Few people took Chery Automobile seriously when it was established, a little more than a decade ago, in the city of Wuhu, in Anhui Province, China. Chery was a newcomer in a small area that had little tradition of manufacturing and was far from the country’s traditional centers of auto production, in Beijing, Changchun, Shanghai, and Wuhan. When the start-up failed to find buyers for a motor engine it had developed, there was little choice but to manufacture a car of its own so that the engine could find a home. After this first car had been built, bureaucratic obstacles prevented the company from selling it. As chairman and chief executive officer Yin Tongyao puts it, “Chery kept hitting the wall over the past decade. Every time we hit a wall, we just reoriented and moved on.”

Chery truly has moved on. In 2007, it sold 381,000 passenger cars, generating 20 billion renminbi ($2.86 billion) in sales and ranking fourth in the domestic passenger-car market. (The top three are brands associated with joint ventures between Chinese and foreign automakers; Chery is an independent manufacturer.) The company is among a handful of Chinese carmakers that have proprietary technology to build core components, such as engines, gearboxes, and chassis. It has also been the top Chinese passenger-car exporter for five consecutive years—in 2007, it sold 119,000 units abroad, accounting for 30 percent of that year’s total sales. Today, Chery’s Tiggo, Eastar, and A5 models can be found on the streets and roads of nearly 70 countries, and the company has seven foreign assembly plants, in Egypt, Indonesia, Iran, Russia, Ukraine, and Uruguay.

Over the past two years, Chery has accelerated the pace of its globalization by entering into an agreement with Quantum, an Israeli holding company’s US subsidiary, to produce 150,000 cars jointly and by talking with European and North American companies about the possibility of cooperating with them. All of those moves have one objective: developing overseas markets.

In a recent interview at Chery’s headquarters, in Wuhu, Yin Tongyao shared his recollections of the company’s difficult early days in a conversation with Paul Gao, a McKinsey principal, and explained his vision for the automaker and the challenges it faces in going global.

The Quarterly: Chery has just passed its tenth anniversary. What do you recall most vividly from the company’s early days?

Yin Tongyao: We started from scratch and had a lot of bad luck. But I think it’s the inferior position that we were stuck with at the beginning that eventually led to today’s success. Ten years ago, Chery had almost nothing—no state support, no deep funding sources, no technology, not much of a staff, not even any formal production ability. Plus, Chery started in a small place like Wuhu and was run by a few young, inexperienced people. No one really had much faith in Chery’s chances of success. If we had to go through all this again, we probably wouldn’t have the guts to do it.

The Quarterly: Why did you choose to keep going?

Yin Tongyao: For one thing, our local-government leaders were confident and promised to be supportive. This was one bit of good luck for us—the local government both allowed us to pursue our ambitions in manufacturing and invested in the undertaking.

Although we didn’t have a clear plan, we did have a simple idea about how to proceed. We thought we could buy a second-hand production line and the technology to produce engines. Later on, however, we found that it was not easy to buy useful second-hand technology or production lines. We first spent over $20 million purchasing a used production line from a foreign company, but that turned out to be obsolete. We trusted foreigners and hired an overseas technology and engineering company to help with the installation and commissioning. However, that company repeatedly asked for more money, even though the project was only halfway done. When we said no, it quit and left. The only thing we could do was to proceed on our own.

When we finally made the engine, nobody wanted to buy it, so we decided to build our own cars. We negotiated with a European OEM in hopes of buying tools and technology for one of its models. The company rejected us on the grounds that such a deal would be inconsistent with its strategy. We were rejected by an American OEM for similar reasons. Chery once again had no choice but to develop car technology on its own. We worked very hard and also hired a few small European and Taiwanese companies to work on the car design. Finally, our first car, Feng Yun—meaning “wind cloud”—came off the production line in 1999.

However, the car was not allowed on the market, since it was not listed in the state catalog, so we had to figure out how to get it listed. We finally managed to have ourselves affiliated with the Shanghai Automotive Industry Corporation (SAIC) and thus were able to get the car’s “birth certificate.”

The Quarterly: What inspired Chery to go global when China’s domestic auto market was just starting to blossom?

Yin Tongyao: To be honest, our move into global markets was not planned, and our global strategy was not as systematic as it is today. Our global strategy now has four aspects: technical cooperation with overseas enterprises, car exports, overseas assembly plants, and equity joint ventures. Technical cooperation began earlier, with the design of our own engines—the first batch of engines was developed in partnership with AVL List, a European design company. That cooperation enabled our engineering and engine teams, as well as our suppliers, to improve their capabilities. Eventually, we became a leader in engine technology in China.

Later, we cooperated with Italian companies on car design. To lower costs, we outsourced only part of the design and tried to do everything else ourselves, so all of our employees were able to improve their skills. It’s in this way, I think, that being in an inferior position helped Chery to grow.

The Quarterly: When did Chery start to develop a global strategy?

Yin Tongyao: Our global strategy came about quite by accident. At the beginning, we only had our eyes on the domestic market. We did not come up with the “brilliant idea” of starting to export to developing markets before breaking into more mature ones, because we were not that business savvy.

In 2001, shortly after Chery was permitted to sell cars, a Syrian car dealer saw the first model of our cars in Beijing and wanted to import from us. With no prior international trading experience, we almost refused him. Eventually, this car dealer bought 10 cars from us in that year, 100 cars in the year after, and over 1,000 in the third year. Gradually, Iran and other countries began to show interest in Chery. This is how we broke into the Middle East market. It’s the same for other markets—instead of our reaching out to car dealers, they came to us first.

The Quarterly: What inspired Chery to set up plants overseas?

Yin Tongyao: This wasn’t planned, either. Some people approached us with the idea to put plants in developing nations. We agreed, and that was it. In hindsight, this was actually a great opportunity because it gave us time to learn from our mistakes before entering more mature and competitive markets.

We are very careful and cautious in establishing overseas plants. We always start small. If this works, we’ll increase our investment. You always need a nurturing period if you want to take root in a local market, so I don’t expect exceptional sales in any country. My hope is that one day these plants can help Chery to penetrate into other, bigger, more developed markets in the neighboring regions.

The Quarterly: How do you assess the risks involved in overseas operations?

Yin Tongyao: We make our own risk assessment, although not always on a scientific basis. For example, currently only Chinese auto manufacturers are selling cars in Iran; Western companies are shunning that country. This is a huge business opportunity. Iran may involve a lot of political risks to certain automakers, but the risks are low to us. It is the same with other countries where the market is not big and Western competitors have no presence.

The Quarterly: Have you gotten to the point where Chery’s talent pool cannot keep up with the company’s rapid global expansion?

Yin Tongyao: Talent is a huge bottleneck. On the one hand, we attract domestic and foreign experts and overseas returnees; on the other hand, we groom young professionals. Despite our initial concerns, many of these young people turn out to be fast learners. Given the right opportunities, they can quickly blossom into managerial professionals.

But we are very cautious with professionals on overseas assignments. All of them rotate into new positions every three years or even less. In addition, we’ve developed a special system to evaluate our employees in an all-around manner to see if they possess managerial abilities, good communication skills, an innovative mind-set, and a sense of responsibility. A manager’s or executive’s supervisor and staffers also participate in the evaluation process. Of course, the most important gauge is whether or not the person can help to create profits for the company.

The Quarterly: Do you have local people in the management teams of your overseas operations?

Yin Tongyao: Chery sends over one to two Chinese people to each plant; the rest are all locals. Our Chinese people have difficulties adapting to the conditions, so we hire local people at our overseas operations. For example, we have more than 70 local employees in Russia, from high-level managers to ordinary workers, and their performance is often above our expectations. The general manager, sales director, service director, and financial director of Chery’s Russian office are all locals.

The Quarterly: Exhaust emissions and global warming are critical social and environmental issues. How is Chery acting in response to these concerns?

Yin Tongyao: We’ve made some breakthroughs in areas such as engines. Chery will continue to increase its R&D spending to reduce carbon dioxide emissions by creating new types of engines, gearboxes, and electric controls, as well as hybrid cars and cars running on alternative fuels. Our R&D is based on Europe’s latest emission standards and we have developed new plans for using alternative fuels. Chery cars meet China’s current emission requirements, and we are trying to upgrade to the highest European standards and to California’s emission standards in preparation for entering European and North American markets.

The Quarterly: Over the past year, the Western world has become increasingly concerned about the quality of products made in China. What has Chery done to tackle the challenge of quality?

Yin Tongyao: We are aware that people have concerns about products made in China. To respond to these concerns, we must overdesign, overtest, and overservice. We think concerns about the quality of goods made in China will quickly disappear if consumers cannot find problems, even with very picky eyes. In our recent joint-venture negotiations with a foreign OEM, our foreign partner put forward quite a few requirements, and we agreed to all of them. If we are able to meet stricter requirements from foreign OEMs like this, it should demonstrate the improvements that Chery has made.

For example, we released a new model specifically designed for a foreign OEM. This customer was happy with the quality and wanted to place orders immediately. But Chery insisted on doing more checks and ensured that it lived up to the design specs and quality requirements. We are very careful in doing business in developed countries. We didn’t attend the Detroit or Frankfurt auto shows. My principle is that if we are not fully prepared, we should not stage a presence.

The Quarterly: Chery is known in China as a company that makes its own models and brands. Recently, however, Chery signed several joint-venture contracts as well as a deal to supply cars to Chrysler. Does that mean Chery has shifted its philosophy?

Yin Tongyao: During our beginnings, being independent or self-reliant was not really what we meant to achieve. At that time, in fact, we wanted to find a “sugar daddy,” local or foreign. We failed because of our own weaknesses and were then forced to rely on ourselves. Now, although Chery has reached a certain scale, we are still not wed to the notion of independence and are open to other arrangements. That said, we insist on two points: first, the technology should be our own, and, second, the brand should also belong to us.

The Quarterly: In your own marketing material, Chery highlights its capacity for innovation. How has the company innovated in terms of globalization?

Yin Tongyao: We have cooperated with foreign partners a good deal, and in ways that are quite innovative for China’s automobile industry. For example, we not only do contract production, in which we produce cars based on the specs of our partners, but also often design and develop our partners’ future products in addition to manufacturing them. So far, no other Chinese carmaker has used its own technology to develop products and manufacture cars for foreign OEMs.

The Quarterly: Looking forward, what are Chery’s biggest opportunities and challenges?

Yin Tongyao: Environmental pressures and high oil prices will force people to buy cheaper and smaller cars. The big cars will be penalized. For example, the last oil crisis helped cement Toyota’s position in the United States because the company could offer high-quality, smaller cars at a time when the competition had few to provide. In my opinion, the looming energy crisis could help companies like ours. The large-size and luxury-car manufacturers do not have any advantages over us. It is very difficult for them to make smaller and midmarket cars, but we could make bigger and more high-end cars. Indeed, this is a rare opportunity for us.

From my perspective, Chery has four major challenges. First, we are facing a shortage of qualified people. To deal with our rapid growth in both domestic and overseas markets, Chery’s management and technical specialists all have to take multiple positions, some of which they may not be good at, and that is not sustainable. Second, there’s an issue with brands. Chery brands already enjoy good awareness in China for inexpensive, low-end cars. We want to move gradually toward the higher end of the market but still ensure customer loyalty and sustained growth.

Related to that point is product quality. Chery must improve its product quality along the whole value chain instead of just focusing on the production line. This requires fundamental improvements in important processes such as product development, supplier management, logistics management, production management, and sales and after-sales services. Finally, Chery needs to raise huge amounts of money to maintain its growth. The cash flow generated from day-to-day operations would not be sufficient to support our global ambitions, so Chery needs better access to the capital markets, perhaps by being listed on domestic or overseas stock markets or both. Despite the challenges, I am confident that Chery will gradually become a well-known international brand.

Courtesy: The McKinsey Quarterly, China

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Posted by Naresh Koshti on 14 May, 2008 12:31:12 PM IST #