Jaguar Land Rover, Chery moving ahead

By Liang Fei Source:Global Times Published: 2013-10-25 5:03:07

A Land Rover SUV model is displayed at the Shanghai auto show in April. Photo: CFP

A Land Rover SUV model is displayed at the Shanghai auto show in April. Photo: CFP

British auto company Jaguar Land Rover Ltd (JLR) and Chinese carmaker Chery are said to have reached a consensus on how to unify distribution channels for imported and domestically produced Jaguar and Land Rover vehicles, signaling new progress in the alliance formed almost a year ago.

Both companies are expected to have an equal say in determining new dealers in China, while Chery may explore options to have some of its own dealers join the sales network of domestically produced JLR vehicles, Beijing-based Economic Observer reported Monday.

Such a decision could see both imported and domestically produced JLR vehicles displayed side by side one another within the same dealership, industry analysts said about the news that comes some 11 months after the companies agreed to build a joint venture in China - to localize production of JLR's Jaguar and Land Rover premium auto brands in the world's largest auto market. 

'Avoid repeat mistakes'

But analysts say that it is in the interest of both companies to settle the issue before Chery Jaguar Land Rover Automotive Company, the joint venture, for which each party holds a 50-percent stake in, starts production next year in Changshu, East China's Jiangsu Province.

Though the 2014 start date for production has yet to be announced, the joint venture, with a total investment of 10.9 billion yuan ($1.79 billion), is expected to produce 130,000 units of cars annually.

Further plans to build an engine facility and research center at the plant have also been tabled.

To the surprise of many, the British premium car producer chose to partner up with privately owned Chery rather than a State-owned auto group as most foreign auto companies choose to do in China, to get around bureaucratic red tape in a timely manner.

But JLR needed a Chinese partner that could quickly win approval from the Chinese government in pushing forward with plans for localization in China, according to industry analysts - and JLR saw Chery as a good choice in this regard.

Yet the reality is that even with the joint venture slated to begin production next year, the timing is still off for JLR - as it will only just then be starting to localize production in the Chinese auto market, which has already started to cool, Zhu Bin, an industry analyst at Shanghai-based consultancy LMC Automotive, told the Global Times. 

Thus, JLR has missed the best chance to up the ante in China, he said, warning that it is imperative that the joint venture settles its distribution channels before production starts to avoid repeating the mistake that Daimler's Mercedes-Benz made in China.

"If the distribution channels [of imported and domestically produced vehicles] are not unified, competition between the two channels is likely to occur, which could really hurt both sides," said Zhu.

It is a lesson learned well by German premium auto brand Mercedes-Benz.

Because it only unified sales channels with its Chinese partner BAIC Motor at the end of last year - years after their joint venture was created in 2005 - previous competition between the two channels had seriously undercut the premium brand's development in China.

Mercedes-Benz is still trying to account for losses today, even after it finally formed a sales company with BAIC in December.

Currently, JLR has around 150 dealers in most first and second-tier cities in China. Therefore, if a distribution channel agreement between the two companies is reached, domestically produced JLR vehicles would also benefit from the established network, say industry observers.

In striking such a deal, Chery's bottom line would be ownership of at least 50 percent of the sales unit, according to the Economic Observer report.

Unifying the distribution channels, however, would also see Chery take a share of the profits from the sale of imported JLR vehicles, which would mean a concession on the part of JLR.

What it boils down to is that Chery currently holds the more enviable position in the partnership as its British partner cannot afford to delay entry into the China market any longer, according to Zhu.

Analysts, too, generally believe that Chery has the upper-hand in the arrangement, pointing out that even the Chinese automaker's company appears first in the name of the joint venture, Chery Jaguar Land Rover Automotive Company.

But when a public relations officer at the Chery Jaguar Land Rover Automotive Company was reached by the Global Times on Monday, she said that she would be unable to comment on the joint venture's situation by press time.

A win-win deal 

It is somewhat surprising that JLR - a company on the verge of bankruptcy five years ago, which was sold by Ford to India's Tata Motors - has rebounded so quickly and already reported such pretty sales numbers in China.

In the first three quarters of this year, JLR recorded a total sale of 66,505 units in the Chinese market, up 18.3 percent year-on-year, a figure that was driven mainly by sales of its Land Rover SUV models. Chinese consumers were even willing to pay an extra 400,000 yuan to buy a Land Rover vehicle in China, where strong demand is currently outstripping supply.

Fueled by rapid growth in the SUV sector in China, which surged over 45 percent year-on-year in the first three quarters this year, Land Rover SUVs are expected to see even better performance after its localization in the future, analysts say.

LMC Automotive's Zhu noted that even sales for Jaguar, less popular than the Land Rover brand in China, is estimated to reach sales of 20,000 units to 30,000 units a year.

While both companies had loosely agreed on technology-sharing terms when forming the joint venture, analysts note that it is difficult for domestic companies to obtain any such meaningful information from their foreign partners who prefer to keep their technological trump card in-hand.

But that's not to say that Chery has nothing to gain from the partnership. The financially troubled Chinese automaker has suffered from sluggish performance in recent years, amounting to losses of more than 2 billion yuan in the last four years, according to media reports.

"The profits made from the joint venture will benefit Chery the most," Wu Shuocheng, editor-in-chief at industry Web portal, told the Global Times on Monday.

Wu added that while consumers believe the joint venture may hurt JLR's brand image and lift Chery's, he said that neither would be the case. "Like most other auto joint ventures in the country, operations for the joint venture and domestic brand are kept separate from each other, so there shouldn't be a direct impact on either brands," he said.

But as three strong German brands - Audi, BMW and Mercedes-Benz, which altogether sold around 800,000 units of cars in China in the first three quarters this year - continue to dominate the Chinese market, there is an upward curve in the road ahead for Chery and JLR.

"Still, if any second-tier premium auto brand is able to get closer to the three German premium auto brands in the short-term, it would be JLR," said Zhu.

At the same time, Chery and JLR need to keep in mind that other premium brands like Volvo, Cadillac and Infiniti are hurrying localization plans in China.

Volvo started local production in August, while Japanese premium brand Infiniti's production facility is set to begin next year and Cadillac's plant is slated to be operational by 2015.


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