Reports: Local govt help, will use scrapped models

As Chery Automobile Co trims its lineup in an attempt to restart growth, an all-new carmaker could to emerge from the models it has abandoned.

According to recent domestic media reports, Chery's co-founder Lu Jianhui has brought some 200 staff members to start a new auto company in Chery's home city Wuhu, Anhui province.

Not yet registered, the new company will have a designed annual production capacity of up to 700,000 cars - some reports say 330,000 - and is expected to begin production in 2015.

The first model will be a subcompact car developed by Chery, the reports said.

The news came after Chery announced in April it will drop its multi-brand strategy. At its most ambitious, the carmaker had four brands and more than 20 models as well as 130 ongoing R&D projects.

But the costly strategy failed as sales continued to decline over the past two years.

Once the sixth-largest domestic carmaker, Chery even fell from the top 10 list in terms of sales in the first half of this year, surpassed by former followers Brilliance Auto, Great Wall Motors, JAC Motors and Geely Automobile, according to statistics from China Association of Automobile Manufacturers.

In an effort to rebound from years of stagnant performance, the company plans to retain only its namesake brand, reduce its lineup by half to 11 or 12 models, streamline operations and cut costs.

Analysts generally believe that the automaker is on the right path with its "One-Chery" strategy, but they are doubtful about the prospects for the new spin off car company.

They note that the central government has been calling for consolidation in the auto industry and is not likely to approve the new project, and even if it gets the green light, whether it will find a place in the market also remains in question.

Zhu Bin, an analyst with LMC Automotive, said "it doesn't make sense to use old models for a new brand".

"Also, the micro car and subcompact segments it is eyeing have been shrinking as increasingly affluent Chinese mostly want at least a compact model as their first vehicle," he said.

Independent auto analyst Zhong Shi agreed that it is more challenging today for a new company to enter the car manufacturing business as the golden age of market opportunity has passed.

China's passenger vehicle market has slowed from its previous torrid pace in recent years and the market share for homegrown brands has been further squeezed by resulting fierce competition.

"Even Chery is facing business risks, let alone a new company derived from it," Zhong said.

According to media reports, the government of Wuhu has invested 2 billion yuan in the new company, which is now called the Jiangbei project because it would be produced in the city's Jiangbei Industrial Park.

The local government doesn't want Chery's surplus assets to flow to other provinces, according to a report on the 21st Century Business Herald that quoted anonymous sources with knowledge of the project.

The new government-backed company might also use Chery's production facilities and distribution channels in the initial stage, the report said.

Currently Chery has annual production capacity of about 900,000 vehicles. The strategic transformation will leave the company with only four lineups - the QQ micro, Tiggo SUV, Fulwin subcompacts and compacts as well as its Arrizo compact and mid-sized cars.

The company now runs an equal joint venture with Jaguar Land Rover. The joint venture in Changshu, Jiangsu province will be operational next year first producing premium SUVs.

It also has a 50-50 joint venture with the Israel Group to make the Qoros that debuted its first production car in March in Geneva. It will go on sale in China later this year.