Chery Heading For China Junk Yard
China’s auto industry is in desperate need of consolidation, and faded car maker Chery looks set to become one of the first victims despite its launch of a turnaround plan that looks like too little too late. Of course there’s always the possibility that local government stakeholders will come to the rescue of this colorful company, which is a big employer and economic engine in its home province of Anhui. But central leaders in Beijing seem increasingly determined to force consolidation in many of the nation’s overcrowded industries, and cars are one area where such downsizing is long overdue if China ever wants to produce some world-class auto makers.
Chery is making headlines with its formal launch late last week of a new model, the Arrizo 7, a mid-sized sedan that it hopes can stop a sales plunge that has made it one of China’s fastest shrinking car makers over the last 2 years. (English article) The model is Chery’s first since it announced a formal retrenchment plan to scrap all of its brands and focus exclusively on the Chery nameplate. It’s still unclear what will happen to the other brands, including Riich, Rely and Karry, which may be spun off into a separate company.
The company had originally launched its multi-brand strategy 4 years ago during better days when its sales were booming. But times have quickly changed for Chery, which has rapidly lost market share to aggressive foreign automakers in China. After several years of rapid growth on the popularity of its QQ line of cheap compact cars, Chery’s sales slid into reverse in 2011, falling 2.8 percent. The declines accelerated last year to a 10.6 percent, and sales were down another 16.1 percent in the first 6 months of this year.
Chery’s unit sales peaked at more than 600,000 units in 2010, but will be lucky to hit the 450,000 mark this year. Its accelerating slowdown is all the more noticeable because it contrasts sharply with domestic rivals Geely (HKEx: 175) and BYD (HKEx: 1211), which also saw sharp declines over the last 2 years but have managed to return to a growth track in 2013.
One of Chery’s bright spots had been exports, with strong demand from developing markets helping the company to become China’s biggest car exporter. But even that area has become problematic, as Chery faces pressure from China’s appreciating currency and also grapples with a high-profile product recall in Australia. (previous post)
Chery is billing the Arrizo 7 as a completely new model, even though other reports say the car is based on some of the company’s previous designs. We’ll have to wait and see how well the model sells, though I wouldn’t be surprised to see slow sales in its first few months. Chery is also trying to get a shot of innovation from its recently formed joint venture with Jaguar Land Rover. But that tie-up looks like a bad match to me, since Jaguar’s high-end luxury cars don’t have many common elements with Chery’s more budget-focused models.
This collective pile of negatives leads me to conclude that Chery might be better off scrapped, with its assets acquired by one of China’s other healthier automakers. The nation already has around a dozen such major car makers, which is a huge number when one considers that the US and Japan each have just 3 big manufacturers.
So, what do I see in the future for Chery? I do expect that local stakeholders in Anhui won’t easily be persuaded to let the company fail or be acquired, and the new joint venture with Jaguar could also complicate any future plans. But I do expect we’ll see central planners in Beijing ultimately win the battle, and Chery will be merged with another healthier firm in the next 2-3 years. Such a development would mark the end of a colorful era that once saw QQ cars become a common fixture on China’s roads. But it’s also a much needed move to weed out weaker players from China’s overcrowded car market.
Bottom line: Chery’s overhaul plan is destined to fail, and the firm will get merged or closed in the next 2-3 years as China’s auto sector consolidates.
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