Global Insight Perspective | |
Significance | The much-talked-about deal will see DaimlerChrysler enter the competitive B-Segment (subcompact) with a Chinese partner in order to produce the vehicle profitably and give it the economies of scale required |
Implications | The news confirms that the previous tentative tie-up with Volkswagen to produce subcompacts in Brazil was too costly for Chrysler, and also establishes DCX as a future major-volume player in Chinaat last. |
Outlook | Chrysler will market the model under one of its U.S. brands, probably Dodge, as the 2006 subcompact concept the Hornet appeared under that moniker. Globally, the move is as much about establishing a presence in China and Asia as importing Chinese-made cars to the United States, although this element is the most controversial and may be emblematic in its upcoming UAW negotiations. |
DaimlerChrysler (DCX)'s Chrysler Group chief executive officer (CEO) Tom LaSorda has signed a pact with Chery Auto of China to produce subcompact (B-segment) vehicles that will be marketed locally and globally, including in the United States, Europe and South America. According to Jason Vines, a spokesman for Chrysler, the deal is still subject to approval by DaimlerChrysler's supervisory board, but, if approved, it could see Chery producing small cars for Chrysler "soon", reaching the market as early as 2008 (see China: 23 November 2006:Auto China 2006: DCX CEO Confirms Chery is Favoured as Small-Car Partner), an achievement of considerable note as in automotive terms this represents an extremely quick turnaround.
The pact with Chery signals the end of the planned arrangement with Volkswagen of Brazil to set up subcompact production in that region and a victory of sorts for CEO Tom LaSorda, who personally negotiated the Chery deal and who has become frustrated with the pace of negotiations. LaSorda has been under pressure, since the group reported a US$1.5-billion loss in the third quarter last year, to show palpable initiatives to turn the business around and implement further restructuring in the key U.S. market.
The deal is DCX's first major move in the subcompact car segment in China since falling out with Hyundai in 2004, ostensibly over their separate strategies regarding China. DCX already has a joint-venture (JV) agreement with Beijing Auto for the production of some Jeep models, which has been expanded to include a new factory to produce the Chrysler 300C and Mercedes E-Class sedans, but the deal with Chery would see DCX enter the expanding subcompact segment and give it an economical base from which to attack local and international markets (see China: 15 September, 2006: DCX Opens New Factory in China).
Separately, China's Chery Automobile Co. announced that its exports rose by 178% to 50,000 units in 2006, according to company sources. Overall car sales climbed by 61% to 305,236 in 2006. Chery has been one of the most aggressive in its export intentions to established markets like the United States and Europe, but has tempered this ambition more recently, partly due to the impending DCX deal and partly as it realizes that it must develop vehicles that are competitive on the global stage if it is to succeed.
Outlook and Implications
DaimlerChrysler's strategy is as much about establishing a volume presence in China as it is about launching a global model from a Chinese production base, although it is this that seems to be grabbing the headlines. The inking of the deal also closes the door on the potential deal with Volkswagen of Brazil to produce a subcompact in that region for sale globally, and underlines the problems faced by Brazil's automakers regarding increasing costs due to the appreciating real currency.
DCX is currently absent from the subcompact segment globally since cancelling its Smart ForFour model, a shared project from the now defunct Mitsubishi tie-up, whose poor sales and early cancellation cost the company dearly. In Chery, DCX has acquired a partner with experience in producing small cars, and with impending fuel tax legislation in the region, the segment is forecast to boom in the buoyant Chinese market and also represents a credible base from which to attack other Asian and emerging markets in which subcompacts make up the bulk of sales. It is these factors that represent the major reasons for DCX's decision to ink the deal with Chery and not full-scale exportation to the United States. In addition, DCX will need to develop a car that significantly moves the game forward in terms of Chery's current offerings if it is to have any impact on the global stage.
Exporting a B-Segment contender to Europe under a niche U.S. brand name is unlikely to spread fear into the European manufacturers, indeed it has not even registered in the European press. The same cannot be said in the United States, where the irrational fear of a full-scale onslaught of Chinese exports has taken over the reality and practicalities of the Chrysler deal. Although the new subcompact will be marketed in the United States, the forecast volumes are small and will not threaten the established players. In addition, although the deal may have some emblematic influence on Chrysler's upcoming negotiations with the United Auto Workers (UAW) union, it should barely register, as the model was never considered for U.S. manufacture in the first place, largely because of cost, but more so because of its negligible market impact.
The real fear should be the establishment of an independent Chinese auto industry with global intention, which is the long-term aim of both Chery and China's auto industry, much of it based on "acquired" technology and design.