Join forces to compete in increasingly fierce market

Affluent Chinese consumers now have a great appetite for SUVs - big, muscular and versatile vehicles with a higher suspension - yet only a handful of locally made models are available.

Most are expensive, imported products.

But in two years, the landscape could look a lot different with local customers able to buy China-made Land Rovers that offer good value for money.

Even without local production, China could become Land Rover's largest market this year. [Photo/Agencies]

The India-owned UK carmaker Jaguar Land Rover last week announced that it has agreed with Chinese carmaker Chery to form an equal partnership joint venture to manufacture and sell cars in the world's largest auto market.

Terms and conditions of the agreement were not disclosed, but the company has said on different occasions that it plans to first build a compact SUV in China - possibly the Freelander or Evoque, the only two compact options in Land Rover's product lineup.

The UK company now owned by India's Tata Motors has already realized stunning sales growth using solely exports to China, from some 2,000 vehicles in 2005 to more than 42,000 last year.

China is now its third-largest market worldwide after the UK and the US and is likely to top the list next year, if not this year, even before local production starts.

But in the long run, local production in China is crucial for sustainable business as competition becomes increasingly fierce.

In large part because of successful local joint ventures, Audi, BMW and Mercedes-Benz currently have about 80 percent of the luxury car market in China, and their advantages may further expand as they all move aggressively to double or triple local output.

Audi alone is aiming for yearly capacity of 700,000 vehicles in China by 2015.

Other luxury manufacturers, including Jaguar Land Rover, could feel the squeeze without a solid local production facility.

The slow development of Lexus in China might serve as a lesson.

After rapid growth before 2009, the company hit a bottleneck in China and fell well behind German rivals due to its lack of local production.

For Jaguar Land Rover, local production is needed if it wants to gain a competitive edge in price to attract local customers.

Audi, BMW and Mercedes-Benz each have an SUV on the production line at local plants and have announced plans to introduce more.

The company also needs more capacity to meet demand for its off-road vehicles worldwide, which rebounded strongly from the economic downturn of 2008.

For Chery, the marriage with Jaguar Land Rover offers great chance for it to improve profitability and brand image.

China's seventh-largest carmaker by sales and the nation's biggest car exporter, Chery is known for its small, economic cars, but it failed in its effort to build more advanced vehicles with a bigger profit margin.

If government subsidies are not counted on its financial sheet, Chery has been a loss-making company. The poor financial performance has also impeded its long-desired plan for an initial public offering.

By making luxury vehicles with Jaguar Land Rover, Chery could be helped toward profitability and a breakthrough in making high-end models.

The proposed joint venture also plans to develop a new, local brand, both companies said in a statement last week. The scope of the partnership will also include an R&D facility and engine plant, they said.

Neither company provided details, but one possible option for the new brand would be a luxury product based on a Jaguar car, industry observers said.

The biggest current uncertainty is whether the plan will get the green light from regulators.

Jaguar Land Rover is calling its Chinese plan Project Horizon, while at Chery it is codenamed Apollo - plans that could bring new horizons to an old brand from the UK and make a young Chinese carmaker soar.

Contact the writers at gongzhengzheng@chinadaily.com.cn and hantianyang@chinadaily.com.cn