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The glory and dream: Chery’s yesterday, today and tomorrow

When Chery reduced the price of its vehicles across the board earlier this year, it was a decisive and well-contemplated act. Last year Chery edged into the ranks of China’s top 10 automakers with close to 300,000 units in sales.
 
“Both GM and Volkswagen have shown their cards,” said Chery’s communications director with a smile. “It is now our turn.”
 
Yesterday
Doubts have long loomed over the profitability of independent car brands. And Chery has been confronted with the pressure of profitability from day one. In 2005, its ¥500 profit margin for each vehicle was in sharp contrast to the ¥10,000 figure of mainstream joint ventures (JV). Although Chery did not provide its profit numbers for 2006, the estimated ¥1 billion in total profit released by a financial research institute sounds credible. This means last year it was able to clench ¥3,000 in profit for each unit of the 300,000 cars sold. These statistics point to Chery’s huge cost advantage.
 
But Chery still faces huge financial pressure considering its close-to-¥50-billion investment planned for the next five years. The good thing is that governmental and private financial support seems to be always available. What Chery needs to do is to continue increasing its profit margin in keeping with sales growth.
 
Until most recently, Chery has followed a strategy of sustaining a strong growth in output and sales in order to expand market shares. Chery’s top management believe that expanding market shares is the only way out for independent brands, which lag behind JV products in brand image and product integrity. However, market share has been achieved at the expense of profitability. Over-emphasis on market share easily exposes to foreign OEMs the weakness of Chery and other independent brands.
 
As if by design, Shanghai-GM, Shanghai-Volkswagen and FAW-VW suddenly reduced the price of their vehicles by a big margin. And their intention seems to be clear.

Today
Chery stood up to the challenge in March by announcing to reduce the price of its vehicles by as much as ¥23,000 a unit. This was the steepest price cut in recent years for a mid-level car. It was like a war declaration against JV carmakers.
 
The price reduction by joint ventures of multinational automakers in early March focused without exception on cars priced below ¥100,000, such as the Jetta, Santana, Polo and Excelle. The intention of JV carmakers was clear: to stem the expansion of independent brands in the compact car segment.
 
JV carmakers did not lower the price of high-level cars at ¥150,000 and higher as they do not yet see competing independent brands in this segment and therefore are able to maintain high profit margins. Take the Passat Lingyu for example. The model now provides Shanghai-VW 60 percent of its total profit. S-GM is able to stick to the price level of its star profit-winners, the Buick LaCrosse and the GL8 MPV. FAW-VW’s top profit earner, the Audi A6, still maintains its premium pricing.
 
In the mid-level car segment, other foreign-invested OEMs like Southeast Motor and Dongfeng-Citroen joined the foray and cut the prices of their cars by around ¥100,000. No doubt the concerted efforts of JV carmakers are putting further pressure on independent brands. Independent carmakers such as Chery, Geely, BYD, Shanghai Maple, Brilliance, etc. will have no alternative but to respond in order to survive.
 
With its introduction of a complete line of independent engines, Chery seems to be structurally prepared to survive the price war. The question is if Chery is strong enough to withstand yet another round of price cut down the road. In a larger picture, as independent brands have similar levels of car products, Chery’s further price cut may trigger a “civil war” among independent brands and the result may be a life-and-death struggle for some.
 
At present, independent brands take up about 30 percent of the passenger car market. Chery now has about eight percent, or one quarter of the 30 percent. A price war among independent brands may lead to a major reshuffle of local players in the market.
 
However, due to heated market competition, we should still expect yet another round of price reduction in 2007. If the price of the Camry, Accord, Regal and Passat, models that enjoy both profit and brand recognition, should come further down, we may see another price war in August.
 
Once these models start to fight for market shares, China will witness a real all-round price war. Currently, the Accord and Passat have had only nominal retail price adjustments. The 2.4L LaCrosse, the 2.4 Accord and 1.8T Passat also are selling at roughly the same price levels. There is definite room for another round of price reduction for these models.
 
Target sales of the Accord in 2007 are 140,000 units. But sales in the first quarter were only less than 30,000 units. In comparison, Guangzhou-Toyota’s Camry has been selling at an average of 11,000 units per month.  We expect that with the arrival of the new Accord, there will be a definite downward price adjustment. A price war among high-level cars is therefore unavoidable if the market remains sluggish during the next six months. If the Passat and 2.4L LaCrosse will follow suit with the Accord, their concerted price-cuts may affect the Camry. If the Camry maintains its current price level, then a large-scale price slide may be avoided. But once the Camry gives in under pressure to reach its sales target of 150,000 units in 2007, the consequence could be serious.
 
If high-end cars join the price war, it would immediately affect the mid-level cars priced under ¥200,000 such as the Civic, Focus and Corolla. In turn, the downward pressure will be thrown back to the compact and economy models in the ¥100,000 range. Independent brands would be forced to cut price all over again. Non-competitive JVs or independent brands may very well be eked out of the market due to such price wars
 
Tomorrow
Chery scored beautifully in 2006 with 300,000 units in sales. Yet, Chery did not stop there. “We are heading for higher goals,” announced Chery’s ambitious chairman & president Yin Tongyue and sales president Li Feng. While S-VW and FAW-VW are both under a low-key process of recovery and S-GM is busy dealing with the Chevrolet setback, Chery is aiming for the No.1 position of China’s passenger car market. (Indeed, Chery came out to be No. 1 in total sales of cars, SUVs and MPVs in March. – Editor)
 
Chery originally planned to reach 400,000 units in sales for 2007, including 80,000 in export. The plan changed at the end of the first quarter as Chery’domestic and overseas sales hit 45,000 units in March. With the steady increase in export sales and thanks to the breakthrough in production capacity of its independent engines, total export target for this year is now changed to 120,000 units, according to Li.
 
However, Chery’s current product line does not include high-end cars. Even the mid-level Eastar’s profit contribution to Chery is rather limited. Chery may still be forced to lower prices for the current models, cutting further into its profit margin.
Of the 25 models displayed at Auto Shanghai, the high-end A6 was under spotlight. A6 is Chery’s key strategic model priced at the ¥150,000 range. Thus A6 will be the touchstone of its first high-end car model in its 10 years of aggressive operation.
 
It is far from enough if we only measure Chery’s potential through its output and sales numbers. Like in any other industries, future competition in the auto sector depends on the management structure and human resources of an enterprise. S-GM, for example, has gained first-class market performance with secondary products thanks to its healthy management system and sales and marketing talents. In comparison, Chery’s biggest challenge today is talent retention and a dependable management system.
 
Currently, Yin and his classmates and close friends comprise the core of Chery’s management team and none of the team members has had any overseas experience. Yin, Li and Jin Yibo are schoolmates from Anhui Institute of Technology. As entrepreneurs they each excel in their respective fields and have helped Chery develop at unprecedented speed. But that is no guarantee of a smooth path ahead. Chery has been growing in leaps and bounds thanks to the rapid expansion of a huge market. But the independent and State-owned automaker is now haunted by the departure of a series of returned overseas talents.
 
No doubt Yin, Li and Jin are management talents and have had excellent performance through all these years. However, with sales figures soaring from ¥20 billion to ¥40 billion today and ¥80 billion in a few years, human resources at every level of Chery’s expanding and huge management system will be under test. 

So far, Chery still sticks to a vertical management structure with Yin at the top. Under this comparatively simple setup, Chery was invincible at the initial stage of development. But since last year, Chery has commenced businesses in multiple fields: mergers and acquisitions, overseas operations, engine and powertrain development, and even commercial vehicles. The shortage of management and engineering talent is becoming more apparent than ever.
 
Further more, in its future blueprint, Chery is aiming for not only the No. 1 independent brand but also the No. 1 carmaker in China. Such an ambition is admirable and may not be so difficult to achieve provided Chery maintains the current growth rate of 50 percent annually.
 
As a pioneer of China’s independent brands, Chery has achieved noticeable glories during recent years and its future dream has every promise to be realized. Much is expected of Chery by thousands of consumers in China.
Rewritten by Louise Liu, based on the author’s Blog

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