Jaguar Is Far From Becoming China's Next Top Model

Agenda-Setting Financial Insight.
March 22 2012 5:07 PM

Jaguar Is Far From Becoming China's Next Top Model

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Jaguar is teaming up with China's Chery Auto in an effort to corner a piece of the rosy Chinese car market.

Photo by THOMAS SAMSON/AFP/Getty Images

Jaguar Land Rover wants to be China’s luxury brand of choice, but it is taking a circuitous route. The high-class car maker, owned by India’s Tata Motor, has announced a joint venture with China’s Chery Auto, a state-owned producer known for being cheap and cheerful. As a strategy for snagging a bigger share of China’s giant auto market, this is risky.

It’s easy to see why luxury brands want more of China, now the world’s biggest car market. Jaguar Land Rover’s sales there grew 58 percent by volume in the fourth quarter of 2011, year on year. While sales of passenger vehicles overall have slowed, and even luxury models are being discounted by dealers, the underlying trend for trading up is still strong. Audi, BMW and Mercedes Benz are the top brands, thanks to their own joint ventures, and BMW reckons China could become its biggest market this decade.

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With a partner JLR can start producing in China, which should boost its already-healthy 17 percent EBITDA margins. It may also get better treatment with a local badge. Foreign manufacturers are heading for a tough time, since China’s own auto companies are wrestling with chronic overcapacity, and yet adding ever more. Foreign brands were excluded from a recent list of approved models for official purchases.

The regulatory road, though, is long. The National Development and Reform Commission, which gets to rule on the planned venture, recently removed the car industry from its list of priorities for foreign investment. Other foreign joint ventures, like HSBC’s credit card deal with Bank of Communications, have taken years to get through.

Then there’s the choice of partner. Chery, despite some unimpressive forays into the high-end market, is distinctly low-end. Its classily named Riich G5 Sedan didn’t take off, and the company is only in the black thanks largely to government subsidies. Fiat, Chrysler and Subaru have all come close to shacking up with Chery, only for the wheels to come off in all three cases.

One shouldn’t dismiss Chery too readily - as the success of once-backward Korean and Japanese carmakers shows. But when a strong brand collides with a weak one, it’s usual for the latter to come off best.

Read more at Reuters Breakingviews

John Foley is breakingviews' Greater China correspondent, based in Hong Kong. He previously wrote on mergers and acquisitions, capital markets, consumer goods, mining, and luxury.

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