Chrysler is pressing ahead with a plan to build small cars in China in partnership with Chinese automaker Chery. But could the Chinese also be interested in taking over the struggling US automaker? Mark Bursa reports

Despite putting Chrysler Group on the block, DaimlerChrysler's supervisory board has approved the concept of setting up a partnership with China's Chery Automobile, which would see the Chinese firm building small cars for Chrysler to sell in Europe and North America.

Is this a case of business as usual, or are stronger forces in play here? Could the Chery deal be a stalking horse for a takeover of the struggling US automaker - which lost US$1.5bn last year - by a Chinese company?

It would be a bold step for China. While lesser lights of the global auto industry - Rover and Ssangyong - have fallen prey to Chinese companies, buying Chrysler, with its enormous US manufacturing organisation, would be a deal in a different league. But the indications from China are clear - not one, not two, but three Chinese automakers are interested in acquiring Chrysler.

With most established western automakers ruling themselves out of a Chrysler deal, the Chinese may offer the DaimlerChrysler board an attractive alternative to General Motors, or the legion of private equity investors that have held preliminary talks. These are believed to include Cerberus, which bought a 51% stake in GMAC, the finance arm of GM, last year; and Carlyle, part of a consortium that in 2005 acquired car rental giant Hertz.

According to reports, Chery is one of the Chinese companies interested - though few believe that it has the experience or scale to digest Chrysler. Chery is less than 10 years old as an automaker, and its production levels are small - it'll build only around 400,000 cars this year.

More likely suitors are the established major Chinese automakers. Both Shanghai Automotive (SAIC) and First Automobile Works (FAW) are believed to have made enquiries about Chrysler. The Oriental Morning Post reported that FAW was planning a bid, and had already sent representatives to the US for talks. And the South China Morning Post put both Chery and SAIC names in the frame, without corroborating the evidence.

Remember too that SAIC and Chery have history - SAIC was an early investor in Chery, and only sold its 20% stake in the company following pressure from GM over the notorious 'design piracy' issue, when Chery started producing its QQ minicar, a blatant copy of the Chevrolet Spark that SAIC builds in partnership with GM.

SAIC publicly distanced itself from Chery - but privately it's believed links still remain between the two Chinese companies. Chery already has links with Chrysler over the mooted small car deal, and SAIC could provide the muscle to make the deal happen.

DaimlerChrysler CEO Dieter Zetsche said he would pursue "all options" for Chrysler, though the dice seem loaded against the Chinese - and other left-field candidates to buy Chrysler, such as Russia's GAZ. Financially, the deal may make more sense for a more local player - such as General Motors, or MagnaSteyr. Analysts believe Chrysler has an equity value of about $5 billion, but it could add as much as $9bn in value to GM, according to a Citigroup report. The Financial Times also reported that DaimlerChrysler could a stake in GM as part of a deal. Finance men are clearly driving the deal.

If GM, Magna or a private equity company were to beat the Chinese suitors to Chrysler, would it affect the Chery small car deal? Probably not. The new owner would almost certainly go ahead with the Chery deal, simply because it makes good business sense. Chrysler CEO Tom LaSorda said last month that expanding the use of alliances and partnerships worldwide was part of the plan to return Chrysler to profit next year, regardless of whether or not it is taken over.

In any case, the Chery deal looks likely to be in place long before a new owner for Chrysler is found. An agreement is likely to be in place by March, and this will then have to be approved by Chinese authorities. It's unlikely to be turned down: approval should be in place this year, with production starting in 2009.

Chrysler has already designed the vehicle it would have Chery build - the Dodge Hornet concept car. This is a boxy mini-MPV, and would compete in the US with Toyota's popular Scion xB. The strategy of building this car in China is a good one; the other option of using a Chery design has been discounted simply because Chery's designs aren't up to the task in terms of quality and, crucially, safety.

This, of course, appears to be the reason why Chery's earlier plan to launch a full range of self-designed cars in the US has foundered. This plan, trumpeted with enormous razzmatazz by ebullient American entrepreneur Malcolm Bricklin two years ago, was knocked on the head last November.

Bricklin claims his Visionary Vehicles company pulled out because Chery's models would have achieved two-star US crash ratings at best; he'd hyped the cars up to being of BMW quality standards. "The Chinese need to learn that you can not develop cars for the Chinese domestic market and then upgrade them for the North American market," Bricklin said in December 2006. "You must instead, build for the North American market and then de-option for other markets."

Bricklin also said he pulled out of the agreement partly because Chery was talking to other automakers about partnerships, and would not have been able to hit Visionary's deadlines.

In reality, Chery is glad to see the back of Bricklin. The entrepreneur, best-known for introducing Yugo to the US in the 1980s, basically railroaded a naïve Chery board into a deal it couldn't fulfil. Chery simply is not ready to mount a full-scale assault on the US volume sector. Under Bricklin's over-ambitious plan Chery would have been selling 250,000 cars a year in America through a nationwide network of gin palace dealerships. Contract manufacturing with Chrysler is a much safer option - it will help Chery grow volume, and Chrysler will help it improve its own quality.

Bricklin isn't going away, however. He claims Visionary Vehicles is now looking to draw up its own designs and specifications for a three-model range, and will take a leaf out of Chrysler's book, outsourcing the manufacturing to three different Chinese companies. He claims up to 15 companies have been approached, and each of the three selected Chinese partners will be responsible for a product group: front-drive vehicles; rear-drive vehicles and trucks. Sales will start in 2009, and hybrids are part of the plan from year three. The branding issue is unclear - Visionary seems likely.

For now, the 28 US dealers who signed up for Visionary's $2m-a-throw US territories are sticking with the plan. But clearly Bricklin has to prove that he's not all mouth and deliver a tangible deal sooner rather than later. Visionary Vehicles said earlier this year that an announcement was due in February - but as of February 28, there was no news.

If Malcolm Bricklin does get Visionary Vehicles up and running, the chances are the US market will be a very different one to today. Ironically, he could find himself competing with major US brands under Chinese control.

Mark Bursa