SAIC-Chery Automobile Coporation (B)

In December 2003, Mr. Zhan Xialai, Secretary of the Wuhu Municipal Committee of the CPC (Communist Party of China) and board chairman of SAIC-Chery Automobile Corporation (“Chery”), was reviewing the annual performance of the company. Chery, founded only four years earlier, had established itself as one of the most successful domestic brands in China’s fast growing passenger car market. As 2003—considered by Mr. Zhan and his senior executives to be “the most critical year” for Chery’s growth—concluded, he heard both good and bad news. Chery had been created with strong support from the Anhui provincial and Wuhu municipal governments. By involving SAIC, one of China’s largest state-owned automotive groups, as a “nominal” but important shareholder, Chery had obtained a license from the Central Government to enter into China’s booming automobile manufacturing industry. Instead of forming joint ventures with foreign automobile giants, Chery had adopted an “autonomous product development” strategy. It introduced technology and equipment from automobile companies in other countries and cooperated with the leading car-designing companies. Then, Chery “integrated” these resources to develop new products under its own control. The initial experiment seemed quite successful, bringing Chery onto the list of China’s top carmakers. Chery initially targeted its products at home car owners who had business needs, and then gradually enriched its product variety to cater to lower- and higher-end customers. During its first two years, Chery kept a low profile but grew steadily. However, as competition grew more fierce, Chery hired a new marketing director to launch a more aggressive and eye-catching marketing strategy. Meanwhile, Chery was confronted with several challenges. For almost all its car models, Chery faced accusations of infringing on the intellectual property rights of leading global brands. Tensions grew between Chery and major auto giants, such as Volkswagen and GM. An exacerbating factor was that SAIC, one of Chery’s shareholders, had major joint ventures with Volkswagen and GM; thus, Chery risked losing SAIC as a shareholder. In addition, the aggressive style of Chery’s new marketing director has created tension with other senior executives, and his radical actions had bred dissatisfaction among both internal and external observers. Zhan Xialai also faced political criticism for holding both a Party official post and a business post, which was considered a violation of CPC rules.