Attaining Sustainable Competitive Advantage

Adrian Carrión � Guarang Kalsaria � Lia Leibgold � Diego Ocampo � Patrice Senior

Agenda

•  Chinese Auto Market •  Chinese Auto Industry •  Company Overview •  Recommendations •  Questions

China has surpassed Korea, France, Germany, and the United States, trailing only Japan in terms of [2008] production volume

◦  Growth has shifted from heavy vehicles to passenger vehicles ◦  which accounted for more than 65% of production in 2008

◦  Some contributing factors include: ◦  Cheap and ample manufacturing capacity ◦  Falling car prices - down by nearly 6% from 2006 ◦  Urban residents per capita income increased by 12.2% to $1,942/yr ◦  Infrastructure

◦  China doubled its network of high-speed roads between 2006-2008 to 37,282 miles (United States = 46,603 miles).

◦  2008 Car ownership rates = High Demand in China ◦  Global average - 120 per 1000 people ◦  China - 22 cars per 1000 people ◦  US - 600 per 1000 people

Chinese Auto Market

Chinese Auto Industry

�  Largely dominated by international companies, constrained only by China’s 50/50 rule (FDI-JV). ◦  Reverse Engineering ◦  Intellectual Property

�  @ 117 Auto Mfrs ◦  Domestic 2/3 state owned

�  State Council, 3/09: Automotive Readjustment and Revitalization Plan ◦  Mergers Encouraged

�  Acquisition ◦  Rover-SAIC ◦  Volvo-Geely ◦  Hummer-Sichuan Tengzhong ◦  Various parts mfrs

000s % 000s %GM 1,032 11.7% 1,074 11.3%VW 918 10.4% 964 10.1%TOYOTA 460 5.2% 538 5.6%HONDA 422 4.8% 470 4.9%HYUNDAI-­‐KIA 355 4.0% 437 4.6%CHERY 387 4.4% 356 3.7%NISSAN 272 3.1% 346 3.6%FAW 294 3.3% 302 3.2%GEELY 220 2.5% 237 2.5%MAZDA 222 2.5% 209 2.2%TOTAL 8,819 100% 9,541 100%

Table  1.  Motor  Vehicle  Sales  in  China  and  Market  Share  of  Selected  Manufacturers,

2007-­‐2008

Source:  Ward’s  Auto  InfoBank.

�  China’s leading independent auto manufacturer ◦  Founded in 1997 ◦  Started as an engine manufacturer ◦  Chery’s annual production capacity is expected to rise from its current level

of 650k to more than 1 million vehicles by early 2012

�  Models include: A3, A1, A5, V5, Tiggo, Cowin, QQ3, QQ6, QQme. ◦  First entry was a chassis licensed from VW (Seat Toledo) ◦  Today they manufacture over 10 original models

�  09 vehicle sales reached 500k and 2010 projected sales are 900k ◦  It took 7 years to produce 1 million vehicles, but only took 2 ½ years to

double that output

�  Has operations in Asia, the Middle East, Africa, North America, South America, and Australia

�  Accounts for 50% of China’s car exports

Company Overview

Quality Control

�  “We must learn lessons from international automakers and make high-quality cars while providing good service.

- Yin Tongyao, Chairman �  Poor Quality ◦  Issues of poor quality inhibit exports to developed countries (i.e. U.S.,

Europe) ◦  Chery/Chrysler ◦  http://www.youtube.com/watch?v=5kQGAK550LE

�  Recent Improvements ◦  The Chery A3 recently received a 5-star crash rating from the CNCAP ◦  Chery QQ3 and QQ6 received top honors from J.D. Power Asia-Pacific ◦  http://www.youtube.com/watch?v=FnXT1agrus4

�  Recommendations Moving Forward ◦  Ongoing development and implementation of a standard quality

management system is essential ◦  Differentiation à Quality and Safety

Innovation: New Energy Technology

�  “Green” Technology ◦ Chinese government putting pressure on companies to develop “green” technology ◦ Government subsidies to spur demand

� Cost Leadership ◦ Chery excels at manufacturing small, gas-efficient vehicles at low cost ◦ Cost leadership strategy reduces: � Threat of new entrants � Threat of substitutes � Threat of rivalry

International Expansion

�  Current Expansion ◦ 1st Chinese Auto Manufacturer to open a foreign facility, $370M plan in Iran, 2003.

- Russia, 2005 - Malaysia, 2006

◦ Political Ties - Long term business relationships with Syria,

Iran, and Cuba.

International Expansion

�  Opportunity for Further Expansion ◦  Emerging Markets (Latin America and Middle East) �  Example: Brazil

�  Recommendation ◦  Build brand awareness and reputation through

emerging markets. ◦  Continue to produce economy vehicles

Financial Capital Resources

�  If Chery can maintain its financial resources, flexibility and its financial control, it can gain competitive advantage and possibly sustained competitive advantage

◦ Obtain cheaper cost of funds than its competitors.

◦ Maintain relationships with local government

◦  Advantage over foreign firms from obtaining local capital

Questions?