Chery, Great Wall Hit Export Speed Bump 奇瑞和长城汽车遭遇出口障碍

Domestic car makers Chery and Great Wall Motor (HKEx: 2333) have hit a first major speed bump in their recent export drive, spotlighting the uphill road China’s big domestic brands will face as they look overseas to offset sputtering sales at home. Media are reporting that both companies have launched recalls for most of their cars sold in Australia after asbestos, a well-known carcinogen, was found in the engines and exhaust systems of some vehicles. (English article)

I don’t want to be too critical of these companies, which are just trying to survive in the face of stiff competition at home from the likes of global giants like General Motors (NYSE: GM) and Volkswagen (Frankfurt: VOWG). But really, these companies need to do a little homework before they begin exporting their vehicles to see what is and isn’t allowable in the markets they’re targeting.

Asbestos is clearly a banned item in most major western markets and probably in developing markets as well, as the substance has been known to cause cancer for quite some time now. That said, I’m fairly certain that engineers and executives at both Chery and Great Wall must have realized this fact before they began their export drives.

This new recall, affecting 20,000 Great Wall cars and 2,500 from Chery, will not only cause the 2 companies lots of time, resources and money in Australia, but is likely to spark probes in the companies’ other export markets like Brazil and South Africa. Such probes are likely to discover that cars being sold in those markets also contain asbestos, thus making additional recalls necessary. In a worse-case scenario, the companies may even have to recall cars in their home China market, which still accounts for the majority of their sales.

The overseas drive looked like a good idea when names like Chery, Great Wall and Geely (HKEx: 175) started seriously promoting exports around 2 years ago in the face of intense competition at home  from the big global automakers. The latest industry data show the competition at home has continues to be fierce this year, with Chery and Geely as the only 2 domestic brands to finish in the list of top 10 auto manufacturers based on sales through July.

Adding to the woes, Chery’s sales have contracted non-stop over the last year, and are down 10 percent in the first 7 months of 2013, even as nearly all the big international brands have posted double-digit growth. A look at the top-selling models for this year to date also reveals that the top 20 all carry foreign nameplates.

Up until now, exports had looked like one of the few bright spots for struggling domestic names like Chery, Geely and BYD (HKEx: 1211; Shenzhen: 002594), which were using exports, mostly to developing markets, to offset their problems at home. But this latest setback in Australia, which could very easily spread to the companies’ other export markets, could quickly put the brakes on the export drive. What’s more, the added expense of having to recall so many cars in markets where they lack the infrastructure to handle such problems is likely to weigh heavily on their bottom lines, potentially accelerating their slide down the road to insolvency.

Bottom line: A product recall for Great Wall and Chery cars in Australia could quickly spread to their other overseas markets, putting the brakes on their recent export drive.

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