Chery Takes Manhattan

"They sentenced me to twenty years of boredom"
"For trying to change the system from within"
"I'm coming now, I'm coming to reward them"
"First we take Manhattan, then we take Berlin"

Leonard Cohen - First We Take Manhattan

Chinese state-owned automaker Chery Automobile has big export plans, and is being promoted as "The Next Toyota."

The Asian company has been building cars for only a decade and has already assembled one million vehicles.

In a saturated world auto market, this growth is phenomenal; Chery built 189K cars in 2005, 305K in 2006, and is on track to assemble 400,000 Chery automobiles in 2007.

When Chrysler was first put up for sale, Chery was frequently, though incorrectly, mentioned as a possible buyer.

There is no secret that China wants its pet car-maker to become a global player, they have launched Chery Automobile automobiles in more than 40 countries.

The Chery brand has skyrocketed from near-zero recognition outside China to significant internet keyword search strength in recent months. Remember when GM unintentionally catapulted car industry critic Ralph Nader into the limelight? The same is happening with widely publicized legal actions drawing attention to the little Cherys.

But recently videos showing Cherys dismally failing crash tests have popped up all over the web. Chery's cheap automobiles give a new meaning to the phrase "crumple zone." Instead of the front fender wells crumpling on impact to protect the passenger compartment, Cherys fold up like a squashed soda can.

Crash test dummies are pulled from the wrecked Cherys in pieces.

Critics, including The New York Times, point to Chery's crash test failures, legal conflicts with General Motors over copycat knockoffs, and fragmentation of the Chinese car industry as evidence that Chery is not ready for prime time. They think China will need to meet our standards for safety, quality, and business ethics before it can succeed on the new global stage.

You've Come a Long Way, Baby

I respectfully disagree.

I do not believe China can ever meet often illusory western ethical standards. More importantly, they won't have to. With respect to Cherys the difference in quality is price sensitive and the safety margin for the competition, say Chevy Aveo, slight.

So, where is the truth about Chery?

Well, the last people to ask are the Chinese. After the Chery crash test failure videos were all over youtube.com, questionable still photos of crash test "success" began to circulate.

The hard-working folks at Chery have achieved everything they have, emerging from a port city shipping surplus hand-grown rice, to become a world-class car exporter wanna-be, by reverse engineering western automobiles. Cherys are indeed copy-cat cars.

Chery won't suddenly "get it" the way westerners supposedly do. Sure, any corporation will react to a threat with a public relations spin campaign, but there is a serious credibility gap here.

Western joint venture partners with marketing experience will smooth these speed bumps for China's Cherys. Against the backdrop of a global auto industry shakeout, I predict remarkable relative progress for the Chinese automotive industry as a whole and Cherys specifically.

Why do I think GM is sweating the "tiny" Cherys?

Let's inquire deeper into Chery's background for my reasoning.

Wuhu Who?

China's central authorities chose the Yangtze River deep-water port of Wuhu, in the interior about 150 miles west of Shanghai, to spearhead their plan for an assault on the global car industry. Try Google Earth 'Wuhu, China' for detailed satellite shots.

In contrast to the built-up coastal and tourist areas being prepared for visitors to the 2008 Olympic games, Wuhu is the real China. This fast-growing central Chinese city is in Anhui province, one of the poorest, most overpopulated, polluted, and rurally isolated, in China.

The factories, shipyards, smokestack plumes of coal fired power plants, and dingy apartment blocks of Wuhu are a shining beacon. Millions of willing peasants work rice paddies in Anhui province, starting right at the edge of town.

Chery's first generation industrial workers accept even lower wages than their compatriots in glittering space-age Shanghai. These folks can and will build acceptable small cars at low cost.

Wuhu Airbase, where China Nuclear Forces Migs can be seen parked near the runway, is right in the town of 500,000 plus. With a target like that, who needs SARS?

Western concepts like "highly motivated labor force" cannot adequately convey either the former desperation or current tide of optimism concentrated in the new Cherys.

Because of government backing (China holds $600 billion in US currency reserves), and strategic multi-modal transport hub location, Chery bears few similarities to western-style under-capitalized startups. The conflict with General Motors over reverse engineered copy-cat Chery QQ cars illustrates this: GM lost.

Chery Automobile promoted itself in China as an underdog rebel, resisting the "foreigners" who seek to dominate the Chinese auto industry.

GM, which has a big investment in China, tried to stop Chery's QQ output by pressuring their venture partner Shanghai Automotive Industry to cut ties with Chery. Shanghai Auto complied, but other locals happily stepped in to fill the void.

GM filed complaints with the government in Beijing, which didn't even scold its favorite son Chery.

Global Strategy: 1M Cherys Annually

Chery CEO and Chairman Yin Tongyao, formerly a senior engineer at China's First Automobile Works-Volkswagen joint venture, has been named among the ten most influential people in China's economy by state TV in Beijing.

Chairman Tongyao plans to raise Chery's annual output to 1 million vehicles annually by 2010.

Since Wuhu is maxed out, expansion will take place globally: a flanking maneuver.

Producing cars elsewhere allows Chery to avoid foreign nations’ tariffs.

There is a growing market around the world for small, cheap, fuel-efficient cars that the US cannot compete in. This is the future GM worries about.

Mr. Tongyao's target is 14 overseas plants by 2010 to assemble Cherys. Chery now has seven factories in six nations; Iran, Uruguay, Russia, Ukraine, Indonesia, and Egypt. Cherys are gradually gaining recognition from Egyptian, Russian, and Indonesian consumers. The "small" Chinese car exporter is considering new plants in India and Argentina.

Let's Make a Deal: Chrysler and Chery

Chery's early attempts to stage a direct assault on the United States have been unsuccessful. A couple years ago, a deal with automotive entrepreneur Malcolm Bricklin fell through.

But the indirect approach is working overtime: two developments are significant.

Chery Automobile is close to being the first Chinese company to enter the U.S. auto market.

The newly independent and newly-managed Chrysler didn't wait long to reveal the private equity group's strategy for a comeback. Chrysler announced a deal with Chery to import Chinese-built Cherys into the United States as badge engineered Dodges. The Chinese government was also a party, but to me this is a distinction without a difference.

So Chery has a partner with thousands of lonesome dealers and the engineering talent to raise quality and safety to minimum American/European standards very quickly.

Cereberus Capital Management, new owner of Chrysler, plans a two-tier vehicle strategy for the Chery partnership.

The two will market low-tech, low-cost vehicles, essentially current Cherys, to less-discerning consumers in Asia, Latin America, north Africa, and eastern Europe.

These same cars will be upgraded and premium features added for the United States, Canada and western Europe. The US price point will be maybe $500 below the cheapest Chevy (Aveo).

The second significant development is Chery's investment in the Islamic state of Iran.

While American car companies, including GM-Daewoo, are out of Iran because of US sanctions, Chery will exploit Iran's large, young, naive population. Will they surf the web for crash test videos?

Chery has inked a deal, conceived and brokered by Toronto investment company Solitac, with Iran’s largest automobile group Khodro, for a joint venture in Iran. The Iranian plant will manufacture 200,000 Cherys annually from kits shipped by China.

The Devil Went Down to Georgia

Chery is not the next Toyota, but the reasons are hybrids and lithium-ion battery technology, hydrogen fuel cells, electric vehicle technologies, clean quiet diesels, and sophisticated engine/drive-line/braking control software.

These engineering topics challenge even BMW, Honda, and Toyota. This material, and the engineering talent behind it, will be more difficult to reverse engineer and technology-transfer.

But lower income consumers in the US are not terribly sophisticated when it comes to safety. If the price is right, they will buy, let's say three-star crash rated Cherys. Much of the established imported competition, even some selling in the US today as badge engineered domestics, also has poor crash survivability.

Chrysler, caught in the SUV trap, and with only 8% of its sales outside the USA, had no choice but to cut a deal. It simply cannot produce profitable small cars unassisted.

An economic down-turn will only accelerate the downward pressure on vehicle price and size.

When the global platform now being built provides a critical mass for economies of scale, Chery Automobile will take Manhattan.

"And I thank you for those items that you sent me
The monkey and the plywood violin
I practiced every night, now I'm ready
First we take Manhattan, then we take Berlin"