Landmark GAC-Chery linkage

First cooperation between State-owned carmakers

In a landmark move between State-owned companies, Guangzhou Automobile Group Co, China's sixth-largest carmaker by sales, and ninth-ranked Chery Automobile Co will sign an R&D agreement tomorrow.

The linkage is designed to bring technological cooperation without any capital transactions, according to insiders with knowledge of the deal.

Chery might transfer vehicle platforms and technologies on engines or transmissions to GAC, they said.

"This is strategic and expected to be a breakthrough in cross-province cooperation between State-owned companies," Yin Tongyao, Chery's president, told the media on the sidelines of a recent industrial forum in Jiangsu province.

Though details remain unknown, the unprecedented partnership was met with a warm response as in the industry looks forward to see how well the cooperation works.

"We have seen too much competition and too little cooperation among domestic carmakers," said Zhong Shi, an independent auto analyst in Beijing.

A good match

Industry analysts generally believe it could be a good match since GAC and Chery have complementary advantages in cash and technology.

The partner of Toyota, Honda and Fiat, GAC has been known for the profitability of its joint ventures that make lucrative models such as the Camry and Accord.

On the other side, Chery has been struggling to make ends meet with a lineup of mostly economic models and has been relying heavily on local government subsidies.

The carmaker headquartered in Wuhu, Anhui province had to cut the majority of R&D projects last year due to a lack of funds. It also decided to shed two sub-brands because of stagnant market performance.

But in self-developed technologies, GAC is the poor cousin. It just started to build its own-brand vehicles two years ago. The first two models - the Trumpchi sedan and GS5 SUV - are both based on Fiat's Alfa Romeo 166.

In contrast, Chery's heavy investment in R&D every year has built up rich technological reserves.

As well, recent sales declines of Japanese car brands following the territorial dispute over the Diaoyu Islands put pressure on GAC to accelerate development of its own-brand vehicles, analysts said.

GAC's net income tumbled 58 percent in the third quarter partly due to falling sales at its joint ventures with Japanese partners.

Though rare in China, strategic alliances are common among international automakers as they try to reduce R&D costs.

In July, German luxury carmaker BMW announced it would join forces with Toyota on development of technologies including energy-saving battery systems and production methods for future racecars.

Earlier this year, General Motors and PSA Peugeot Citroen also formed an alliance to jointly work on next-generation products.

A good start

The cooperation between GAC and Chery may be a good start for others to follow, analysts said.

Compared with complicated mergers and acquisitions, it is a more feasible choice for domestic carmakers to integrate resources, they added.

The Chinese government has been calling for consolidation of the domestic auto industry to strengthen competitiveness.

Successful efforts include Shanghai-based SAIC Motor Corp's takeover of Nanjing Automobile Co in 2007 and FAW Group's acquisition of Tianjin Automobile Group in 2004.

The deal between GAC and Chery might also involve cooperation in their sales networks, analysts close to both companies said.

Chery has vast network in small domestic cities and mature overseas distribution channels, which GAC may find attractive in developing its wholly owned car business, they said.