May 12 (Bloomberg) -- A year ago, investors loved Great Wall Motor Co.’s cheap SUVs. The stock surged to records, margins fattened beyond those of any automaker and the chairman even talked about outselling Jeep. Then it tried to go upscale.
Today, its ambitions to be China’s first challenger to major foreign car brands have hit a snag. Sales of the new Haval H8, Great Wall’s first sport utility vehicle priced in the 200,000 yuan ($32,100) plus segment dominated by the likes of Volkswagen AG’s Tiguan and Ford Motor Co.’s Kuga, were suspended indefinitely last week because of quality concerns, the vehicle’s second delay this year.
The announcement sent the stock tumbling 17 percent, its biggest single-day drop since 2008, as the setback undermined the credibility of Chinese automakers and their ability to move beyond making cheap cars. At least seven analysts cut their ratings on Great Wall and the company said the experience exposed its weaknesses in developing quality vehicles.
“We believe the event indicates domestic automakers haven’t met requirements to upgrade to be a high-end vehicle maker,” wrote Vivien Chen, a Hong Kong-based analyst at Oriental Patron Financial Group, who cut her rating on the stock to hold. “The event definitely hurt customers’ perception of H8, and hurt company image.”
In its May 9 statement, Great Wall said it decided to halt sales of the H8 after after customers reported hearing “knocking noises” in the transmission system when driving at high speeds. While the company didn’t say when sales of the SUV will resume, UBS AG is estimating the launch to be pushed back until the end of the year or beyond.
The incident “reflected the company’s deficiencies in research and development in as well as technical management of high-end products,” Great Wall said in the statement. “As such, the company decided to further rectify Haval H8 which will not be launched unless it is of premium standard.”
Max Warburton, an auto analyst at Sanford C. Bernstein in Singapore, wrote that the H8 may be facing a calibration problem between its engine and six-speed automatic transmission, which would be difficult and costly to fix.
Xu Chengzhi, a Great Wall spokesman, declined to comment beyond what the company said in its statement.
In January, Great Wall delayed the debut of the SUV after China’s automotive press panned it in test drives, causing the shares to tank 12 percent the next day.
Great Wall’s latest stumble, following a recall in Australia in 2012 for banned asbestos parts, illustrates the reversal of fortune for a company that had seen its stock jump 40-fold over five years. Its success had led Ford Motor Co.’s Asia chief David Schoch to say it had the most traction among Chinese automakers with global ambitions.
“The one that’s probably one to watch is Great Wall,” Schoch told reporters in October. “They seem to be coming up with good designs, quality. They’ve started to export.”
Chairman Wei Jianjun, whose wealth is estimated at $5 billion by the Bloomberg Billionaires Index, set a target in May last year for Baoding, China-based Great Wall’s Haval marque to surpass Chrysler Group LLC’s Jeep and make it the world’s top SUV-dedicated brand in three to four years.
As part of that plan, Great Wall began constructing a new research center the size of 35 soccer fields in the city of Baoding, about 160 kilometers (100 miles) from Beijing and the company plans to increase the number of engineers by at least 40 percent to more than 10,000.
Great Wall’s ambition to surpass Jeep is coming under increasing pressure as sales decline both abroad and at home.
Overseas sales fell 22 percent to 74,942 units last year amid severe competition and as the Japanese yen and Korean won depreciated, the company said in its annual report.
The automaker’s sales, including exports, fell 11 percent last month, compared with the 12 percent gain in industrywide passenger-vehicle deliveries. The collective market share for Chinese brands slumped for an eighth straight month in April, down 2.5 percentage points from a year earlier to 37.1 percent.
Despite the slump, Great Wall’s Haval remains the best-selling SUV line in China, with 111,290 deliveries this year, according to data by the China Association of Automobile Manufacturers.
The company “bit off too much” by jumping into a premium product rather than following up with an improved product to the H6, said Janet Lewis, a Hong Kong-based autos analyst with Macquarie Group Ltd., who has an outperform rating on the stock.
“The key will be how it learns from this experience and avoids making a similar problem in the future,” she said. “We believe it will learn and move forward.”
The company was “very responsible” in delaying sales of the Haval H8 until it gets it right, even though doing so has dented its image as a leader among local automakers, said Dong Yang, CAAM’s secretary general. This reflects growing maturity, as in the past local automakers probably would have rushed to sell models before they were ready, he said.
Great Wall was among a small group of local carmakers that have stated ambitions to enter developed markets, with the U.S. as the biggest prize. Until now, the biggest buyers of China’s auto exports have been countries such as Algeria, Russia and Chile.
BYD Co., the electric carmaker partially owned by Warren Buffett’s Berkshire Hathaway Inc., has made some headway with its electric buses in California, and has said it plans to introduce four passenger-vehicle models in the U.S. at the end of 2015. Geely Automobile Holdings Ltd. and Chery Automobile Co. have made similar predictions as far back as 2005, though they’ve yet to sell their first car in America.
Those ambitions were dealt a blow in 2012 when Great Wall and Chery Auto recalled 23,000 of their vehicles sold in Australia, which has safety standards comparable to Europe’s, after authorities found banned asbestos in some models. Chery later widened the call-back to five more countries including Brazil and Singapore.
Great Wall’s latest delay with the H8 is a reminder that Chinese automakers still grapple with the move into making more sophisticated and profitable vehicles.
“The company faces monumental challenges in trying to move up a league in the automotive world, and the problems faced by the H8 confirm Great Wall is struggling with technology,” Bernstein’s Warburton said. “Serious questions will now be asked about Great Wall’s growth potential.”
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