operations communications manager from Chrysler Group, in an email response to CBU/CAR.


 


The deal, if approved, could prove to be a win-win situation for both Chrysler and Chery.


 


Deal allows Chrysler quick entry into small vehicle market


 


The deal would give Chrysler a relatively quick entry into a growing segment of the car market, the so-called “B-segment,” where it now has no significant product. With the recent hike in fuel prices, leading automakers such as GM, Toyota, Nissan and Honda have launched more fuel-efficient models in this segment, such as the Toyota Yaris, Nissan Versa, Honda Fit and Chevrolet Aveo. Chrysler, which is known for its Dodge pickups and Jeep SUVS, as well as Chrysler minivans, believes that the deal with Chery is the most economic and profitable means to enter this segment.


 


Being able to partner with Chery represents a long-term solution to the challenges of how to profitably compete in the small vehicle segment,” said LaSorda, CEO of Chrysler Group in a Chrysler statement. “This supply partnership is part of a new business model that is allowing us to introduce all-new products more quickly, with less capital spending. It reflects the realities of a global industry and DaimlerChrysler’s need to remain competitive in all segments.”


 


It’s generally understood that the only way to compete in the ultra-price-sensitive small car market requires a low-cost manufacturing base.” Elshoff told CBU/CAR.


Chrysler Group actually is no stranger to Chery. The Chinese automaker is the largest third-party customer of the Chrysler Group/BMW Group Tritec engine joint venture in Brazil. Since 2004, Tritec 1.6-liter engines have been exported for use in Chery’s A15 and Fengyun models.


 


We already have a well-established relationship with Chery,” said Elshoff, “It is natural that we have had discussions over the last several years regarding what additional business opportunities we might explore.”


 


Elshoff also noted that Chery has already adopted some of the most state-of-the-art product development and manufacturing processes, and is on its way to becoming a world-class automaker, and achieving its goal to be the No. 1 Chinese automaker by 2010.


 


Starting from such a fine position, we have no doubt that our partnership will produce vehicles that meet the quality standards of other global automakers and the expectations of our customers,” said Elshoff.


 


Asked whether Chrysler had received any feedback or response from dealers, Elshoff told CBU/CAR: “the vehicles represent important additions to Chrysler’s already diverse product portfolio and the deal will represent a new business model that will allow us to introduce all-new products more quickly, with less capital spending – always good news to dealers.”


 


Chery’s new route to the U.S. market


 


For Chery, the deal would present a whole new route for it to enter developed markets, especially the U.S.


 


Chery had plans to begin exporting vehicles to the U.S. as early as this year in a deal that was signed at the end of 2004 with U.S. entrepreneur Malcolm Bricklin’s Visionary Vehicles, but the deal fell apart in November. Chery wanted to modify existing cars and Bricklin wanted totally new products.


 


The deal with Chrysler came on the heels of another record year for the rapidly expanding automaker from Wuhu, Anhui Province.


 


Chery’s car sales in 2006 rose more than 60 percent, or 115,000 units to more than 305,000 units, moving to become the fourth largest carmaker after Shanghai-GM, Shanghai-VW and FAW-VW. Car exports nearly tripled to 50,000 units, the most in China. It was the second consecutive year that net increase in sales volume had topped 100,000 units. Chery was also the only carmaker with two models (QQ and Qiyun) each exceeding 100,000 units in sales in 2006.


 


Chery also has just received an enormous loan of ¥5.8 billion ($744 million) from the China Development Bank (see P.4) to help it expand production capacity and product development. Its production capacity is expected to double to 700,000 units by the end of this year after the expansion is implemented.


 


The deal with Chrysler certainly would help Chery better utilize this expanded capacity.


 


Cooperation with Chrysler will also benefit Chery in management, craftsmanship and technology, noted Zhang Yi, a well-known automotive analyst. Chrysler is expected to send experts to Chery to help it fine-tune the production line, upgrade skills and improve product quality.


 


DaimlerChrysler is the world’s fourth-largest automaker. Cooperation with this giant is expected to provide Chery with advanced technology, capital and experience. It is going to be a win-win cooperation, said Jin Yibo, president of Chery’s sales division.


Some people in China’s automotive industry circle worry that producing vehicles for Chrysler may affect Chery’s independent status. But this does not bother Jin at all. “This agreement with Chrysler is a brand-new model for cooperation. Our independent brands will not disappear. On the contrary, Chery’s independent development path will become even smoother in days to come,” commented Jin.


 


Deal to change landscape of China’s auto industry


 


From a bigger perspective, the deal could change the landscape of China’s auto industry.


 


It could be the first time that a non-joint venture carmaker in China produces foreign-branded vehicles. It could also be the first time that a state-owned company produces foreign-brand cars for export only. Chrysler can also claim to be the second foreign automaker after Honda to have set up an assembly project in China exclusively for export.


 


For years, joint ventures in China have mostly produced cars for sale in China, while non-joint venture automakers have built vehicles in China for both sale in China and export. Chrysler’s project with Chery could be the first in which a foreign automaker and Chinese automaker work to develop brand new models in China exclusively for export (Honda’s export base produces Honda’s Fit compact car known as the Jazz).


The deal pairs two automakers that have the perfect incentive for each other: Chery wants to enter the U.S. market while Chrysler wants someone to build cars for the U.S. market. The only thing left is for the two partners to prove to DaimlerChrysler and Chinese authorities that the deal will work.

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