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From a report in the Detroit News:

DaimlerChrysler AG is close to finalizing a deal with China's Chery Automobile Co. Ltd. to produce Dodge-branded subcompacts for sale in the United States, in what is likely to be the first such arrangement between a leading global automaker and an aspiring Chinese manufacturer.

General Motors Corp., Toyota Motor Corp., DaimlerChrysler and other industry leaders make vehicles in China with local venture partners. But the deal between DaimlerChrysler, Chery and possibly a third partner would mark the first time a Chinese automaker would be building vehicles for export for a U.S. or European company.

The deal, reported by the German magazine Der Spiegel, was confirmed to The Detroit News by people familiar with the negotiations.

DaimlerChrysler had no comment.

The automaker provoked an uproar a year ago when its top China strategist, board member Ruediger Grube, said the company was exploring the possibility of making vehicles in China for export, including a subcompact for the Chrysler Group's U.S. lineup.

Grube's comments stirred concerns that U.S. and European automakers would accelerate the shift of vehicle production to low-cost countries, eliminating jobs at home.

But most major automakers cannot earn money selling tiny and inexpensive cars built in western Europe or North America. That is a growing handicap for Detroit's automakers as high gas prices push consumers toward smaller, more fuel-efficient cars.

Japanese companies have taken advantage of the trend by importing small cars they sell in other parts of the world, such as the Toyota Yaris and Honda Fit, to the United States.

Honda exports a Fit built at its Chinese venture to western Europe, but not to the U.S. The Fit sold in the U.S. market is built in Japan.

GM's small Chevrolet Aveo was designed by the GM Daewoo Auto & Technology, and it is built in South Korea.

"It's just a segment we don't compete in," Chrysler CEO Tom LaSorda said last week. "We need to look at that segment, if we can make a profitable case."

He pointed out that the cars in that category that Chrysler's competitors sell in the United States are built mostly in Asia.

Chrysler has displayed concept cars in that class, such as the Dodge Hornet, which is slightly smaller than the Caliber compact.

LaSorda is likely to address the subject today at an Automotive Press Association luncheon. Chrysler executives have said in the past that they want to forge a deal with a company that already builds subcompacts in large volumes and could turn out a few more for Chrysler.

Chery, a state-owned carmaker based in Anhui province in eastern China, previously formed plans to export cars to the U.S. in a venture with entrepreneur Malcolm Bricklin. But that partnership has fallen behind the original schedule and recently postponed the date at which the first models were expected to arrive, by a year to 2008.

No Chinese-built cars have been sold in the U.S., but industry analysts say the Chinese are likely to follow in the footsteps of the Japanese and South Koreans.

Chinese manufacturers now export vehicles to a few emerging markets, such as Syria and Sudan, and analysts say the quality of their vehicles is improving rapidly.

Privately, many U.S. auto executives believe the only way to prepare for competition from China's carmakers is to establish their own low-cost production and export operations in China.

In U.S. auto industry circles, Chery has gained some notoriety because GM has accused the Chinese company in court of copying one of the small cars it makes in China, the Chevrolet Spark.

"The Chinese are learning quickly and efficiently how to make cars, but they don't have the distribution networks," said auto analyst Peter Schmidt, Warwick, Britain-based publisher of the AID newsletter.

"They realize that, to speed up the process and gain a foothold in the important markets, they need a little bit of help," Schmidt said.

The deal would be timely for Chrysler, which has too few small cars to offer in a market which is now rewarding fuel-efficiency.

DaimlerChrysler stunned investors last week when it said Chrysler is expected to lose $1.5 billion in the third quarter, more than double its previous loss estimate for the Auburn Hills carmaker.

Chrysler also could benefit from having a subcompact in its model range to offer in Latin American markets.


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