IHS Global Insight Perspective | |
Significance | Chery's new Brazilian plant will make subcompacts and hatchbacks for the domestic and other Latin American markets. |
Implications | The USD400-million plant is Chery's second full production site outside of China. The other is currently being built in Turkey. |
Outlook | Chery has 12 assembly plants globally, but the shift to full production is a marked change in strategy and emblematic of the wider ambitions of the Chinese auto companies, although they still have a long way to go in terms of brand perception, design, and quality. |
Chery Automobile broke ground at its new plant location in Jacareí, 100 km north-east of São Paulo in Brazil, on Tuesday (19 July), according to a Wall Street Journal report (see Brazil: 18 February 2011: Chinese Automaker Chery to Receive Land for First Brazilian Plant). The plant will become operational by the end of 2013, with initial capacity put at 50,000 units per annum (upa). The plant, built with an investment of around USD400 million according to latest reports, will eventually be expanded to 150,000 to 170,000 upa, depending on demand. Speaking at the ground-breaking ceremony, Chery Automobile president Yin Tongyue said, "This is our biggest investment outside China and will be the base of exports for all of South America", adding, "Brazil is increasingly becoming one of the world's most important markets and no company wants to be left out." According to Cuir, the plant will direct about 85% of its production capacity to the domestic market, with the remaining 15% targeted for export to other Latin American countries. Chery is aiming for an initial market share of 1% in Brazil, according to the report. Earlier reports have suggested that Chery is aiming for a 5% market share by 2015.
Chery's Jacareí plant will also usher in the establishment of a supplier park in the region, with as many as 20 Chinese parts suppliers expected to join local producers to manufacture Chery compact cars. The investment by Chery is being supported by the China Development Bank and is a result of the growing trade relationship between China and Brazil. China overtook the US in 2009 as Brazil's biggest trade partner and the pace of foreign direct investment (FDI) growth has also accelerated, according to Chinese ambassador Qiu Xiaoqi. Before 2009, Chinese investment in Brazil totalled USD350 million, but since then has surged to more than USD20 billion, Qiu said. "This factory is a symbol of the quickly developing relationship between China and Brazil", he added.
Chery has yet to confirm which models will be built at its Brazilian facility, but it currently imports the Tiggo from Uruguay and the QQ, "Face" (S18), and Cielo to the country. Chery is targeting first-time buyers in the country by maintaining its competitive pricing strategy, despite the high costs of production in Brazil. "We carried out economic viability studies to see if it was worthwhile to produce here", Curi said. "We are going to maintain competitive prices such as we practice today in the market."
Local industry association Anfavea released a report last month stating that parts, labour, taxation, and bureaucratic costs increase production costs in Brazil by 60% when compared with China. Although importers such as Chery have to pay a high tariff to import vehicles into Brazil, the strong Brazilian real has still encouraged imports, and they now account for more than 20% of sales, up from less than 10% five years ago.
Outlook and Implications
The new plant in Brazil will be Chery's second full production site outside China, joining the facility currently under construction in Turkey. Chery has not confirmed which models will be produced at the Brazilian plant, but given that the Tiggo is subject to reduced import tariffs as it is assembled in Uruguay, the likelihood is that the Chery S18 subcompact could be one such model (see Brazil: 19 April 2010: Chery Says US$700-mil. Brazilian Plant to Become Operational During 2013), along with the A13 C-segment hatchback.
Meanwhile, the new plant in Turkey is—according to sources—set to launch its first vehicles within the next few months (see Turkey: 29 April 2011: Chery to Launch First Turkish-Assembled Model Within Six Months). The deputy managing director of Chery joint-venture (JV) partner Mermerler Automotive, Aydin Akyol, said that the site will not only be an assembly facility but will also be able to manufacture up to five different vehicles and produce diesel engines. He added that up to 65% of the factory's production will be exported, with Turkey becoming Chery's gateway to the European market. Chery and Mermerler Automotive have been extremely aggressive in their investments in Turkey considering that up to now Chery has been a relatively unknown brand in the country. The investment in the site, which will have the capacity to build up to 100,000 upa within the next five years, has been put at USD500 million, although this will also include a hotel and a shopping centre. The site will initially focus on producing two C-segment models, with a further, yet-to-be-decided model joining them eventually.
Chery is the latest Asian automaker to set up shop in Brazil, with Hyundai and Nissan having also announced new investments in the country this year. Chery currently has 12 completely knocked down (CKD) kit assembly plants around the world, assembling cars from imported parts, which have formed the basis for its global growth strategy thus far. Full production is a large leap in terms of commitment and investment and is emblematic of the wider long-term ambitions of China's automakers. Brand image, quality, and reputation will all need to improve, however, if Chery is to compete with Fiat, Volkswagen, and General Motors in the country, which together dominate the market (see Brazil: 18 July 2011: Brazilian Light-Vehicle Sales Rise 8.2% Y/Y in June, But Exports Tumble amid Trade Dispute).