The Chinese Business Forum @ MIT Sloan

Source: Financial Times London

Time: March 21, 2006

Title: "China's Chery prepares to make a splash"

Author:  GEOFF DYER

Original BODY:

A decade ago, private cars in a Chinese city tended to be big and black. But over the last couple of years, a dash of colour has begun to appear on the streets, small darts of metallic lime green and garish yellow.

The bright colours are usually found on the QQ, a micro-car made by Chinese company Chery that was one of the hottest sellers in the domestic car market last year, with sales rising 130 per cent to 110,000 units.

The QQ is one of the models that have taken Chinese companies from being bit players in their own car market to significant competitors. The best selling model in China last year was the Charade, a sub-compact car made by First Auto Works, another local manufacturer.

In total, Chinese brands won a market share last year of 26 per cent, up from 2 per cent in 2000, putting them just behind Japanese brands which had 27 per cent.

The surge of Chinese brands would be of natural interest to the leading global automakers because of the growing importance of the Chinese market. Yet it is of particular significance given that Chery and several other Chinese companies have announced plans over the last year to begin exporting cars to the US and Europe.

"I showed these market share figures to some people in Detroit a few weeks ago, and they were stunned by the Chinese sales," says Michael Dunne, president of Automotive Resources Asia, an industry consultancy based in Shanghai.

The question being asked of the Chinese companies is whether they have won market share simply by selling at low prices, or whether they are also beginning to master the dark arts of branding and marketing - skills they will need if they are to succeed overseas.

Price is definitely a big factor. The QQ retails for Rmb33,000 (Dollars 4,109), compared with Rmb46,000 for the General Motors Spark in the same category.

Such low prices have helped create a new generation of car-buyers, less concerned about the status symbol of a large vehicle. The greater fuel efficiency of smaller cars has been an added incentive in a period of higher oil prices.

The Chinese companies have so far faced lower research costs. The QQ first won notoriety through allegations that it was a near-exact copy of the Spark, including the components as well as the shape. Indeed GM sued Chery in China, although the two companies settled the case last year and did not disclose the terms.

The Charade, meanwhile, is an old model licensed from Daihatsu of Japan.

When asked why the QQ is so much cheaper than the Spark, the manager of a Chery dealership in the Pudong area of Shanghai, who asked not to be named, quipped: "Because we do not have patent fees."

QQ sales were more than four times those of the Spark last year. Yet in the case of the QQ, industry observers say there is more to its success than just a low price-tag.

Unlike most other Chinese brands, whose marketing involves glitzy gimmicks to attract first-time buyers, Chery has managed to create a significant amount of buzz around the model, especially among young people.

The brand itself is also the name of an instant messaging service that is popular among young Chinese and the company has used the internet - including collaborations with the Sina.com portal - to reach new consumers. The bright colours have also helped establish an image.

"More than any other Chinese model, the QQ has managed to establish an identity for itself," says Chris Reitermann, managing director of the Beijing office of OgilvyOne, the advertising agency.

The company's sales network has been revamped and is beginning to win plaudits for its flexible approach.

"You can see the same thing with several consumer goods companies in China, like Haier or TCL, and now Chery. They are good at managing the sales channel," says Paul Gao of McKinsey's Shanghai office.

Yet the success of one product does not mean that Chery is now a master marketer. The QQ accounted for 60 per cent of its sales last year and most of its other products are relatively anonymous.

"As a product, the QQ might be more successful than others, but the challenge is to transfer that (to) the whole product range," says Mr Gao.

Moreover, there are still quality concerns about Chery's cars.

According to JD Power, the car consultancy, the QQ generated 30 per cent more problems than the Spark last year.

When Chery starts selling in the US, nothing could scupper its brand name more quickly than persistent quality complaints.