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Will JAC and Chery merge after Zuo Ya’a’s departure?

In a text message sent on January 3, Zuo Yan’an, chairman of Jianghuai Automobile Group Corp. (JAC), apologized for not being able to accept my invitation to speak on behalf of JAC at our 17th annual international conference on April 24-25 in Beijing. 

“Thank you for your trust and repeated invitation,” Zuo writes. “But due to a change in my position after the Spring Festivals, it would no longer be appropriate for me to represent the company.”

A few days later news came from a board meeting at JAC, the public-listed automaker based in Hefei, Anhui Province, that Zuo will no longer be a member of the board. The Anhui provincial government also confirmed the news by announcing that JAC president An Jin will be the next chairman of the state-owned automaker.

The departure of 62-year-old Zuo Yan’an, JAC’s helmsman and inspiration leader for 22 years, may signal a possible merger between China’s two leading independent automakers, Chery and JAC, which are both majority-owned by the Anhui provincial government.

 

China’s leading independent automaker

As director of the former Jianghuai Automobile Works, Zuo Yan’an led the small company on the verge of bankruptcy first into the country’s leading bus chassis producer in 1995 and then a leading light truck maker in 1996 before successfully listing the company (600418) on the Shanghai Stock Exchange in 2001.

Since 2002, JAC moved into MPV, heavy-duty truck, gasoline and diesel engines, SUV and eventually car manufacturing, thus becoming China’s only independent brand that manufactures a complete line of automobile products covering light commercial, passenger and heavy-duty vehicles.

Under Zuo’s leadership, JAC for 15 years maintained an annual growth rate of 50 percent in sales. The success of Jianghuai’s sustainable growth and expansion into full lines of automobile production was due to a company operating in an open market with strategic positioning of its different vehicle products. In addition, Zuo and his management team have created a distinct business culture for a state-owned company to ensure its success in the market. Zuo once said that JAC’s success lies in the building of what he calls the “four corporate pillars” of technology, management, brands and sales and marketing.” “The four pillars are built on the foundation of total employee training which began in the early 1990s. We are making Jianghuai into an enterprise of learning and total employee training to raise the capability of the entire enterprise.”

No doubt, Zuo Yan’an has been instrumental for the rise of JAC.

 

JAC and Chery

Anhui Province has given birth to two strong local independent brands, JAC and Chery. In an exclusive interview in August 2003, Zuo discussed at length with me about the two automakers in Anhui and why they are more competitive compared to other traditional state-owned and JV automakers.

Asked about the possibility of an emerging local Hyundai in China in the future, Zuo said: “Frankly speaking, this type of enterprise can only be found in Anhui Province” due to production factors which determine competitive advantages. “There will come a day when profit in automobile assembly will be made by counting pennies. Is your employee better educated and trained? How much are they paid? How well are your employees motivated? The human factor is the No. 1 factor in production. An annual salary of ¥20,000 in Anhui is already quite high. The salary level at Chery is much lower because they have a new salary scheme. The average salary at Jianghuai is higher than at Chery, but compared with the Big Three, it is much lower, especially compared with workers in Shanghai. Compared with labor cost overseas, our workers are paid only one-tenth or one-fifteenth.”

Zuo spoke highly of Chery Automobile during the interview: “Whatever its future or difficulties, Chery is a creative enterprise. It is an enterprise that utilizes global human, technology, management, product and R&D resources. It is capable to make vehicles at a certain technology level with much lower cost.”

The same comments on Chery obviously apply to JAC as well. In fact, China’s private entrepreneur Yin Mingshan, chairman of Lifan Industry Group, once said that he thinks highly of only two senior executives at China’s independent automakers. “First is Zhan Xialai, former chairman of Chery Automobile and second is Zuo Yan’an, JAC chairman. As for JV automakers, I do not care if they make hundreds of billions a year in profit.”

Some analysts believe that Zuo Yan’an may have been against a merger between JAC and Chery and speculate that now that Zuo is out of the picture, it may be easier for the Anhui provincial government to tailor a merger between China’s two leading independent brands. Such a speculation is ill-founded because both Zuo and Chery chairman Yin Tongyue have expressed that the two Anhui enterprises should look for ways of cooperation and both agreed that if a merger is necessary it should not be a simple acquisition by one over the other.

From a long-term point of view, consolidation of China’s automobile industry is inevitable and the central government has repeatedly emphasized on the need of speeding up industry consolidation. The merger of JAC and Chery, if based on products and market orientation, will undoubtedly help streamline their many resources, complement each other with their different lines of vehicle products and consolidate their domestic and international sales networks, creating a more competitive enterprise.

If Zuo Yan’an assumes a role after he leaves JAC and if he is able to work closely with Chery’s godfather Zhan Xialai, now executive deputy governor of Anhui Province, we may see a successful merger of JAC and Chery. If the merged company is able to bring out the competitive advantages of both automakers, it would be a meaningful development for Anhui Province as well as a blessing for China’s independent brands.

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