A Cheap Chery Ride
Background
Chery Motor Co. was founded in 1997 in the underdeveloped Chinese province of
Wuhu, largely to support the local economy. In 1999, automobile production began
using SEAT Toledo chassis, though Chery’s lack of proper licensing prohibited It
from selling automobiles outside of the province. The purchase of 20% ownership by
Shanghai Automotive Industry Association in 2001 allowed the small firm to utilize
the SAIC retail license, thus beginning the rapid expansion of the small Chinese auto
maker.
Chery’s first car exports were to Syria in 2001, making the company the first to export
cars from the mainland. The company also began efforts to improve production
quality and technology by founding a research institute. Chery hired a number of
Japanese automotive consultants to assist the auto company in achieving the six
sigma/ lean process standard to her Japanese/Western competitors. These efforts
yielded almost immediate results, with Chery being granted ISO/TS 16949:2002
production quality by 2005; the strictest international production quality certification
available.
To improve aesthetic design, Chery turned to Bertone and Pininfarina of Italy, the
fabled design consultants to Ferrari and Lamborghini. In addition, Chery contracted
with AVL of Austria to assist in the production of 18 new engine models for
integration into new models.
Record Breaking Results
Sales and exports followed, buoyed by tax breaks and burgeoning domestic demand.
Total automobile sales rose from a meager 2,000 units in 2000 to 305,000 in 2006,
making it the 3rd largest domestic auto company. Foreign exports accounted for
nearly 50,000 units, representing a 178% increase from the year prior. Other estimates
suggested similar growth rates for 2007.
To meet growing sales, Chery has invested in a variety of domestic and overseas
production facilities. In 2003, Chery Motor Co. became the first Chinese company to
open a foreign production facility when it began manufacturing several models in Iran.
© This case was prepared by W. Gerry Sanders and Mason A. Carpenter. The case was written as a basis for class
discussion rather than to illustrate effective or ineffective handling of a business situation, or provide authoritative
factual representations of any of the organizations described in the case.
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Similar plants opened in Russia in 2005 and Malaysia in 2006. Primary importing
countries included Russia, Egypt, and other developing markets.
Chinese Auto Industry
The successes of Chery Motor Co ride on the wave of general growth in the Chinese
auto industry. Total Chinese auto exports rose to 340,000, nearly twice the sales
results of the previous year. Much of this growth can be attributed to Beijing, which
has set goals to help the domestic auto and auto parts export industry grow from
0.7% of GDP to nearly 10% over the next ten years.
However, many analysts have suggested that the recent surge in exports and export
mindedness is at least in part attributable to over capacity in the domestic Chinese
market. According to the National Development and Reform Commission, demand
came to just 71.5% of capacity in 2006.1 Other reports indicate that Chinese
companies face restrictions to building additional manufacturing plants unless certain
capacity utilization levels are met. Such measures have only further incentivised the
need to expand and grow exporting activities.
Barriers to Growth
The expansion goals of Chery Motor Co. and much of the Chinese auto industry have
been challenged by the quality issues facing auto exports from China. A crash test
conducted by J.D. Power and Associates in early 2007 yielded poor results for a
variety of Chinese automakers, compounded general consumer concern with the
quality and safety of Chinese automobiles. Experts such as Nick Reilly, head of GM's
operations in the Asia-Pacific region, have commented on the logistical, servicing, and
reverse duties issues that would also plague Chinese imports to North America.2 Key
to successful entry would also be an integrated dealership network, a barrier that has
proved pivotal to entrants in times past.
Regarding foreign expansion, Chery President Yin Tongyau said, “North America and
Europe have very tough and demanding safety and emission laws that our vehicles do
not respect yet," Yin said.3 "We need time." According to Yin and others, Chery’s
expansion will come in stages. Current exports are focused on the emerging markets
of the Middle East, Latin America, and others. Improved quality will also come by
utilizing foreign firms as sources of necessary parts. Key partnerships also offer the
resources and expertise to improve manufacturing quality.
1 China Car Industry's Export Ambitions, Businessweek. May 3rd, 2007
2 Cars from China: Not so fast. Fortune. Jan. 27th 2007
3 “DATELINE”, Turin, Italy. 2007
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Figure 1: Chery Results
Figure 2: China’s Production Levels
International Motor Vehicle Program, MIT. May 6, 2005
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Figure 3: Prices for Chery Automobiles and Comparables
Figure 4: Chery Product Development Lifecycle
Source: The Growth of Independent Chinese Automotive Companies, MIT. 2006
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Figure 5: Profile of Chery Automobile Co., Ltd
Chery Automobile Co., Ltd. was founded by five Anhui’s local state-owned investment
companies with a registered capital of RMB 1.752 billion in 1997, the construction of which
commenced on March 18, 1997. In 2006, it accomplished a sales volume of 305,200, an increase
of 62% over the same period of the previous year, and had a share of 7.2% of the Chinese car
market, ranking 4th in the Chinese passenger car industry, thus showing its great strength in
marching into the first camp of the Chinese car industry having been long monopolized by
Chinese-foreign jointly-funded brands and taking a commanding lead among independently
managed car enterprises.
Since its products entered the market, Chery has attached great importance to developing the
international and domestic markets, guided by the principle of “stabilizing through the domestic
market, strengthening through the overseas market and developing the domestic market through
the oversea market in a flexible way” and with the strategy of “going out”, it became China’s
first car enterprise exporting complete vehicles, CKD, engines and vehicle manufacture
technology and equipment to foreign countries. So far, it has exported products to over 50
countries and regions in the world with its car export volume ranking 1st for four years in a row
in China.
Chery now owns a full set of manufacturing and R & D systems, including two car plants, two
engine plants, a gearbox plant, an automobile engineering research institute and an automobile
planning and design institute. It has so far a total staff of 23,000, total assets of RMB over 22
billion and an annual production capacity of 650,000 complete vehicles, 400,000 engines and
300,000 sets of gearboxes. Its current products include ten series (Eastar, Cowin, Tiggo3, A5,
V5, QQ3, QQ6, Karry, Riich 2 and A1) of complete vehicles and their auxiliary engines,
gearboxes and key parts and components. By the end of this year, Chery will become one of the
passenger car manufacturers offering most varieties of products and most complete product
series to the market in China.
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As early as at the beginning of its products’ entry into the market, Chery has established the
permanent aim of “customer satisfaction” and the quality principle of offering customers with
zero-defect products and considerate service as the persistent objective of each employee, and
successfully passed ISO9001 International Quality System Certification in February 2001. Also
in October 2002, it took the initiative in passing ISO/TS16949 Quality Management System
Certification of Germany TUV. The unremitting control of quality made all Chery cars conform
to Chinese national standards in the surprise inspection of the State Bureau of Technical
Supervision of China, most of which were even superior to the national standards.
Through years of continuous improvement, Chery’s brand and corporate image has lifted rapidly.
In October 2006, “CHERY” was acknowledged as one of the Chinese famous trademarks by the
State Administration of Industry and Commerce of China. In November of the same year, Chery
was honored as the 11th most favorable Chinese companies by Fortune Magazine, becoming the
only Chinese car manufacturer ranking top 25 in the list.
Source: http://www.cheryglobal.com/about_chery.jsp
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Figure 6: Company Timeline
Milestones
Mar. 1997
The ground-breaking ceremony of Chery No.1 Engine plant marks the beginning of Chery Automobile
Co., Ltd.
May 1999
Chery’s first engine rolled off the production line (CAC480).
Dec. 1999
The first Chery car came off the production line.
Oct. 2001
The first batch of Chery cars were exported to Syria.
Feb. 2003
Chery singed a CKD agreement of producing Chery cars in Iran with Iranian SKT Group.
Oct. 2004
Chery and Egyptian CIG Group held a grand launch ceremony in Cairo for Chery QQ model and Fulwin
model.
Nov. 2004
Chery signed a cooperative agreement with Malaysian ALADO Company
Aug. 2005
Chery signed an agreement of intent with an Ukrainian company of aiming to conduct Chery CKD project
in Ukraine.
Oct. 2005
Chery ACTECO series engines are released in China.
Dec. 2005
Chery set up a subsidiary company in Russia, which was the first one overseas.
Jan. 2006
The agreement of SKD project on manufacturing Chery cars in Russia was concluded with Russian
Avtotor Group.
Mar. 2006
The agreement of CKD project on manufacturing Chery cars in Indonesia was signed with Indonesian
Indomobile Group.
April 2006
The first Chery car produced by SKD assemblage in Russia came off the production line in Kaliningrad,
Russia.
April 2006
Chery cars were launched in Moscow, Russia.
June 2006
The official agreement of SKD project on producing Chery cars in Ukraine was signed with Chery’s
counterpart from Ukraine.
June 2006
Chery signed an agreement with Mermerler Group on selling Chery cars to Turkey.
Aug. 2006
The first Chery car produced by CKD in Indonesia come off the production line.
Nov. 2006
Fiat Group signed an agreement with Chery of annually purchasing 100,000 units of ACTECO engine.
Mar. 2007
The 800,000th Chery car come off the assemble line.
Mar. 2007
The contract signing ceremony between Chery Automobile Co., Ltd. and SOCMA, Argentina was held in
Beijing.
Mar. 2007
Chery became the champion in monthly sales with its monthly sales of 44,568 units of cars.
July 2007
Chery and Chrysler finalized cooperative agreement in Diaoyutai State Guesthouse, Beijing, China.
Aug. 2007
Chery and Fiat reached a Memorandum of Understanding to establish a joint venture for Manufacturing
passenger vehicles.
Aug. 2007
Chery, Iran Khodro and Canada Solitac enter into an agreement of joint venture.
Aug. 2007
The 1,000,000th car of Chery rolled off the assembly line, with the birth of Chery's new model---A3.
Aug. 2007
Along with the launching ceremony held in Santiago, Chery products were launched in Chile.
Source: http://www.cheryglobal.com/about_chery.jsp?columnId=11736915090001
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tn
A Partnership with Chrysler
Yin Tongyau and Chery Motors saw their fortunes improve in 2007 as Chrysler
began to see the benefit of a strategic partnership with the young Chinese
automaker. Like the other Detroit automakers, Chrysler had struggled to compete
with the low cost compact cars gaining popularity with rising oil prices. Analysts
had also suggested the a move to Chinese manufacturing would help leverage
corporate negotiators as they sought to deal with UAW pension negations.
In partnering with Chery, Chrysler gained access to cost-effective production of Btype vehicles; the like of which would compete with the Toyota Yaris and Honda
Fit for sale in the North American and European markets. U.S. Sales in this
segment had surged 59% in 2006 to 314,225 units, largely reflecting the increase
in petrol prices.
Chery has suggested that co-production with Chrysler will likely begin with the A1,
a compact car that will be sold in Latin America around 2010. Automobiles meant
to enter the U.S. market are likely to enter some time after that.
The deal is hardly one-sided, with Chery receiving access to the technical and
design expertise of the well-oiled Detroit automaker. In addition, the deal will
lead to the integration of Chery made automobiles with the intensive Chrysler
dealership and servicing network in North America. One fact is certain, both
companies see this opportunity as necessary to accelerating towards future
growth in an increasingly globalized auto industry.
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