With a Chery on top

It wasn’t quite the opening day that Chery’s marketing bosses were hoping for. Belying the name of the car he was driving – the Rely X5 – racer Ningjun Lu pulled out of the Dakar Rally with engine problems on the first stage of the competition.

In fact, more than 70 cars were retired from the Dakar this month (confusingly, the rally now takes place in Chile and Argentina) so Chery probably deserves a little kudos for getting the two other Rely X5s in the race all the way to the finishing line.

WiC’s coverage of China’s automotive sector has tended to talk more about media favourites, like Geely and BYD (see issue 88). But Chery Automobile is actually China’s largest “independent” carmaker (a manufacturer producing vehicles without a foreign equity partner). It made 682,000 cars in 2010, according to the People’s Daily, which put it first for purely domestic brands for the 10th year in a row.

But Chery – still wholly state-owned – lacks the reputational buzz of other large manufacturers like SAIC (which has big joint ventures with foreign automakers Volkswagen and GM). It can also trail smaller but higher profile operators like Geely or BYD (positioned as “private sector” challengers to the state dinosaurs).

Perhaps that’s one reason why Chery chairman Yin Tongyue said in December that the company is preparing for a domestic IPO in the first half of the year.

Would that prove a good prospect for retail investors? Chery will find it hard to wean itself off state subsidies, says Century Weekly. It will also have to dismantle some of the web of political connections that have supported it since 1997, when it was founded in the city of Wuhu in Anhui province. For years, Chery founder Zhan Xialai, conveniently also the local Communist Party chief, fought the company’s corner.

Best of all, state ownership offered access to financing, primarily from Chery’s lead shareholders in the Wuhu city government. It also had access to generous loans from the state banks, as well as funds from government agencies keen to promote domestic brands (Chery is China’s largest exporter of cars).

The financial support hasn’t always proved enough. A disastrous 2008 forced Chery to look for more cash, and factories were built in Dalian and Kaifeng in return for equity stakes for the respective city authorities. Erdos in Inner Mongolia got its own plant too, opting to pay up (rather unusually) with a coalmine. This year, Changshu in Jiangsu has likewise signed a cash-for-factory deal, says China News Service.

Here’s the dilemma. An IPO might generate a return on some of these investments. But the local governments see their stakes delivering something more important: plenty of production and jobs at the plants in their cities. Analysts say that similar expectations contribute to poor profit margins (in 2009: Rmb66 million of net income on Rmb20.7 billion of revenue). That year, Chery manufactured 16 different models of car across its various production lines, making it harder to leverage economies of scale.

Perhaps a partial listing would see the unwinding of some of these arrangements? Some bureaucrats are resistant to the very idea of an IPO in the first place. “Chery doesn’t have to be anxious to list,” one official in Anhui told Century Weekly. “Even if it posts a loss, the government will support them”

Of course, similar taxpayer largesse has been on offer to US carmakers recently. But Western investors will usually express a preference for private sector enterprise over state-owned endeavour, arguing that it leads to better performance over the longer run.

The distinction is not always drawn so clearly in the Chinese context, not least because so few of the country’s largest companies can claim to be entirely without state-owned investors. Nor can ‘private sector’ status always be taken at face value. Last week WiC wrote about Hainan Airlines, often described as the country’s leading ‘privately-owned airline’ despite having a provincial SOE as a shareholder.

Greg Anderson, a China specialist who focuses on state-owned enterprises and corporate governance in the auto industry, has long argued that the “private versus public” debate isn’t clear-cut in the car business either. Local governments are always keen to support manufacturers on their provincial home patch. The central government also regards the auto sector as a pillar industry, and one in which Chinese firms must become global leaders. That can mean state support in the form of soft loans and subsidies for nominally ‘private’ companies too.

Further, in a posting this week on his blog ChinaBizGov, Anderson shows that it can be difficult to be sure about ownership stakes, even in the highest profile firms.

His example is Geely, best known outside China for taking control of Volvo last year. Using information in Geely’s most recent annual report, Anderson outlines that 48% of the Hong Kong listed holding company is indeed held by public shareholders. But the remainder is indirectly controlled by a British Virgin Islands company owned by company chairman Li Shufu and an unidentified “associate”.

That leaves Geely’s shareholder roster open to conjecture. Until the “associate” is fully identified, who’s to say there isn’t a little state ownership behind the scenes there too?

Updated 04/02

Since the original post on Geely’s ownership situation, Greg Anderson has uncovered an additional HKSE filing that indicates that Li Shufu does indeed own a 90% controlling stake of Zhejiang Geely Holding Group Ltd. (ZGHGL), which means that his overall control filters down to listed vehicle level (Geely Auto Holdings) in Hong Kong.

The “associate” mentioned in the original story owns the remaining 10% of ZGHGL.

An additional point worth making: Volvo is also owned by Zhejiang Geely Holding Group, and NOT by Geely Auto Holdings in Hong Kong.

“That explains why Li Shufu has been quoted as saying, “Volvo is Volvo, and Geely is Geely”, meaning that these two companies are entirely separate entities. The only thing they have in common is control by Li Shufu”, Anderson concludes.

 

 

 

 

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