Access to the Chinese market is a key driver behind Fiat’s new car-making JV with Chery. The move is likely to hasten the demise of Fiat’s old partner, Nanjing Automobile, writes Mark Bursa.
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Fiat has further strengthened its relationship with Chery Automobiles, China’s fastest-growing and arguably most ambitious automaker. The Italian automaker is setting up a joint venture with Chery to make 175,000 Fiat, Alfa Romeo and Chery cars a year (start of production 2009).
The move has been expected – earlier this year, Fiat chairman Sergio Marchionne told a startled press conference of his dismay at Fiat’s existing Chinese JV with Nanjing Automobile, saying he was “fundamentally displeased with the level of interaction with Nanjing on the passenger car project” and threatening to look at “alternative arrangements” – a move he has now carried out.
Nanjing Fiat built just 31,300 Palio, Siena and Palio Weekend models in 2006, 13% fewer than in 2005, and well below the venture’s current capacity of 100,000 units a year. Marchionne blamed Nanjing’s acquisition of MG Rover as a major cause of the problems: “They have been distracted by other brands that are of no interest to us,” he said. Indeed, noises from China suggest that a resolution between Nanjing and Shanghai Automotive Industrial Corporation (SAIC) could be imminent on Rover, which could result in further upheavals at Nanjing.
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By GlobalDataChery, meanwhile, has been in Fiat’s orbit for some time, ever since it changed its course from trying to crack Western markets under its own steam to setting up JVs with Western automakers. In stark contrast to his disparaging views on Nanjing, Marchionne has praised Chery as “a young and modern company with a solid technical background”. It has grown rapidly from a standing start in 1998 and last year built 302,000 cars.
Chery’s reputation is now a million miles from its early headline-grabbing activities at the centre of “design piracy” claims over its QQ model, the Daewoo Matiz lookalike that angered GM. Chery was also at the centre of the pie-in-the-sky plans of US entrepreneur Malcolm Bricklin to launch it in the US, though Chery managed to extract itself from that deal last year.
Subsequently Chery this year signed a deal with Chrysler to develop a new small car platform – likely to result in Chery manufacturing the Dodge Hornet for exports. This deal looks safe despite recent upheavals at Chrysler following its takeover by Cerberus. New Chrysler chairman Bob Nardelli – the US business hard-man trained at GE and now tasked with turning round the ailing US firm – is know to favour emerging markets initiatives.
In his previous job, turning round US DIY store chain Home Depot, Nardelli drove the company into emerging markets, notably Mexico and China, doubling the company’s turnover and delivering a massive yield for shareholders. He’s unlikely to strike a better deal for Chrysler’s China market entry – so the deal is likely to progress rapidly.
Fiat, meanwhile, started courting Chery last year when the problems at Nanjing became too much for Marchionne. In October 2006, Chery signed an MoU with Fiat to supply 100,000 Chery-designed 1.6- and 1.8-litre petrol engines to Fiat, for use in cars built both in and outside China.
So it’s no real surprise to see that JV extended into car-making – it’s expected to start production in 2009, and a formal JV agreement will be signed in October. What is perhaps surprising is that the JV will start with Alfa Romeo rather than Fiat models. Assembly of 159 sedan and 147 five-door hatchback from CKD kits for the Chinese market will precede full-scale manufacture of Fiat – and Alfa – models, including the company’s two specialist emerging markets cars – the Linea sedan, launched in May, and the second-generation Palio/Siena, due next year.
Chery has other attractions to Fiat beyond its technical and manufacturing skills. It also has something that Nanjing lacked – a vibrant, aggressive dealer network in China. Speaking at the recent Automotive News congress, Fiat Automobile CEO Luca De Meo said distribution was a central – but often overlooked – element in manufacturers’ emerging markets strategies. “A low price doesn’t guarantee success. You also need a proper dealer network and a good brand image,” he said.
De Meo cited Brazil, where Fiat has a good dealer network established during its 30-year presence in the market, and Turkey, where it has a strong partnership with the local Koc corporation. In these markets, Fiat has seen strong sales for the Palio family as dealers have developed customer loyalty over the years. By contrast, the Palio had not hit its sales targets in China and India because of an inadequate dealer network and because customers did not understand Fiat’s brand values.
Speaking recently before his move to Renault, Fiat’s global operations director Stephen Norman said access to markets were significant drivers behind Fiat’s choice of partner in China and India, where it has a far-reaching JV with Tata, India’s second-largest automaker, which has a substantial dealer network throughout the country.
Fiat’s earlier failed Indian JV was with another struggling, long-established automaker, Premier, which until 2001 was still building the ubiquitous Bombay taxi, the Padmini, based on a 1950s Fiat 1100. In many ways, Nanjing is China’s equivalent of Premier – one of the oldest companies, but one that has been left behind as new upstart business take a more ambitious approach.
Nanjing, meanwhile, looks likely to exit stage left, swallowed by its much larger rival SAIC. Last month the two companies signed an MoU to discuss “all-round” co-operation and a possible merger of their auto operations. Such a move has been widely expected ever since Nanjing bought the assets of MG Rover in 2005 – after SAIC had already purchased the design rights to the cars.
The upshot is both companies make their own versions of the Rover 75 – SAIC using the risible ‘Roewe’ brand, while Nanjing has access to the MG brand. The Chinese government wants to consolidate the two operations as part of moves toward reducing the number of smaller automakers – such as Nanjing – in the market.
The MoU is not a done deal – indeed, SAIC said there were “numerous uncertainties” about the prospects for future co-operation. But SAIC chairman Hu Maoyan favours a deal, and indeed, the likely withdrawal of Fiat from Nanjing is likely to simplify any takeover. Chinese law only allows an automaker to have two foreign partners – and SAIC already has large JVs with GM and VW. It would be unable to assimilate Nanjing into its own operations if a third JV was brought to the party.
SAIC would also be good news for the UK, as it would have the financial clout to restart and upgrade a low-volume sports car operation for MG at Longbridge. This would be a good move politically for the Chinese company and the MG brand would greatly assist a launch in Europe.
Mark Bursa
