WORLD / Wall Street Journal Exclusive

Seeking a Foothold in Selling Chinese Cars to U.S.
by Wall Street Journal
Updated: 2006-03-01 11:35,,SB114114965164085523-Tp41WZ7AqcROx_ZXQhS9vZ2JcEM_20060307,00.html?mod=regionallinks

Malcolm Bricklin, the man who brought Americans the Yugo, wants to sell U.S. consumers a new line of cars made in Wuhu, China. But this time, instead of going after bargain-hunting buyers with cut-rate compacts, Mr. Bricklin says he will aim squarely at the middle of the market.

Working with Chery Automobile Co., a state-owned enterprise that is one of China's fastest-growing auto makers, Mr. Bricklin plans to introduce to the U.S. made-in-China sedans and sport-utility vehicles priced at $19,000 and designed to steal customers away from cars such as Toyota Motor Corp.'s Camry and General Motors Corp.'s Buick LaCrosse. And he hopes to do it by as early as the end of 2007.

"China is coming," said Mr. Bricklin in an interview in Beijing after a visit to Chery's headquarters in Anhui province. "This is the way the world is going. It's what the consumer wants."

Chery officials are more circumspect than the hard-selling Mr. Bricklin about when the cars will hit American showrooms. Kan Lei, the Chery vice president in charge of preparations to enter the U.S. market, says: "We are not in a position to say anything yet."

China recently passed a milestone, becoming a net exporter of vehicles for the first time. Should it succeed in exporting passenger cars in significant numbers, that could strain trade tensions between the U.S. and China and heighten the competitive pressures on America's struggling car makers.

But getting a foothold in America won't be easy. There are high regulatory hurdles. Skeptics question whether U.S. car buyers will be willing to pay nearly $20,000 for a car from a relatively untested Chinese maker with no history of selling in the U.S. And company officials and analysts say Chery will have to improve its cars' durability and performance to succeed in the tough U.S. market. It took Korean auto makers, such as Hyundai Motor Co., about a decade of steadily improving cars to gain a significant following among Americans.

"It's a brand-new brand. The reality is that a lot of people won't want to take the chance," says Wesley Brown, a partner at Iceology, a Los Angeles-based consumer-research firm. "They will be worried about quality and reliability." For that reason, he says, Chery "will have only one chance to do it and get it right."

Mr. Bricklin, 66 years old, has long been viewed as an eccentric character in the U.S. auto industry. In the 1960s, he imported Subarus when Japanese cars were few and far between on U.S. roads. In the 1970s, he designed and financed the production of a gull-winged Bricklin SV-1 sports car that failed to catch on with buyers. In the 1980s, his name became inextricably linked with that of the Yugo, a hatchback made in the former Yugoslavia. Mr. Bricklin says more than 150,000 of the cars, which became the butt of jokes for their bare-bones construction, were sold by 1988, when he sold his stake in the venture for about $20 million. Yugo imports stopped in the early 1990s after sanctions were imposed on Yugoslavia during the Balkans wars, leaving dealers in a lurch.

Even though Mr. Bricklin was no longer involved with the company when sanctions were imposed, the little car still casts a long shadow with some dealers. "People got burnt with the Yugo," says Robert Petro, a third-generation GM dealer in Warsaw, Ind. "I don't know if Mr. Bricklin's the man who can get it done."

Founded in 1997 in one of China's poorest provinces, Chery has risen to prominence on the Chinese automotive scene by producing small, cheap cars that have earned it a reputation as a copycat. Chery's best-selling QQ, a subcompact, looks almost exactly like GM's Chevrolet Spark.

GM's South Korean affiliate, which designed the Spark, sued Chery in 2004. The companies settled the case last year, without disclosing the terms. GM and Chery declined to comment on the settlement. Mr. Bricklin says that, as part of the agreement, the Chinese auto maker agreed not to use the name Chery, just one letter away from Chevy, on cars sold in the U.S. The company says its name is drawn from the English word "cherry." Mr. Bricklin says Chery and his company, Visionary Vehicles LLC, are still considering what brand name to use in the U.S.

Industry watchers say Chery's knockoff days are over. The company has hired Italian design firms Pininfarina SpA and Bertone Group to help it launch a new line of vehicles. Some, including a racy hardtop convertible, are being developed especially for the U.S. market. Chery also has enlisted AVL List GmbH, of Austria, to help it make engines. And, as it rapidly expands its production capacity, Chery is building state-of-the-art factories.

"Chery will be a formidable competitor. They have the ambition, they have the leadership and they have the money," says Michael Dunne, president of Automotive Resources Asia, an industry consultant. "They're not trying to scoot in the back door with a cheap vehicle."

Mr. Bricklin signed an agreement at the end of 2004 to become Chery's exclusive North American distributor. He had one year to raise $200 million to invest in Chery and assemble a network of U.S. dealers. Mr. Bricklin had to seek an extension. A spokeswoman said Mr. Bricklin at first planned to raise all the money from dealers, who would be rewarded with exclusive sales territories and ownership stakes in Visionary Vehicles, but he failed to find enough willing to put up the required $2 million without a stronger guarantee that the deal with Chery would actually go through. He then started looking for private-equity investors and signed a $225 million funding agreement with Atlantic-Pacific Capital Inc. He says that nearly 40 dealers have now signed up, and he says he expects to sign up another 200 by the end of May.

Last week, Mr. Bricklin and his financial backers met with Chery officials to hammer out details of a joint-venture deal, which would give Visionary Vehicles a 40% stake in Chery operations that can produce 250,000 cars a year, Mr. Bricklin says.

Chery has big ambitions. Last year, the auto maker sold nearly 190,000 cars, more than twice as many as in 2004. The company says it expects to sell 280,000 autos this year. In 2005, Chery also exported 18,000 cars, mostly to the Middle East. Starting in 2008, the company says it aims to sell more than 300,000 vehicles overseas annually.

With U.S. auto makers reeling, Mr. Bricklin says, there is an opportunity for new players. Mr. Bricklin is aiming to have Cherys on sale by late 2007 or 2008, depending on how quickly the company's cars improve.

Tim Ciasulli, chief executive of Planet Honda, a dealership in Union, N.J., is one of the dealers who signed up with Visionary Vehicles. He says he expects China to extend its industrial reach to autos. "Virtually everything we wear is made in China," he says. "A lot of what we drive will be, too."

Zhang Lin, a former DaimlerChrysler AG executive who now heads Chery's international operations, says he doesn't want to predict when his company's cars will hit the market in the U.S. "We're still in the very preliminary stages," Mr. Zhang says.

Mr. Zhang says that the timing of Chery's entry into North America will be dictated by how quickly it can improve the quality, durability and performance of its vehicles. "When we enter the market, we want to be successful," he says. At the moment, Mr. Zhang says, Chery is focused on Russia, where it will begin assembling cars this year, as well as the Middle East and Southeast Asia.

Mr. Bricklin says he wants to launch five Chery models in the U.S. initially. One promising car, Mr. Bricklin says, is a blend of a station wagon, SUV and minivan. Another is the hardtop convertible.

Mr. Bricklin says he wants the cars he imports to have the feel of luxury makes such as Volkswagen AG's Audi and BMW, but sell at a price below that of the average Toyota Camry and comparable models.

That is a tall order. But Chery and its proponents point out that the company has many engineers and executives with experience working for multinational auto makers. It also has the financial muscle to buy high-quality design and technology -- key elements that are now available on the market in a way they weren't when Japan and South Korea were building their auto industries.

"Everybody thought what I was looking for was a cheap car," says Mr. Bricklin. "What I was really looking for was a factory that would build the kind of cars I want."