I. Why China's Auto Industry differs
Its easy to dismiss the rise of China as the world's biggest car maker as a mere copy of what Japan and Korea did decades before. Japan, through its all powerful Ministry of Trade and Industry made it a policy to push Japanese car makers not only to make cars for import substitution but to also conquer the export markets. The Koreans also had the same strategy. To do this, they made the cars durable and with plenty of features, enhancing their value for money appeal vis-a-vis the established Western brands. China's push into cars was not so much an import substitution move but a leap for Chinese society from pedal power 2 wheels to 2-pedal motoring on four wheels.
Forced into exports
What makes the Chinese experience different is the truncated time line. If it took Japan 30 years to achieve export supremacy, and the Koreans, 15, the Chinese are aiming to get there in less than ten years. And to think, the Chinese are "distracted" from focusing on exports as it has a car hungry domestic market with a high consuming middle class that numbers as many as the population of the EU's 27 nations or English speaking North America. With China's massive economies of scale, importers from developing countries were attracted to the very low price of China made cars. To put it politely, ready or not, the outside world, like Commander Perry's black ships threatening the coast of Tokugawa Japan, wanted China's cars. This is mainly the reason why China's early exports of CBU's failed the high quality standards of most Asian consumers, aggravated by a non-existent supply and logistics chain for the after sales parts market. Quality is a long term goal of all Chinese car makers that aim for exports in the near term and they are aware of the costs of their premature venture into the global market. Factor in that China produced 18M cars in 2010 mostly for the domestic market and it makes it the biggest than any country's largest volume in car making history.
Profits for the politburo or the people?
Chinese car companies, are essentially operated as private firms, owned by investment companies of the provincial and national government. Despite their ownership, these companies are run on profit motivated capitalists terms and do corporate social responsibility, share holder accountability, financial solvency, borrow money, etc. just like any multinational firm. This makes such profit taking Chinese firms a willing participant in regional economic development. Of course the State is there to emphasize that the "Made in China" label must not only mean profitable for business but also good quality, just like all of China's successful exports of garment, chips, cell phones and high speed trains.
To jump start their technology, the Chinese invited joint ventures with the condition of transfer of technology, a rather ordinary clause found in all developing countries' requirements in exchange for protectionist tariff walls and oligopolistic access to their domestic market. Naturally, foreign companies, protective of their proprietary intellectual property usually gave current but not future technology. This, naturally, led the Chinese companies to nurture and accelerate their own R & D, with the help of foreign technological companies, to diminish their dependence on the foreign car making licensers. Despite this, Chinese companies continue to be hounded by accusations of stealing IPR.
Another difference between Chinese and Japanese/Korean export strategy is the Chinese car makers flexibility in considering CKD assembly in small volumes. This is unlike most developed country car makers' business model that need to assemble one variant at 200,000 units p.a. Per assembly line. Likewise, all Chinese car makers are open to manufacturing foreign brands in their plants which are usually newer than most developed country's car plants and have the latest Western technology installed. Recently, Fuji Heavy, makers of Subaru cars is rumored to be talking to Chery to jointly manufacture Subaru cars in Chery's China plants. Chery's Wuhu plants are the latest word in flexible manufacturing. For example, the typical Japanese or European plant can only have 3 to 4 different models built on one and the same assembly line, usually sharing one platform. At the Wuhu plants, one assembly line was finishing 8 different models, with only 2 models sharing platform with any of the other finished models. Chery is proud of its A3 which merited a 5-star rating for Euro-NCAP crash safety.
II. The Chery Motors Philippine story
It is with this background that Iseway Motors, a subsidiary of a big Hong Kong conglomerate, along with a bunch of local investors risked bringing in the Chery brand to the Philippines in 2007. Prior to Chery's daring move, other China brands, mostly commercial vehicles, buses and trucks, were quietly began imported from China via local trading firms, which expanded into a small dealer network with rudimentary service. Chery came into the Philippines with a big splash, deserving its status as one of China's top ten car makers and the world's 27th largest back five years ago.
CKD a priority
At that time, Chery's main experience in selling in foreign markets was mainly in setting up CKD operations in Russia, Ukraine, Uruguay, Thailand, Indonesia, Egypt and Malaysia. In a way, Chery was following China industry practice in reverse. If a foreign company wants to enter the China market, they were required to work with a JV partner. As the China company matures, the JV will be out grown and a production cooperation agreement usually follows. For outward investment, Chery, like most China car companies, start with cooperation before launching into a JV. The exception to this rule are Chinese car companies who want to jump start the maturation process by buying a foreign company. Examples of these are the purchase of MG-Rover and Ssangyong by SAIC and Volvo by Geely. There are also other acquisition/cooperation modes, like the Geely-LTX-Manganese Bronze JV, makers of the London Taxi or BAIC's purchase of SAAB's Trollhattan production line.
QQ and beyond
When Chery launched in the Philippines, its smallest car made the biggest waves. The QQ bagged a huge fleet order, making the brand attractive to more than ten dealership applicants. These fleet orders were like a vote of confidence, much in the same way that the PCSO ambulance fleet purchase of Foton Views, etched Foton in the radar screen of many fleet operators. Chery pricing was as keen as when the first Kia Pride started undercutting the Mitsubishi Mirage, Toyota Starlet and Nissan Pulsar in the mid eighties and early 90s. After a number of assembly quality control and design problems appeared, Chery was supposed to take the next step and begin limited CKD assembly of some models for our market, which, quality wise, is far more demanding than the China domestic market. Assembly in the Philippines was supposed to jump start the rise of quality standards as production for the Chinese market was in a rush to supply rising demand. China respects the stature of the Philippines as the oldest car culture in Asia, while the Chinese middle class is just beginning its first generation of car consumers. But the perception of quality problems and uncoordinated parts stocking of the CBU units became a drag on the brand's reputation and Chery Philippine investors, were at one point, on the verge of abandoning this market.
Phoenix from the ashes
Late last year, a new set of investors, led by Dr. Si Chung Chang, decided to buy the Philippine operation from Iseway Motors and start all over again with what's left of the dealer network and the rectification facility in the former Francisco Motors plant in Las Pinas. To make Chery Motors Philippines work, the new investors deepened the relationship with Chery Automobiles in Wuhu, Anhui province. No longer will it be a simple importer-supplier trader relationship but a full blown cooperation with the aim of enhancing export quality CBUs, a genuine parts on-the-ground inventory, while CKD assembly phases in. With flexible manufacturing and labor practices, Chery need not be burdened with high fixed costs that is usually the cause why car assemblers of old demand tariff protection so that they can sell as many as their break even 200,000 unit/year assembly lines can produce. Chery is committed to take the next step, wisely avoiding further brand damage if it did abandon this market. Chery Motors has its work cut out for them, as respect for the brand will have to be rebuilt and they need to address it by providing product quality, and more importantly, timely parts inventory that pleases the pernickety Filipino buyer. Three years after entering the Philippine market, Chery is making a comeback, reliant on all the latest German and Japanese manufacturing technology that was just beginning to be installed three years ago but is now running at full capacity and reliability. Moreover, Chery International in Wuhu finally has a dedicated parts and logistics center to service the export market, which was overwhelmed in the rush to satisfy importers.
This early, Chery is preparing the assembly of the Chery A-1, a micro-compact car that can easily qualify under Thailand's econo-car category. The A-1 is the next generation QQ, a micro car that is engineered to take on not only internal combustion engine propulsion but has a current version sold in China as a plug-in rechargeable electric vehicle, much like the vaunted Nissan Leaf. If this materializes, this would be a first for the Philippine market as there are no incentives for electric vehicles, much less CKD kits exported from China. Nor are there any tax incentives for assembly of economy cars.
III. Chery's very short history
Child of the late 90s
In a world where many car companies have been around more than a hundred years and many are past their mid-life 50's, Chery is a very young company. Chery Automobile, predictably, is owned by the local government of Wuhu, Anhui province. Founded in 1997, it began auto production in 1999, using a platform licensed from Volkswagen's SEAT Toledo.
Enter Six Sigma, exit SAIC
In 2003, Chery created its own R & D, began working with foreign consultant firms to improve its technology and quality. Chery hired a Japanese engineer from Mitsubishi to head Chery's Lean/Six Sigma production systems, which were first applied to their cars in 2003. They were early adopters of the latest technology, when Chery chose DURR Paint systems, one of only 5 factories in the world to use such in 2004. As the Chinese car industry grew by leaps and bounds, SAIC, an early investor in Chery, had to sell out to prevent conflicts of interests with SAIC partners VW and GM.
ISO and more
Chery consistently and slavishly upgrades to relevant ISO standards ever since 2005. Malcolm Bricklin's Visionary Vehicles, tapped Chery, hoping to be one of the first Chinese automobiles sold in the United States, selling 250,000 cars a year by 2007 but things did not pan out. This did not stop Chery from reaching out ing Bertone and Pininfarina design houses of Italy for aesthetics. AVL of Austria is also working with Chery to produce 18 different engines, including a turbo-diesel, for the new line of cars. The new engine brand, called ACTECO, meets Euro IV emissions standards and uses advanced technologies such as aluminum alloy cylinder blocks/heads and direct fuel injection. Bosch is helping Chery to design modern injection and transmissions. Lotus Engineering is aiding Chery in car design and quality. Ricardo Consulting Engineers is also developing a hybrid power train for Chery for use on it's first hybrid vehicle.
Production license issues
Chery was accused of copying the Daewoo Matiz, General Motors' Korean subsidiary and the Infiniti emblem on the Chery Eastar, itself an off shoot of the Daewoo Magnus mid-sized sedan. Chery attempted to negotiate local Chinese production licenses of those vehicles with bankrupt Daewoo Motors prior to General Motors' purchase of the bankrupt automaker's assets in 2002 but the negotiations were never concluded. Nevertheless, Chery proceeded with the production of these former Daewoo vehicles without a license, triggering General Motors to sue Chery for infringement in December 2004, citing "extreme similarities".
IV. Chery today
Why the name?
Chery's name is rooted in the 2 Chinese characters that spell Chery. The first character means cheery as in gay and happy. The second character means lucky so the idiom means "be cheerful and you will be lucky..."
Chery produces most of its cars in China. In 2003, Chery built a plant in Iran. Also in 2005, a CKD facility became operational in Russia at Avtotor. Chery began production in Malaysia in late 2006 and its cars are now being built at the former Daewoo Motor Egypt plant at Maadi, Cairo under the Speranza brand name. Chery has a joint venture with Argentine conglomerate Socma that produces the QQ and Tiggo in Montevideo, Uruguay. Another production facility for Chery cars known as Mermerler Otomotiv is located in Istanbul. Chery reached cooperative agreements with America Quantum, Chrysler, and Italy Fiat in 2007. In September 2010, it signed a framework agreement with the state of São Paulo, Brazil to build Chery cars in the city of Jacarei. From 1999 to 2007, Chery produced 1 million cars, but it only took 2007 to 2010 for Chery produce another 1 million units. At present, Chery possesses a full set of production and R&D units, such as Car Factories, Engine Factories, Transmission Factory, Automotive Engineering and Research Institute, Planning & Design Institute and Testing Technology Center, makes 20 models and have an annual output of 900,000 cars, 900,000 engines and 450,000 transmissions. Besides, Beijing and Shanghai, AERI has branches in Turin, Melbourne and Tokyo. Chery export to 70 countries.
The Chery factory
Much of the credit of Chery's lurch into million unit production is that the latest European and Japanese machines that were installed in 2008 were up and running. This meant not only a huge jump in productivity, but an even larger reduction in quality control defects as the latest car building techniques were already up and running. The massive upgrade in production facilities has accelerated Chery's climb to world class quality. One of the salient features of the being the youngest and fastest growing car industries in the world, means that Chinese car companies employ a lot of young men and women. In most developing countries with state sponsored compulsory education, young men and women usually prefer the more glamorous white-collar jobs over blue collar jobs, like car building. In developed countries, most blue collar jobs like car making are the realm of elderly usually unionized laborers. In China, large companies like Chery take a direct stake in their workers well being. Instead of Western country style unionized labor force, ironic in a Communist country, the firm, like traditional Japanese car makers, is directly responsible from cradle to grave. There is subsidized food, health care, transportation and housing for Chery's 25,000 or so workers. Similar visits to SAIC and Beiqi-Foton plants across China also exhibited this trait.
Chery Automobile has 5 sub-brands, Rely, Chery, Kerry and Riich. Kerry, which concentrates on mini-commercials and pick-ups, originated from the word "Carry". Riich's offerings are for the middle and upper classes. Rely's offerings are mostly SUVs, MPVs and minivans. Chery's brand building continues with a finishing participation of its home-grown Tiggo X-5 in the Dakar Rallye series.
Chery's vision of a pollution free future is already is already on China's streets. Chery's New Energy subsidiary has clearly identified three tiers in the pursuit of clean energy. It has identified plug in electric vehicles as ideal for urban journeys of less than 50kms/day. Plug in electric vehicles with enhancements for extended range and hybrids where an on board internal combustion engine recharges the batteries are suitable for ranges of less than 100kms/day. For daily driving of over a 100kms, Chery has identified that the hybrid and fuel cell vehicles are the best way since there is no existing network for battery charging and/or battery replacement. For the rest of its product line, its alliances with many companies that are the leaders in their respective fields and satellite R & D stations in Melbourne, Tokyo and Turin, allow Chery to keep abreast with any new trends. Chery will not find itself taking one side in the hybrid vs. extended range vs. EV debate; it is pursuing and developing all of them. Right now, the hurdles are more a matter of government policy than technology.
QQ and A-1
Chery's cheapest plug in EV is based on the regular QQ. Besides a remaining charge meter, the rest of the interior is bog standard QQ. Since China has allowed some small tax incentives for all kinds of alternative energy cars be it LPG, CNG, electric power, hydrogen, etc., the QQ is usually bought by municipal authorities. Chery pursues all other kinds of alternative energy, just like the German and Japanese majors. The Chery Energy S18, which was embodied in the Riich M-1 we tried right at Chery's New Energy Research Center is, like the much vaunted Nissan Leaf, a plug in electric car and not a range assisted by an IC engine like the Chevrolet Volt. The S18 is a small QQ sized car that uses lithium iron phosphate (LiFePO4) batteries with enough range to roll up to 150 km, while its 336 volt system can allow the 40 kW (53.64 hp) motor to take it up to 120 km/h. Plugged into a 220V outlet, it can charge in 4 to 6 hours or hooked up to a "fast-charger" it can fill to 85 per cent of its capacity in 30 minutes.
Its quite expensive compared to the IC-engine powered QQ and also the EV QQ. This is because the M-1 has technology dedicated to its full EV character. Electric power steering, screw type air con compressor and CVT automatic transmissions had to be used to reduce the power drain on the batteries. Chery is quite bullish about its home grown New Energy technology. Our driving experience with the electric M-1 proves it is a complete package since it has realistic electric power assistance in steering feel and climate control vis-a-vis the electric power only QQ, which, though cheap, reminds us of early attempts in the 80s of some French car makers at electric powered micro compact cars. But then the A-1, on account of being a fresh platform, costs more than a QQ. Incidentally, the internal combustion engine version, the A-1, will be the first Chery model that will be assembled in the Philippines. In the meantime, the A5 sedan, the QQ micro compact, the Tiggo compact SUV and the V5 minivan continue to be supplied as CBU, and hybrid variants are a matter of when not if.
After years of development, Chery has grown from passive orders' acceptance to pacify the overseas markets to strengthening management of overseas distributors, after sales supplies and logistic. To do this, Chery targets emerging markets first in order to deepen relationships for production cooperation and joint ventures.
V. Beyond Chery's factory gates
Wuhu City, Anhui province
With icy weather messing up expressway travel across northern China, our hosts wisely decided to skip Shanghai, some 360kms east or 4 hours in the best of weather. Transferring from a MLA-HKG CX flight to Dragon Air's flight to Nanjing meant we just needed to traverse 90kms of China's wintry highways to get from Nanjing airport to Wuhu. Located on the banks of the mighty Yangtze river, Wuhu has, for most of its existence, been a city of trade. Its on the alluvial plain of the Yangtze and there are numerous lakes, harnessed by savvy property developers into charming suburban residential new towns. The city's Roman Catholic cathedral, St. Joseph Cathedral dates from turning into a treaty port in 1876. Major industries only began in Wuhu after the Second World War, with the development of the textile industry, paper mills, and a large automobile factory. With China's exponential growth, teeming migrant workers flocking to Shanghai and other Chinese Eastern Seaboard zones were becoming congested so China decided to promote more heavy industrial employment in their inland cities.
The Guoxin Hotel is located in the Industrial Zone of Wuhu and is typical of the full amenity business hotels that dot China's thousands of booming industrial zones. Here, we are only 5 minutes away from the dozens of gigantic Chery factories surrounding us in this Economic Zone. But its not all industry here as nearby is the "gate" of the Yangtze river. Its a scenic spot on one of the many sharp bends of this wide barge infested river, between 2 steep hills. Right at this portion is a recreation of an ancient Anhui palace and temple. The walled compound of the Palace also serves as a restaurant serving Anhui's exotic specialties.
Nanjing, City of Dynasties
If Wuhu is all brash and booming commerce, with hundreds of new towns and gigantic economic and technology zones, Nanjing is still as gracious and majestic being the former seat of the Ming Dynasty 600 years ago. It also suffers from traffic jams on the expressways that feed traffic through it and more themed high rise residential zones, but it has preserved much of the 35kms of its original walled city. Moreover, Nanjing is criss crossed by many small rivers and genteel tree lined avenues. Arriving on a Saturday, the local tourists were out in force at Dr. Sun Yat Sen's mausoleum in Zhongshan mountain resort. It's situated 700m up on a mountain that overlooks the city and its numerous freezing lakes at this time of year. Its a well designed park with ladies who drive you up in electric jitneys if you plan the 390 step climb to the top. Worth it as one is rewarded with splendid views.
Closer to the lake, the well preserved city walls of the old Imperial City of Nanjing was a good place to admire the contrast of temples and pagodas against the brash ultra modern skyscrapers that line the monumental boulevards and underground expressway that leads to the Exhibition Center side of the city. At the main shopping district, hordes of dating couples and girls out for a night on the town clipped clopped their way to the illuminations by the river side and the temple to Confucius in Fuzimiao. Despite the sub freezing temperatures, the fashionable locals in local designer togs continued to promenade from bars to late night shopping.