CHINA: Chery relies on government subsidy for profit - report

By Graeme Roberts | 19 November 2012

Chery Automobile, once China's largest home-grown automaker and Tata Motors' JLR's partner in the country, is relying on government subsidies to turn a profit while domestic rivals Great Wall Motor and Geely Automobile Holdings pull ahead, a media report said.

The divide between winners and losers in the world's biggest auto market shows the value in focusing on fewer products and brands to get more bang out of the investment buck - a strategy Ford used to avert bankruptcy in 2009, Reuters noted.

"All indigenous brands were neck-and-neck in competition four to five years ago. But those with a focused product strategy and a cautious approach are now ahead," Sheng Ye, associate research director for Greater China at industry consultancy Ipsos, tol the news agency.

Research by state-owned China Lianhe Credit Rating shows that Chery would have lost money in each of the past three years were it not for government subsidies. The losses for 2009 and 2010 are noteworthy because auto sales soared then, thanks to Beijing's incentive programmes.

The company recorded profit of CNY66m (US$10.59m) in 2009 and CNY240m in 2010, according to the report from Beijing-based Lianhe. That means it would have been deep in the red if it were not for the CNY633m and CNY1.12bn in subsidies it received in those two years.

Chery spokesman Huang Huaqiong said the company has made substantial investment in technology and is now adjusting its brand strategy and he expressed confidence that performance would improve.

Ipsos's Ye said Chery could have remained a front runner if it had focused on building up its low-cost brand QQ, its first hit model, which has been labeled a copy of General Motors' Chevy Spark.

Instead, it rolled out dozens of new models with little differentiation and even created two additional brands, Riich and Rely, which never caught on.

"It's easy to win a fight if you have more kids," chairman Yin Tongyao often used to say about his multiple-brand strategy.

But his numerous offspring are struggling.

Chery's sales are down 13% year to date, more than double the 6% decline it recorded in 2011, when the auto maker sold 641,700 vehicles, according to official data.

Reuters noted Warren Buffett-backed BYD is also suffering from over-stretching. After entering the auto market in 2003, the former battery maker quickly expanded into other businesses, such as solar panels and most recently solar energy storage facilities. It even makes and sells light bulbs.

This year, BYD's net income is set to plunge as much as 98% due to weak car sales as well as sluggish solar panel and cell phone businesses.

A BYD spokeswoman declined to comment on the financial performance but said the company was "very optimistic" about the future of its electric vehicles.

Great Wall Motor, which started off as a tiny workshop making cheap pickup trucks 20 years ago, has become China's top SUV and pickup maker. Its net profit more than doubled to CNY1.5bn in the third quarter, three times what Chery made in all of 2009-2011.

A Great Wall spokeswoman credited the company's focused and cautious approach for its success.

Geely, which had a bumpy start with several unpopular models, has emerged as a front runner after fine-tuning its brand strategy five years ago, releasing hit models such as the EC7 sedan and GX7 SUV.

Its acquisition of Australian gearbox maker Drivetrain Systems International in 2009 has also helped lift the quality of its cars. Its year to date sales are up 13%, nearly twice as much as the overall car market.

A Geely spokesman cited the company's broad supplier base and investment in technology among the reasons for its success.

Chery in September announced a major reshuffle of its business, including folding the unpopular Riich and Rely brands into the group.

BYD has sharpened its focus on green cars, recently rolling out a financing package that allows fleet operators to buy its pricy electric car e6 in installments.

But engineering a turnaround will not be easy, especially in a slowing market.

"BYD and Chery are moving in the right direction. But how things will turn out will depend on how well these measures will be executed," Zhang Xin, an analyst with Guotai Junan Securities, told Reuters.