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Finding a breakthrough amidst a slowed-down market (I)

Jones Zhong, editor of the Chinese language weekly newsletter Zhongguo Qiche Yaowen (QCYW, or www.cbuauto.com.cn), was recently invited to visit Chery and Geely manufacturing facilities and had the opportunity to meet and talk with senior executives of two of China’s largest independent car manufacturers. Zhong was also able to observe, first hand, the significant changes of the two carmakers with regard to technology, product development, branding and strategies for both the domestic and international markets amidst a global financial crisis and domestic slowdown. – Editor

Ten years ago at the end of 1999, when I arrived at the newly built general assembly plant of the Anhui Auto Parts Co., Ltd., the predecessor of Chery Automobile Co., Chery’s first generation cars, the Fengyun, were rolling off the assembly line. I was struck with the impression that the facility was a bit desolate and cheerless. This time, as I visited Chery once again recently, what I saw is a big, bustling auto manufacturing city. When it had just crossed the threshold of 1 million cars in cumulative sales last year, Chery decided to produce and sell its second cumulative 1 million within two years. For Chery bent on offering a full lineup of car models and going international, this is a natural, inevitable pursuit.

Among homegrown automakers, Chery has ranked first in sales on the home market for eight consecutive years and ranked first in the export of cars for six consecutive years. By selling 135,000 cars overseas in 2008, Chery was the biggest car exporter in the year among automakers in China. It has built 15 plants abroad in six years. So far, a total of 1.5 million Chery cars are running on the road at home and abroad. The strange thing is that, since the beginning of this year, Chery has continued to be on the upswing amidst a global economic crisis. This year the automaker is expected to launch a total of 16 brand new models and sell 419,000 cars in the year (263,000 units for the home market, and 156,000 units for overseas markets). 

Even though, in growth, Chery is in the front rank of automakers in China, this independent automaker continues to have survivability fears. Its intuitive reaction is to expand to the biggest possible extent in the belief that, only with enough production capacity, can it withstand competition from rivals, and that, for a newly emerging enterprise, survival room on the market has to be wrestled at the cost of extraordinary speed. In the plain words of company chairman and founder Yin Tongyue, if you do’t go crazy, you are doomed.

With respect to its lineup of models, Fengyun/Cowin were followed by QQ, Eastar, Tiggo, A1, A5, A3 … But, with the exception of the QQ, whose sales reached a proud 100,000 units a year, Chery’s models all hit sales ceilings. In particular, the A3, a leading model in which Chery placed great hopes, has failed to become a hot seller. The A3 is Chery’s first A-Class model, the result of the automaker’s attempt at forward engineering and to which Chery has devoted a great deal of resources. The QQ is an entry-level car. The QQ’s long leading role in combined sales of Chery models is embarrassing to the ambitious automaker. QQ, the mini car, which contributed to fairly big volume sales for Chery but has a small profit margin, can hardly help burnish the Chery brand. Only when Chery’s full lineup of models achieves economies of scale can the automaker travel in the fast lane.

After years of accumulation, Chery has acquired a fairly strong manufacturing capability. It has built a fairly complete parts and components supply system and is able to integrate global technological resources. It has acquired a fair level of capabilities for system integration as well as the independent R&D of models and the powertrain. Chery seems to launch new models in all directions and this could be likened to shooting a target with a shotgun. With this approach, it is difficult for Chery to win satisfactory shares of various market segments. After trials and errors, Chery has learned that only when a model is launched for a specific segment within a relatively complete branding frame can it achieve its objective and that models and branding should be harmonious and mutually supportive.

As a result, Chery has begun reshuffling its sub-brands, building a framework that consists of four major sub-brands: Riich (luxury), Chery (entry level), Rely (corporate use) and Karry (microvan).

In a recent interview, Yin Tongyue repeatedly emphasized the great attention the carmaker now pays to brand equity. Chery now has a special team on branding that cooperates with a foreign consultancy in brand research. Along with the launch of new models, the resulting product capability will provide strong support for branding. An increasing number of models will be corralled according to the division of sub-brands. Chery has given greater importance to overseas markets over the years. Chery needs to boost its exports through branding, like what most multinational carmakers do, instead of exporting cars simply as ordinary goods. At the very least, Chery now understands the mutually complementary relationship between the brand and products.

Chery needs a model to mark its branding structuring for 2009. In March, it announced production start for the G6, the first of its Riich luxury brand. The G6 reveals multiple market intentions. First of all, it intends to burnish Chery as a brand from a strategically advantageous position. It is unimaginable for Volkswagen to use only the Golf, but not the Passat and even Phaeton, to promote its brand. Secondly, the government has come up with a series of measures to invigorate the domestic auto industry, including providing corresponding support for independent-branded cars in government procurement. Chery needs to have corresponding products to join in related programs. Thirdly, with homegrown automakers offering few high-end models at present, Chery aims to seize a foothold on the high-end market with the G6. And fourthly, with the G6, Chery intends to change a situation where a long concentration of independent-branded autos in the low-end has resulted in small profit margins for their makers. At joint venture carmakers, mid- and high-end cars make the greatest contributions to profits.

In going upscale, Chery has company. The FAW Car Co. is also expected to launch a luxury car this year. Needless to say, the market does not automatically favor homegrown automakers simply because they have begun offering high-end cars. They are going to travel a tortuous road to achieve an optimistic market penetration and win a respectable market share. It is well known that Phaeton, a luxury car from Volkswagen, is largely a failure and Toyota’s Crown suffered a lot of setbacks before winning recognition on the market. For Chery to become an international automaker with a full lineup of models, the absence of a high-end model is unimaginable.

People, of course, have different opinions on whether or not Chery has chosen the right time to launch its luxury model. Since Chery has come up with its first luxury model, the G6, it must do its best to bring a fair level of respectability to its brand and achieve a corresponding market impact. The significance of this goes beyond Chery the automaker itself. It puts to the test whether or not Chinese automakers can join the world club of high-end car manufacturers.

 (Rewritten by Raymond Chen based on the author’s article)

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