Chrysler's China Patterns

At the risk of antagonizing the UAW, DaimlerChrysler is in talks with China's Chery Automobile Co. to build cheaper, more profitable cars

DaimlerChrysler (DCX) hasn't committed to building the subcompact car it plans for North America in China yet. But if such a plan is announced in the next several weeks, it will likely be the first of at least a few more such arrangements, as automakers take advantage of China's low-cost manufacturing to put more small, fuel-efficient vehicles into U.S. and European garages.

The automaker's Chrysler Group has been saying for months that it's trying to find a manufacturing partner to build a small car for North America at a profit. Because of the high cost of running plants manned by the unionized United Auto Workers, combined with the low profit margins on small cars, U.S. automakers haven't been able to manufacture small cars profitably in the U.S. in decades.

And with their profitability under siege, Chrysler, Ford (F), and General Motors (GM) aren't keen to increase their footprint in manufacturing. Still, the companies see a need to market smaller, fuel-stingy vehicles in the U.S. as demand wanes for big SUVs and pickup trucks.


  The absence of profitable small cars has not only hurt U.S. automakers but created a perception that they're less "green" than the Japanese. "Japanese automakers have been good at building fuel-efficient small cars because the price of fuel and pollution controls in their home market requires it," says marketing consultant Dennis Keene. "Gas prices, until recently, and weak air-quality regs in the U.S. have created a marketplace that loves trucks and SUVs. So I would say U.S. automakers were suffering now in part because they played the cards that were dealt to them," he adds.

It's true that most Big Three manufacturing in the U.S. has grown up around the fat profits to be made for trucks and SUVs, which are mechanically simpler and cheaper to make, balancing the lack of profit from passenger cars.

That's where China comes in. Though the cost of importing parts and components into China and shipping cars out of the country has been increasing, the cheap labor costs and lack of health-care expenses makes the country an obvious choice for building small cars. General Motors already imports its small car, the Aveo, from South Korea. And Ford, in the past, has also imported small cars to the U.S. from Korea. But no automaker has yet sold a China-built car or truck of any scale in the U.S.


  Chrysler, according to company sources, has been talking to Chinese automaker Chery Automobile about manufacturing a small car based perhaps on the Dodge Hornet design study, or concept car, glimpsed at auto shows since last year. Chery has already earned some headlines in the U.S. for signing an agreement with automobile entrepreneur Malcolm Bricklin, whose New York-based dealer network, Visionary Vehicles, will sell Chery-built premium and luxury vehicles in the U.S. The start date has been sliding, however, with the vehicles now not expected until 2009 or 2010 (see, 6/6/06, "Here Come Chinese Cars").

Chery operates three assembly lines and cranks out 400,000 vehicles a year at its base in Wuhu, China, with stated intentions of scaling up to 1 million vehicles per year. Chrysler would likely need a dedicated line from Chery to do about 150,000 Hornets a year, with half coming to the U.S. Chery wouldn't need to strike a deal to joint-venture the vehicle and sell a version of its own in China. Rather, it could just serve as an outsource manufacturer.

Chrysler CEO Tom LaSorda, speaking to the Automotive Press Assn. in Detroit, said the automaker has never named the companies in Asia and Europe with which it has discussed a deal to produce small cars for sale in the U.S. and other markets. But when asked, LaSorda said "China has not been ruled out" as a production center for the new vehicle. LaSorda said he hoped Chrysler would announce a partner for the company's push into small cars by the end of the year.


  All this talk of a small car to be marketed through Dodge has no relation to or impact on DaimlerChrysler's plan to introduce the smart fortwo microcar to the U.S. in 2008. That car will be manufactured in Europe—despite the heavy financial losses booked by DaimlerChrysler on the smart business, as a result of being locked into long-standing European supplier contracts.

Chrysler's possible China gambit comes at a difficult time for the automaker. It will lose $1.5 billion this year because it's overstocked on slow-selling pickup trucks and SUVs. Indeed, the company's product portfolio is more top-heavy than either Ford or GM in truck-based vehicles. LaSorda says it needs to balance out its portfolio with smaller cars and crossover vehicles.

Meanwhile, Chrysler is trying to get the UAW, which is vociferous in its criticism of automakers that outsource manufacturing to cheap-labor markets like Mexico and China, to give it health-care cost concessions worth more than $2 billion a year. The union has already granted such concessions to both Ford and GM. So far, the UAW has said DaimlerChrysler isn't hurting enough financially for it to give up its free health care—especially in advance of contract negotiations to be held a year from now.

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