China’s Auto Industry Takes a New Turn with Chrysler and Chery
In January 1984, American Motors, the fourth player in a U.S. auto industry then dominated by the Big Three, made automotive history by becoming the first foreign automaker to do a joint venture in China. Beijing Jeep, as the American Motors joint venture with Beijing Automobile Industry Corporation was called, produced the Jeep Cherokee as well as the BJ 2020, a purely local design, which populated Beijing’s streets in the 1990s.
Over 23 years later, Chrysler, the company which bought American Motors in 1987, is again making history by becoming the first foreign automaker to outsource the assembly of an entire automobile to a Chinese car company. At a signing ceremony in Beijing on July 4, Chrysler announced that it plans to sell a modified version of a Chery model under its Dodge brand. The cars would be marketed initially in South America and Eastern Europe and introduced into the U.S. market by the end of 2009.
Ever since Beijing Jeep was formed, nearly every global car assembler has established at least one joint venture in China in an effort to capture its share of what will soon become the world’s largest automotive market. Over these years, almost all have ignored the elephant in the room; that is, answering the question of when they will use their production base in China to export cars back home.
Honda became the first to set up an assembly plant solely for export, but in their case, it is manufacturing the Honda brand in a majority-owned assembly plant in China. Chrysler is the first to outsource the assembly of an entire car, which it will sell under its own brand, to a Chinese car company in which it does not have an equity interest. It is not a joint venture; it is not a licensing agreement; it is a contract manufacturing relationship, the first in China’s auto industry. If the assembly of appliances, computers and other sophisticated products can be outsourced to China, why not cars? Five years ago, no one in the industry would have thought this to be even remotely possible.
The Chrysler/Chery tie-up is a win for both companies. With this deal, Chery has established itself as the clear front runner among China’s local car assemblers. With Chrysler’s guidance, it will gain the knowledge and expertise necessary for its cars to meet the stringent safety and emissions requirements in developed markets like the U.S. By improving the quality of its cars, Chery will become an even stronger competitor in China, against other local assemblers as well as the joint ventures of global players.
For Chrysler, it has moved beyond the time-consuming and more costly process of qualifying components made in China, one by one, and then assembling them into a complete vehicle in high-cost assembly plants in the U.S. Why not just qualify the entire vehicle, leaving the component sourcing and assembly to Chery? This is what Chrysler has decided to do.
Some have criticized the company for creating its own future competition by accelerating Chery’s entry into the U.S. market. If Chrysler were the only automotive assembler in the U.S., and if Chery would never be able to find the U.S. market without them, then that might be valid. But even now, Chrysler and the other U.S. car companies are losing market share to Hyundai and other lower-cost assemblers because they cannot profitably compete in the low to medium size passenger car market. Moreover, the entry of Chery and other Chinese assemblers into the U.S. market is only a question of “when,” not “if.” If you are Chrysler, why not leverage your brand and distribution strengths by sourcing from a low cost producer in China? Doesn’t this strengthen, rather than weaken, Chrysler’s competitiveness and that of its brands?
Jim Mann recognized the historic importance of what American Motors had done in 1984 and wrote “Beijing Jeep,” the first book to deal with the subject of foreign companies doing business in China. In making its groundbreaking announcement almost a quarter of a century later, Chrysler could write its own book, “How to Do Business in the Global Economy: Combining an International Brand and Distribution with China’s Low-Cost Manufacturing Base.” I’m certain it will be a bestseller.