Trying times in China for would-be U.S. players

Zotye Automobile Co. and Chery Automobile Co. are two very different Chinese automakers, but they have one thing in common: They're both deeply troubled operations.

Both are also the foundation of a startup import company in California, HAAH Automotive Holdings, which has been signing up dealers in 100 U.S. markets to retail vehicles from one or both of the Chinese manufacturers.
But last week, HAAH said it is suspending plans to import vehicles from Zotye until financial conditions improve in its home market.

It is the latest setback for Chinese automakers seeking to gain a toehold in the U.S. market in recent years.

Instead, HAAH is turning its focus to Chery, HAAH CEO Duke Hale told Automotive News last week.
HAAH has proposed selling Chery-engineered crossovers assembled in the U.S. under the new Vantas brand.
Both manufacturers are coping with financial challenges in their home market.

Troubles at Zotye emerged in 2018 when the Chinese auto market started contracting after nearly three decades of robust growth. A small player in China, Zotye was hit hard by the downturn, with sales slumping 26 percent to roughly 234,000 vehicles that year, according to the China Passenger Car Alliance, a data unit of the China Automobile Dealers Association.

The market declined further in 2019, and Zotye faced new regulatory challenges. China's coastal provinces adopted tougher vehicle emission standards, equal to Europe's stringent Euro 6 requirements. With limited technology capability, Zotye had difficulty upgrading its products accordingly, which made it unable to sell in those provinces.

As a result, Zotye sales plunged 50 percent to some 117,000 last year, and the company recorded a loss of more than 6 billion yuan ($840 million), compared with a net profit of about $112 million in 2018.

The coronavirus, which emerged in China late last year, delivered yet another blow. As sales further contracted, it lost the equivalent of $58.3 million in the first quarter of this year, Zotye said last month in regulatory filings. The company hasn't disclosed its sales for the period.

"Zotye took an enormously big hit in China," Hale said in explaining his California company's decision. "They have to focus on home and get that turned around."
HAAH could revive its U.S. plans with Zotye in the future, perhaps in two or three years, Hale added.
"We still are good friends of Zotye," he said. "We're still working with them. We're going to work with them in Central America. And we have a long-term agreement with Zotye to bring their vehicles to the U.S. market — when it makes sense to do so."
Certifying Zotye vehicles for U.S. sale right now would require millions of dollars of investment, he said.
"To tell them that we're going to spend 'X' amount of dollars to homologate the first and second vehicles — in their current situation — does not make a lot of sense," Hale said. "Hopefully, that starts to turn around."

Hale will turn his attention to HAAH's other proposal, to market vehicles created by Chery and manufactured in the United States.

Chery is a much big player in China. The state-owned company was established in 1997 in east China's Anhui province and was the largest domestic Chinese light-vehicle manufacturer from 2001 to 2011, churning out inexpensive sedans, crossovers and multipurpose vehicles under multiple brands.

During that period, Chinese media often touted Chery as a national champion in the domestic manufacturing sector, and its vehicles were often showcased on festive occasions as a symbol of national pride.

Years of rapid expansion stretched its capital resources. After peaking at 705,000 sales in 2006, Chery's annual sales declined. Despite annual production capacity of 900,000 vehicles, sales fell short of 640,000 in 2019.

Due to the low factory utilization, Chery has been bleeding losses for years. In 2019, the state-owned company opened its financial books in a bid to attract potential investors, showing it lost 1.37 billion yuan ($191.6 million) in the first half of the year, with 62.3 billion yuan ($8.71 billion) in accrued debt as of June 30.

Chery is now majority-owned by a domestic investment fund and is focused on producing compact and subcompact sedans and crossovers that sell for the equivalent of $7,000 to $21,800.

Chery remains the largest vehicle exporter among China's domestic automakers. In the first four months of this year, it shipped 30,008 vehicles from China to other emerging economies including Russia and countries in Latin America and North Africa, surging 68 percent from a year earlier

Local demand remains low, and its overall sales for the period slipped 26 percent to below 128,000, according to the China Passenger Car Alliance.

Chery has attempted to export to mature markets before. In 2007, Chrysler negotiated to sell a compact Chery sedan in the U.S. as a Dodge, but dropped the plan.

In 2017, Chery unveiled a compact crossover known as the Exceed TX at the Frankfurt auto show with the goal of distributing it in Western Europe. That goal has not been realized.

Hale said U.S. dealers who signed up to sell Zotye vehicles in the U.S. will be able to keep their franchises while adding the Chery-based Vantas brand franchise at no additional cost.