VZCZCXRO4001
RR RUEHCN RUEHGH
DE RUEHGH #0096/01 0580139
ZNR UUUUU ZZH
R 270139Z FEB 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7677
INFO RUEHBJ/AMEMBASSY BEIJING 2552
RUEHHK/AMCONSUL HONG KONG 1943
RUEHSH/AMCONSUL SHENYANG 1767
RUEHCN/AMCONSUL CHENGDU 1776
RUEHGZ/AMCONSUL GUANGZHOU 0232
RUEHIN/AIT TAIPEI 1566
RUEHKO/AMEMBASSY TOKYO 0560
RUEHUL/AMEMBASSY SEOUL 0385
RHEHAAA/NSC WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8311

UNCLAS SECTION 01 OF 04 SHANGHAI 000096 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/J 
TREASURY FOR OASIA/INA -- DOHNER/HAARSAGER/WINSHIP 
TREASURY FOR IMFP -- SOBEL/MOGHTADER/CUSHMAN 
USDOC FOR ITA DAS KASOFF, MELCHER, MAC/OCEA 
NSC FOR LOI 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/KATZ/MAIN 
 
E.O. 12958: N/A 
TAGS: ETRD EFIN EINV ELAB EIND PGOV CH
SUBJECT: ANHUI'S AUTO INDUSTRY HURT BY ECONOMIC DOWNTURN, BENEFITS 
FROM GOVERNMENT STIMULUS MEASURES 
 
REF: a) 07 SHANGHAI 284; b) SHANGHAI 79 
 
(U) Sensitive but unclassified.  Not for dissemination outside 
USG channels or posting on the internet.  Please protect 
accordingly. 
 
¶1.  (SBU) Summary: After years of double-digit growth, Chery 
Automobile Company and Jianghuai Automobile Company (JAC), two 
large Chinese auto manufacturers headquartered in Anhui 
Province, saw sales slump in 2008 due to the economic downturn, 
with exports hit particularly hard.  Recent government measures 
to stimulate growth, such as a tax cut on small sedans, lifted 
sales in January.  The companies are cautiously optimistic that 
additional government measures, including subsidies to rural 
consumers, will boost domestic sales in 2009.  End summary. 
 
Background: Rapid Growth 
------------------------- 
¶2.  (SBU) Feng Ping, Vice General Manager in charge of 
international relations at Chery Auto, described the company's 
rapid growth during a meeting in Wuhu, Anhui Province on 
February 17.  Based in Wuhu and founded in 1997 as an auto parts 
manufacturer with two factories, Chery manufactured its first 
passenger vehicle in 1999.  By 2006, Chery had manufactured a 
total of 500,000 vehicles, and in August 2007, the company 
rolled out its 1 millionth vehicle.  Chery's current annual 
capacity is 650,000 cars.  It has four factories, all in Wuhu, 
employing 23,000 workers.  Chery's sales have grown quickly. 
The company sold only 28,610 cars in 2001 but sold 305,236 
vehicles in 2006 and 356,000 in 2008.  Chery has 500 
distribution service centers throughout China as well as a 
global distribution network covering several dozen countries. 
Total export volume has grown exponentially from 100 vehicles in 
2002 to 50,000 in 2006 and 135,000 in 2008.  Exports now account 
for 30 percent of total sales; its major export markets include 
Russia, Eastern Europe, Latin America, Africa, and the Middle 
East.  "We export to everywhere except North America and Western 
Europe," said Feng.  (Note: For more on Chery's background, see 
ref A.  End note.) 
 
¶3.  (SBU) Gong Renhe, Deputy President of Jianghuai Automobile 
Company (JAC), described his company's wide-range of vehicles 
during a discussion on February 18 in Hefei, the provincial 
capital of Anhui Province.  Established in 1999 and based in 
Hefei, the company makes light trucks, heavy commercial trucks, 
bus chassis, auto parts, minivans, and constructions vehicles. 
It also launched its first sedan in 2008.  Company sales have 
grown 30 percent every year, reaching 210,000 vehicles in 2007 
and a "similar figure" in 2008, according to Gong.  Minivans 
account for a large portion of total sales.  According to Huang 
Junchun, Deputy Director of the External Relations Department at 
JAC, the company sold 40,000 minivans in 2008, placing it among 
the top two minivan manufacturers in China.  Econoff visited 
JAC's minivan factory, which churns out 150 to 200 vehicles a 
day.  JAC's exports have also grown in recent years.  Exports 
account for 10 percent of JAC's total sales, amounting to 8000 
vehicles in 2006, 20,000 in 2007, and 24,000 in 2008.  Chief 
export markets include Southeast Asia, the Middle East, Russia, 
and Africa, said Huang.  JAC's employees have increased from 
16,000 in 2006 to over 20,000 now.  According to Huang, JAC 
recruits university graduates majoring in automotive studies 
from across China, many from technical colleges in Northeast 
China.  Though he did not provide exact figures, Huang said the 
attrition rate is low, as JAC employees have ample opportunity 
for career advancement through examinations and good 
performance.  (Note: For more on JAC's background, see ref A. 
End note.) 
 
Hitting a Speed Bump: The Global Financial Crisis 
--------------------------------------------- ----- 
¶4.  (SBU) The global financial crisis hit both Chery and JAC 
hard in 2008.  Chery's total sales decreased from 381,000 
vehicles in 2007 to 356,000 in 2008, the first year-on-year 
decline since the company's founding, according to Feng Ping. 
 
SHANGHAI 00000096  002 OF 004 
 
 
The company originally planned to introduce six new models in 
2008 but ended up launching only one because of the economic 
downturn and technical problems requiring additional tests and 
certification.  The financial crisis has impacted Chery more 
than other Chinese auto makers because of the company's heavy 
reliance on overseas markets (30 percent of total sales), said 
Feng.  January exports this year were down 70 percent from 
January 2008, with sales to Russia and Ukraine hit hardest. 
Feng attributed this to Russia's slowing economy, depreciating 
currency, and 5 percent rise in Russia's import tax on cars. 
Exports to Latin America and the Middle East are still "so-so," 
said Feng, and the company recently launched a new "global 
model" sedan called the M11, which has seen sales pick up after 
a slow start since the company recently slashed prices.  Despite 
the downturn, the company does not plan to layoff employees, 
said Feng. 
 
¶5.  (SBU) JAC's sales were healthy through the first half of 
2008 but declined sharply after July 2008, said Gong Renhe. 
Sales for the full year were up only 10 percent from 2007, a 
sharp drop from previous years' 30 percent annual growth.  JAC's 
sedans, which the company launched in 2008, faced a slow start 
due to "fierce competition" exacerbated by the financial crisis, 
said Huang Junchun.  Although exports (which account for 10 
percent of JAC's sales) grew 10 percent in 2008 from the 
previous year, JAC "will face a lot of pressure" in overseas 
markets in 2009, speculated Gong.  Exports to the Middle East 
and Africa have been hit especially hard.  Huang said the 
company does not plan to layoff workers despite the downturn. 
 
Boosted By Stimulus Measures 
----------------------------------- 
¶6.  (SBU)  China's economic stimulus measures have had a notable 
impact on Chery and JAC, said our interlocutors.  The Chinese 
Government recently halved the purchase tax from 10 percent to 5 
percent on cars with engines 1.6L and smaller, spurring demand 
for Chery's sedans, 90 percent of which are under 1.6L, 
according to Feng Ping.  Though sales are still down from 
January 2008, Feng said Chery's domestic sales in January 2009 
rose 20 percent from December 2008, calling the tax cut a "gift 
from the government for the Chinese New Year."  (Note: Japanese 
analysts said during a separate discussion on February 9 that 
Japanese automakers saw sales in China rise in December 2008 and 
January 2009 but attributed this to a sharp cut in prices by 
manufacturers.  Ref B.  End note.)  Feng also expects Chery to 
benefit from another government plan, due to be implemented in 
March, which aims to boost rural consumption by subsidizing the 
purchase of low-emission vehicles, including sedans, in rural 
areas. 
 
¶7.  (SBU) Gong Renhe hopes the recent tax cut will raise sales 
of JAC's small sedans.  However, he thinks the government's 
effort to boost rural consumption through subsidies will have 
the biggest impact on JAC's sales, since the company's light 
trucks and minivans are widely used in rural areas. 
Infrastructure development projects should benefit JAC's 
construction vehicles, such as its cement mixers and heavy 
loader trucks, said Huang Junchun.  The Chinese Government in 
February also announced cash rebates for the purchase of fuel 
efficient and alternative energy vehicles in 13 designated 
cities across China, including Hefei, where JAC is based, noted 
Gong.  (Note: The other cities designated for the project are 
Beijing, Shanghai, Chongqing, Changchun, Dalian, Hangzhou, 
Jinan, Wuhan, Shenzhen, Changsha, Kunming and Nanchang.  End 
note.)  Gong expects sales of JAC's buses to increase as Hefei 
switches to more fuel efficient modes of public transportation. 
 
Looking Ahead: Optimism Despite Uncertainty 
------------------------------------------- 
¶8.  (SBU) Feng Ping said it is difficult to forecast sales for 
2009 but that Chery remains fairly optimistic about the domestic 
market.  She said the company plans to launch over 10 new models 
in 2009 but admitted there "may be some delays," depending on 
 
SHANGHAI 00000096  003 OF 004 
 
 
the economic situation.  Some of the company's new cars are 
aimed at niche markets, such as the "QQme," a smaller version of 
their popular QQ model tailored specifically for young female 
drivers and scheduled to be launched next month, according to 
Feng.  The company is already producing a BSG (belt 
starter-generator) hybrid sedan, and Feng expects the company to 
roll-out an ISG (integrated starter-generator) hybrid in 2009. 
Feng, however, is unclear how the economic downturn will affect 
Chery's development of hybrids but speculated there may be 
delays in some new energy vehicle projects.  Although Chery 
hopes to export 150,000 vehicles this year (a 10 percent 
increase on 2008), Feng thinks this target may be "difficult" to 
achieve.  She expects Chery to focus on the domestic market this 
year but said the company will have to eventually expand abroad 
to become a "powerful" player able to compete with better-known 
brands in the auto industry.  Chery is thus looking to improve 
the quality of its cars by investing RMB 1.7 billion in a new 
testing facility utilizing state-of-the-art equipment from 
Germany and Japan, according to Feng.  On the other hand, Chery 
is delaying construction of its fifth factory due to economic 
uncertainties, said Feng. 
 
¶9.  (SBU) Huang Junchun of JAC forecasted "small growth" for his 
company in 2009.  The company cut several projects this year due 
to concerns over cash flow but still expects to launch "at 
least" one new 1.5L sedan this year.  Huang said JAC will focus 
on the domestic market, especially rural areas, in 2009, but the 
company is also looking at other areas of potential growth, such 
as overseas markets and new energy vehicles.  JAC hopes to 
increase its exports to 15-20 percent of total sales within the 
next few years, according to Huang.  JAC is also developing new 
electrical buses to take advantage of environmental initiatives 
in Hefei and other large cities.  The company receives local 
government funding for R&D of alternative energy vehicles, Huang 
added. 
 
Working With Foreign Suppliers 
-------------------------------- 
¶10.  (SBU) According to Feng Ping, Chery has partnerships with 
U.S. localized companies in China, such as Johnson Controls and 
Lear Corporation, which provide various auto components.  Though 
the company procures most of its parts domestically from both 
Chinese and foreign-owned suppliers, it also imports 
superchargers, electronic control units (ECU), and other 
specialized components from the United States, said Feng.  Chery 
also imports high precision measurement equipment and machine 
tools from Germany and Japan.  Feng noted that the company 
invited several German engineers to train employees, and that a 
German national who used to work at Volkswagen for 45 years now 
supervises the R&D center at Chery. 
 
¶11.  (SBU) JAC has 500-600 suppliers, of which 40 percent are in 
Anhui and 60 percent in other parts of China, said Gong Renhe. 
The company set up a "supplier network" at the end of 2007 with 
"clusters" of suppliers located in and around Hefei, some of 
which are foreign-owned joint ventures (JVs), according to Gong. 
 JAC currently imports a few components for its minivans but 
procures most of its parts from domestic (Chinese and foreign 
JV) suppliers, including U.S.-owned Johnson Controls, Lear 
Corporation, and Visteon.  Although JAC's 11 subsidiaries each 
have their own purchasing departments, the company plans to set 
up a new Investment Management Department which will coordinate 
requests for investment and business opportunities, said Gong. 
 
Comment 
-------- 
¶12.  (SBU) Econoff observed that nearly all sedans on the 
streets of Wuhu, where Chery is based, were Cheries.  Hefei, the 
hometown of JAC, had a mix of different brands (although most of 
the taxis in Hefei appeared to be Cheries).  It is not clear 
what incentives Wuhu residents and taxi companies receive for 
driving Cheries, if any, but both auto makers receive 
significant support from the local government, such as 
 
SHANGHAI 00000096  004 OF 004 
 
 
preferential tax treatment and R&D funding, according to the 
interlocutors.  A local resident in Hefei driving a Shanghai GM 
Buick, however, laughed at the idea of buying a Chery, 
commenting that Hefei residents who can afford to buy cars 
prefer GMs or Volkswagens, while others just do not buy cars. 
The resident added that foreign cars made in China, such as 
Shanghai GM, do not cost a great deal more than Cheries but are 
better quality.  Feng Ping of Chery acknowledged to Econoff that 
Chery's greatest challenge in the future will be to improve its 
quality and reputation, even among locals, and make it a "cool" 
car to drive. 
CAMP