Chinese carmakers aim to defy downturn

Scarcely a generation ago, China produced only 5,000 passenger cars annually. These days, China is the world's second-largest car market, and rumours swirl ceaselessly about a Chinese carmaker buying Chrysler or General Motors. It is a remarkable transformation and one that cannot be halted, even by the global economic recession.

China's car industry has seen sales slump from the stratospheric double-digit growth of recent years. But car industry analysts are still expecting high single-digit growth for 2008 and possibly 2009 as well. Much of the rest of the global car industry would be happy to see such numbers.

Still, Chinese carmakers - and especially companies such as Chery, one of the largest domestic carmakers - are complaining to Beijing about a sudden and unexpected contraction in the market - November passenger car sales fell by 10 per cent.

No one expects the Chinese government to step in with a Washington-style bail-out, but last month Chery announced that it had arranged Rmb10bn ($1.46bn) in financing from China's Export Import Bank to fund overseas activities, and then immediately said it was calling off a small-car partnership with Chrysler - fuelling speculation that Chery's real intent was to buy the troubled US carmaker.

Yale Zhang, Shanghai-based analyst at CSM, the automotive consultancy, thinks that is unlikely: "If Americans can't manage these brands very well, how will Chery manage them?" he asks. "Chinese automakers have no experience with the UAW [the US autoworkers' union], which would complicate any such take-over," he adds.

"All of the local equipment manufacturers are small compared to the big three," he said. "They would need to borrow a lot of money to buy them."

Chery says it will use the bank financing to boost exports, noting that it exported 125,000 vehicles in the first 10 months of the year, and plans to boost that number to 400,000 in 2010.

But car industry analysts say one reason the Chrysler partnership failed was that Chery cars were not ready to meet stringent US safety and emission standards. And Mr Zhang points out that export-import financing can do little to solve the larger problem: flagging demand in Chery's target export markets.

Meanwhile, Chery's domestic sales are suffering. One analyst says Chery's total sales are expected to fall from a projected 380,000 to 360,000 for 2008.