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Global Economics

Can Chrysler Rebound in China?

It was the first foreign automaker in the Chinese market, but sales have been lackluster. Now, the 300C and the Sebring lead a new strategy and commitment

Nearly 25 years ago, the Chinese government opened its doors to foreign automakers to invest in China's fledgling auto industry. Back then, the first automaker to cross China's threshold was American Motors Corp., the smallest of Detroit's four automakers.

In 1983, American Motors—which was acquired by Chrysler in 1987, then became a division of DaimlerChrysler in 1998, and was spun off earlier this year as Chrysler LLC—formed a joint venture with the Beijing Automotive Works, a subsidiary of the Beijing municipal government. Called Beijing Jeep Co. (BJC), the venture partners agreed to jointly build and sell Jeep Cherokee SUVs in China.

While Jeep enjoyed some first-mover advantages during its early years in China—including limited competition, high margins, and guaranteed customers—its overall performance during the past two decades might politely be described as disappointing.

Success Falls to Volkswagen

Since its inception, BJC has built and sold approximately 250,000 Jeep and Chrysler brand vehicles in China, or an average of just 10,500 vehicles per year. Single-year sales peaked at nearly 26,000 units in 1995, and since then annual sales have mostly been on the decline, totaling just 6,838 units in 2006—or 0.2% of the market, according to official industry figures. Predictably, earnings have been scarce at BJC over the past decade, with the China Daily reporting losses at the company in the five years preceding 2003, then small profits in 2003 and 2004, followed by a return to losses in 2005 and 2006.

By comparison, Volkswagen (VLKAY)—which in 1984 became the second foreign automaker to set up a joint venture in China—has flourished. Since VW launched production at its Shanghai joint venture in 1985, its early success prompted the establishment of a second joint venture in Changchun in 1992, the start of local production of its upscale Audi brand in 2000, and the recently commenced production of its Skoda brand in China.

Volkswagen and Audi sales in China reached nearly 700,000 units in 2006, accounting for 16% of the local passenger-car market. During the past two decades, VW-brand sales have reached nearly 5.4 million units, and as a result VW has, by a considerable margin, the highest number of vehicles on the road in China today. These vehicles are serviced by more than 650 Volkswagen and Audi dealers spread across the country (compared with just 65 Jeep/Chrysler dealers in China). Profits, naturally, have followed in abundance.

Passenger-car Strategy

Despite its struggles, Chrysler is soldiering on in China, hoping to make up for time lost in what has become the world's second-largest and fastest-growing automotive market. As a start, the company made a strategic decision in 2005 to discontinue production of the Jeep Cherokee in China (SUVs account for only 5% of overall passenger-vehicle sales in China) and concentrate instead on passenger cars, which account for nearly 90% of sales.

In 2006, as Chrysler was winding down production of the Cherokee SUV (which is now only imported), it was starting up production of its upscale 300C sedan. Luxury is good in China, and the large and lavish 300C seems to appeal more to Chinese tastes. Chrysler also simultaneously has introduced a new generation of vehicle buyers to what the brand's vehicles can mean.

While the 300C has not moved in staggering numbers—sales are on track to reach 10,000 units in 2007—its relatively higher price tag (between 340,000-499,000 yuan, or $45,500 to $67,000) will allow the company to become profitable. (It is expected to become profitable this year.) This is a welcome change from the past.

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