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Sino-Israeli Startup Seeks Place Among 94 Brands in China: Cars

It’s not easy being No. 94.

Qoros Auto Co., a startup carmaker without a factory, a model name or an established dealer network, plans to introduce a sedan in China next year, joining the world’s most competitive car market, where 93 other brands vie for customers. In Qoros’s favor is that China is also the biggest market.

“The world does not need another” car brand, Volker Steinwascher, 69, vice chairman of Shanghai-based Qoros and a former Volkswagen AG (VOW) executive, said as he showed off his iPad loaded with renderings of ideas for his company’s cars. “If somebody had the idea of doing the same thing outside of China, I would say it would be very difficult. But the situation in China is different.”

The slowing pace of auto sales in China and warnings of overcapacity haven’t deterred Steinwascher and his team, underscoring the resiliency of China’s appeal for automakers. Though he’ll compete against giants such as VW, General Motors Co. (GM), and Hyundai Motor Co., Steinwascher insists that a startup can prosper in China because so many potential customers are first-time buyers who have no loyalties to brands.

Established as a joint venture between China’s Chery Automobile Co. and an Israeli holding company, Qoros says it will invest 16 billion yuan ($2.5 billion) through 2015 and produce about 150,000 units annually at a planned factory in Changshu, a 90-minute drive northwest of Shanghai.

Chery, the biggest Chinese car exporter and maker of the hit QQ mini car, teamed up with Israel Corp. (ILCO), a Tel Aviv company with interests in shipping, oil refining, chemicals and transportation, for the 50-50 joint venture.

Startup Carmaker

Steinwascher was working as a consultant after retiring from Volkswagen when he was approached by Israel Corp., which had a previous joint venture with VW. Executives from the Israeli company asked him to put together a team at Qoros, a chance he jumped at because, after a few weeks of retirement, he said, he simply found golf “wrong.”

The venture plans to boost the number of employees in Shanghai and Changshu to 1,500 over the next two years from the current team of 450, mostly designers and engineers. The company plans to unveil its first sedan at the Geneva Motor Show in March and begin sales in the fourth quarter of next year. The car, yet unnamed, will be sold through about 100 dealerships in China and be priced lower than comparable Volkswagen models, Steinwascher said.

‘European DNA’

Steinwascher, an avowed car enthusiast who drives a black Porsche 911, recruited Mini designer Gert Hildebrand to head the design team at Qoros. Other hires include BMW’s ex-chief engineer responsible for vehicle performance at its motorsports unit, Jaguar Land Rover’s former head vehicle engineer, and Volvo Car Corp.’s former global product manager. Guo Qian, Chery’s chief operating officer, serves as chairman and chief executive of Qoros.

The “European DNA” added by the high-profile hires sets Qoros apart from other Chinese joint-venture carmakers, said Klaus Paur, global head of automotive at researcher Ipsos in Shanghai.

“It’s an extremely strong team in terms of technology and know-how,” Paur said. “This is an interesting approach. There’s no reason why China should not succeed in having a world-class car manufacturer.”

Improve Quality

Chery, which was embroiled in a trademark dispute with GM over its $5,000 QQ that was settled out of court, is seeking to raise its “core competitiveness” and improve product quality through the tie-up with Israel Corp., said Huang Huaqiong, a company spokesman. The manufacturer, which widened a recall to six countries in August after finding potential cancer-causing asbestos parts in some models, is supplying the engines for Qoros.

Israel Corp. sees its investment in Qoros as a “very long- term investment,” and a bet that China’s economic growth and its auto industry will outpace developed economies, said Noam Pincu, an analyst at Psagot Investment House Ltd., who has a buy recommendation for Israel Corp. Eli Goldschmidt, a spokesman for Israel Corp., didn’t immediately respond to an e-mail sent over a public-holiday weekend.

Qoros’s target buyer is 25- to 30-year-olds who want “quality at an affordable price,” said Steinwascher, who headed VW’s operations in North America from 1995 to 2004. “Somebody who wants an Audi logo will buy an Audi. That’s not our target group.”

Biggest Market

China surpassed the U.S. as the world’s largest market for new vehicles in 2009, boosted by rising incomes and stimulus measures. While sales growth has stalled the past two years as the economy slowed, high savings rates and pent-up demand mean the Chinese market will grow to deliveries of 25.5 million vehicles annually by 2015, according to the average forecast of IHS Automotive, Macquarie Equities Research and the Economist Intelligence Unit.

The biggest obstacle Qoros faces may be its lack of scale, said Jochen Siebert, managing director at JSC Automotive Consulting. Automakers need volumes of at least 3 million cars each year for a business to be sustainable, he said. Chery has so far said it has no plans to share design, engineering, or production facilities with Qoros.

“We don’t see a very big chance for them, honestly,” said Siebert, who is based in Shanghai. “They will sell cars, but it’s not enough to really make money. They won’t have return on investment for a long time. They’re too small.”

Auto Sales

By contrast, GM and its affiliates last year sold 2.55 million vehicles in China and the VW Group boosted China and Hong Kong sales to 2.26 million units.

Those companies are among a handful of exceptions in China. Of the country’s 70 automakers, only 15 sell more than 120,000 cars a year, and 53 sell fewer than 10,000, according to China Association of Automobile Manufacturers. A total of 93 auto brands compete for consumers in China, according to industry researcher J.D. Power & Associates.

Hildebrand, the former Mini designer, who had never set foot in mainland China before being recruited by Qoros, insists there will be a place for Qoros. The new car will have “simple lines,” “maximum stretch” and “a very strong face,” he said. “When you put a Qoros beside an Audi A4, BMW 3 series, VW Passat, you feel it belongs to the same class, but we play in a lower class price-wise.” Hildebrand said. “We’re already working on the next generation and the next product.”

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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