Chery on top

Carmaker pulls off new JV with Jaguar Land

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09 Nov 2012
Week in China

“I found cheerful, and I liked it. So I thought about Cheery. But then, to make the name stick in people’s minds, I took out an ‘e’. Then it became Chery”. Yin Tongyao’s explanation of using an English dictionary to come up with a name for his upstart carmaker is straightforward. But as author Michael Dunne explains in American Wheels, Chinese Roads, Chery’s route to market was
anything but.

Back in 1997, Chery started out as an engine maker because it couldn’t get an official licence to make cars itself. But Dunne says that Yin and his backers in the provincial government in Anhui then worked feverishly to establish Chery as a carmaker in its own right. Their masterstroke was enlisting the help of a “Chery godfather” in the central government who was able to push through a minority investment from reluctant state giant Shanghai Auto. By 1999, Chery cars were starting to appear on Chinese roads.

Perhaps Chery executives drew on their experience in winning new approvals for its latest partnership with Jaguar Land Rover. Officials from the Changshu Economic and Technological Development Zone went public with news of a joint venture between Chery and the British-based firm in March (WiC142). The new auto plant was a key part of a local plan to create an Rmb100 billion industrial zone in the city in Jiangsu. The problem? The project flew in the face of an earlier directive from China’s state planning agency in Beijing, the NDRC (which stands for National Development and Reform Commission). Concerned by overcapacity, the NDRC had taken the car sector off the list of industries in which capital from foreign investors was ‘welcome’ (WiC133). Existing JVs could still expand, but NDRC officials didn’t want to see any new overseas investors.

That meant that it was clear from the start that a bureaucratic wrangle was underway between the cadres at local level in Changshu (intent on getting the plant approved) and those at the central planning body, who wanted to hold their ground on the
overcapacity issue.

Changshu officials seem to have been confident from the outset that they could outflank the NDRC directive. In May they encouraged Indian-owned Jaguar Land Rover to talk about its plans for the Chery JV. In October Tata Motors – Jaguar Land Rover’s parent – started negotiations on which vehicles would be produced, as well as how much production could be localised.

The JV will see Chery take 50% of the equity in the new venture, enabling it to piggyback on growing demand for SUVs.

In contrast, in the seven months since the press first broke news of the new venture, the NDRC remained studiously quiet, presumably working to block the deal
behind-the-scenes.

But as Money Week reported on Monday, the central planner seems to have thrown in the towel, announcing via its website that the deal has got the green light. That suggests Chery and the Changshu officials won the battle in the bureaucratic corridors of power.

According to the NDRC statement, the approval allows the joint venture to build 130,000 cars in its first phase, with the plant due to open in 2014. The models to be built include the Aurora Range Rover, the Freelander 2 and Jaguar XS. Money Week says the 81 hectare site in Changshu will require a total investment of Rmb12 billion ($1.92 billion).

For Chery, the deal is a significant milestone. Owned partially by the Wuhu government in Anhui province, Chery’s other shareholders include private equity firms Huarang Asset Management, CDH and Bohai Industrial Investment Fund. Disappointingly for them, Chery failed to complete an intended domestic stock market listing this year. Perhaps the JV offers a new narrative for the next attempt to go public.

Chery sold 412,500 cars in the first nine months of this year, an 11.5% decline versus the same period last year. Conversely, Jaguar Land Rover’s exports to China have done well, with sales reaching 53,000 units in the same period, up 80%. More growth is expected: Jaguar Land Rover’s China dealerships are set to reach 140 by December, having more than doubled in the past two years. The JV will see Chery take 50% of the equity in the new venture, enabling it to piggyback on growing demand for SUVs. Chery also says that it will co-develop engines with its partner for the joint venture’s vehicles.

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