Government subsidies always have some side-effects. China’s Chery Automobile is a case in point. Attracted by official dole-outs a few years ago, Chery plunged headlong into the mini-car sector, notwithstanding the fact it has never had a major presence or experience in the segment earlier. The results, not surprisingly, have been painful. Having experienced losses for two straight years, the division is still struggling to turn around.
Back in 2009, the Ministry of Industry and Information Technology launched a rural subsidy program for vehicle purchases in order to boost domestic demand. The plan emphasized small displacement cars.
Sales of mini-cars, or those with engine displacement up to 1.0 liters, fired up on the back of the policy incentive, with SAIC-GM-Wuling Automobile (SGWA), Changan Automobile and Dongfeng Xiaokang Motor Company setting the pace in the segment.
The then strong market also attracted Chery’s attention. The company launched its mini-car brand Karry in 2009.
Initially, under the subsidy effect, Karry had achieved significant growth. Sales increased over two-fold to 70,000 units in 2010 from the previous year. But as the incentive policy was gradually phased out, the adverse effects of overexpansion and overproduction have started to emerge.
According to data from Karry, its car sales in the first nine months this year slumped to 30,000 units.
For the first three months in 2012, the sub-brand recorded 33.9 million yuan operating revenue and 18.9 million yuan losses. Before that, the group had lost 31.7 million yuan in the whole year of 2011.Yicai.com quoted an industry insider as saying the situation could turn worse in the future. Total sales of mini-cars in China were 121,400 units last month, a 30 percent year-on-year decline, according to the China Association of Automobile Manufacturers.
Leading players like SGWA and Changan Automobile have been adopting a price-cutting strategy to lift sales and ease the inventory pile-up since the start of this year. At the same time, they have been actively developing high-end mini-car models to differentiate from rivals.
Unfortunately, the strategies cannot be applied to Karry as its small scale makes it difficult to undertake price-cuts or further development. For example, annual sales of Changan reached 518,600 units last year, more than 10 times that of Karry.
With uncompetitive price strategy, distribution channels and components procurements system, there seems to be no light at the end of the tunnel for Chery’s mini-car business.
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