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Chery goes upmarket with Jaguar JV I hate to be overly pessimistic, but I have serious doubts about the future of a newly announced joint venture between fading domestic auto giant Chery and luxury car maker Jaguar Land Rover. More specifically, I am quite skeptical that this new tie-up will ever get the necessary approvals from Chinese regulators, which must approve all such major new investments. (English article) Let’s take a quick look at this deal, which was rumored for months before Chery and Jaguar Land Rover, owned by India’s Tata Motors (Mumbai: TTMT), made a formal announcement after finalizing details. The partnership will see the 2 sides invest up to $3 billion to build a manufacturing base in China and develop a specific brand for the market, according to media reports. Previous reports and Jaguar’s own background, coupled with a fondness for high-end cars among China’s new wealthy, all indicate the new venture will produce luxury cars, a sharp break with Chery’s own brand which is distinctly lower market though is also known for reasonably good quality. Chery desperately needs some good news in terms of new domestic initiatives, as the company’s sales have plunged in recent months as foreign joint ventures have stolen market share from domestic rivals amid a broader slowdown in China’s auto market. One of Chery’s few bright spots has been its exports, which have grown sharply in recent months to partly offset the slowdown in domestic sales. Still, the company is at a distinctive disadvantage to many of China’s other major automakers due to its lack of a strong foreign partner. So, the question becomes: is Jaguar Land Rover the partner Chery needs to revive its fortunes? There are a number of good points and bad points to such a tie-up, but in the end I’m betting the NDRC, China’s state planner which must approve the deal, will decide the bad points outweighthe good ones and veto the joint venture. The NDRC will certainly like the idea of developing a new luxury brand for the China market, and it also probably realizes that Chery really needs a foreign partner to compete with many of its rivals. But in terms of choice of partner, Jaguar Land Rover looks like a poor pick due to its small size and highly focused niche market selling very high-end cars with much more limited demand than more mainstream luxury brands like Audi (Frankfurt: VOWG), BMW (Frankfurt: BMW) and Mercedes Benz (Frankfurt: DAI). I do like the idea that Chery is trying hard to improve its outlook and bring in some new ideas from outside to boost its longer term prospects both in China and abroad. But if it’s smart, it will keep talking to other potential partners while it awaits for the final NDRC decision on this deal, which is more than 75 percent likely to be a veto.

Bottom line: China’s state planner is likely to veto a new joint venture between automakers Chery and Jaguar due to limited benefits from Jaguar due to its small size.

Related postings 相关文章:

◙ Chery Finds Foreign Partner in Jaguar 奇瑞与捷豹路虎联姻前景堪忧

◙ China Slams the Brakes on Automakers 中国为汽车行业踩刹车

◙ Geely Eyes Risky New Luxury Route 吉利欲走有风险的豪华车路线

China puts the brakes of luxury automakers A new plan being floated by the central government could put the brakes on soaring sales growth for luxury brands like Audi (Frankfurt: VOWG) and BMW (Frankfurt: BMW), who have so far managed to defy a broader downturn for China’s auto sector. The shift would come as a huge blow for those names just as most are investing billions of dollars to increase their capacity to cater to China’s huge thirst for luxury brands, though I expect the final outcome will be a compromise that allows some government sales to continue. Let’s look at the facts first, which have the Ministry of Information and Industry Technology (MIIT) reportedly proposing a plan that would limit all government agencies to buying only domestic brands, in an attempt to support struggling homegrown players like Dongfeng (Shanghai: 600006) and Geely (HKEx: 175) that have steadily been losing market share to the more aggressive and resource-rich foreign names as growth sharply slows in China’s auto market. (English article) Such a step would mark a huge loss for foreign names like Audi, BMW and Mercedes, as the government now purchases about $13 billion worth of cars each year, many of those luxury models. China’s auto market zoomed in 2009 and 2010, posting growth in the healthy double digit range as Beijing offered a range of incentives to stimulate sales at the height of the global financial crisis. But now the government has ended most of those incentives, causing growth to drop to just 4 percent last year, with most foreign brands reporting low double-digit gains while many domestic ones saw their sales drop sharply. This latest government initiative seems aimed at throwing a lifeline to the domestic players. The only problem is, a big portion of those government fleet sales are for luxury brands that many higher officials prefer, and while the domestic players can provide reasonable mid-range cars, few can offer such higher-end models. One of my friends recently scoffed at the prospect of buying a Chinese-made smartphone, saying he would get laughed at by all his friends who own trendy iPhones. The same is true for many high government officials, who would probably rather walk to work than be seen getting out of a Geely or Chery automobile. At the end of the day, I suspect that cries of protest from both government officials and the foreign luxury brands themselves will get heard by central regulators at the MIIT, and both sides will reach a compromise that will allow continued purchasing of luxury cars by government agencies. But at the same time, I do expect we’ll see a slowdown for the luxury automakers as those government agencies come under pressure to buy more domestic brands, bringing growth rates for the foreign names more into line with mainstream foreign players like General Motors (NYSE: GM) and Volkswagen.

Bottom line: Foreign luxury car makers will avoid a proposed ban on sales to Chinese government agencies, but will see such sales drop sharply as the government tries to assist domestic brands.