DaimlerChrysler AG is hoping to breathe new life into its ailing China venture, Beijing Jeep Corp. (BJC).
The two partners signed a Memorandum of Understanding (MOU) in late September agreeing to revamp the project, China's first automotive joint venture, formed in 1983 between American Motors Corp., which the formerCorp. took over in 1987, and Beijing Automotive Industry Group Corp. (BAIC).
DaimlerChrysler has pledged to pump an additional US$226 million into Beijing Jeep, which reportedly raises the auto-maker's stake in the project from 42% to 50%.
Current investment to date is US$411 million. Beijing Jeep also has two new products slated for production within three years: the latest model Grand Cherokee and the locally designed BJ2. Additionally, the JV's management structure will be revised.
The present joint venture, once the icon of the Chinese automotive partnership but now suffering from financial problems and outmoded technology, is nearing the end of its 20-year term. The two companies are working on an agreement for the next phase of cooperation that would extend the partnership for another 30 years, officials say.
The proposed injection of capital, new products and management changes are designed to give the venture the necessary boost to ensure future competitiveness, DaimlerChrysler officials say.
Pending timely approval of the MOU by the state, the JV will launch its new products. The Grand Cherokee, based on the latest global model, is set to bow by the end of the year. The BJ2, which is expected to debut in 2002, is a locally designed project made with 100% local parts.
The BJ2, DaimlerChrysler claims, holds the distinction of being the first fully new automotive product jointly developed by a Chinese JV specifically for the Chinese market. Beijing Jeep says the product holds export possibilities as well.
The agreement calls for eventual localization of management. Currently, there are two DaimlerChrysler-supplied staff on site at Beijing Jeep. The company also plans to implement modern management training programs along with a performance evaluation system for all employees.
Such training programs are key to improving the entire operation, says Andy Okab, who just finished a three-year stint as DC's top executive at BJC. “Quality to them (the Chinese workers), it's a mystery,” Okab says. “Cost-cutting, efficiency, isn't something they lose sleep over.”
Although the MOU calls for the increase of local management control, Beijing Jeep plans to bring in 20 foreign employees to facilitate the launch of these new products.
Beijing Jeep is considering still more new products for 2003 and beyond, reportedly targeting the introduction of a new vehicle each year.
The increased investment on the part of DaimlerChrysler and the pledge to continue the partnership with BAIC comes as a surprise to industry watchers.
The partners have had a rocky relationship over the years, and it has been widely believed that either the two would dissolve the agreement at the end of its term in 2003, or that DaimlerChrysler would simply let the project languish without official termination but with no additional investment.
However, the project has always been of political importance to DaimlerChrysler. BAIC is owned by the city and government seat of Beijing, which puts its stamp of approval on virtually every aspect of the business world in China. Severing ties with BAIC could be detrimental to the automaker's potential future products in China.
But Beijing Jeep's problems are far-reaching and many believe unfixable, including financial difficulties, outmoded technology, products that are inappropriate for the market and management differences.
The JV has been in the red since 1998, and posted losses of RMB80 million (US$9.66 million) in 1999. Last year, the venture sold 9,139 units of its sport/utility vehicle (SUV) based on the 1985 Jeep Cherokee, and 11,897 of the BJ2020, a small Jeep-like vehicle built off of old Soviet technology. Plant capacity, however, is 100,000 units.
The JV is headquartered at a sprawling, seven-building complex in Beijing, and has capabilities ranging from stamping to engine production to assembly. It also has axle and foundry facilities — although axles now are cheaper to purchase than to make.
The facility, especially in comparison to new JV plants, such as that of Shanghai-Automotive Co. Ltd., is antiquated and inefficient.
Beijing Jeep also is plagued by an employment glut. While DaimlerChrysler wants to reduce the number of employees dramatically, it is in state-owned BAIC's best interests to provide jobs for as many as is justifiable. As one insider said, the two companies have opposite agendas, and they're never on the table.
The JV now employs 4,500, down from 1997 levels of 8,300. But the current number still is too high, Okab says.
“We have reduced by hook or by crook. And we have to reduce more. The right number should be half of what we have now,” says Okab. The newly approved TianjinMotor Co., for example, initially will build 50% more units than Beijing Jeep — with employment of only 500.
But perhaps the most serious problem at Beijing Jeep has been the product offerings. From 1983, when the company was established, until 1995, there was only one customer — the government.
The vehicles were used by China's military, which dictated what products to build, how many, and what color. And as long as all parties were turning profits, making improvements to the products were ignored.
“We never really had to plan,” Okab says. “So, there was no sales and marketing, no quality, no feedback, no finance, in terms of cost-cutting.”
Government reforms in 1995 ushered in a new era, where the Chinese government began to closely watch its budget and seek out competitive bids. Soon after the government began to favor the locally producedMotors Corp. Pajero as a military vehicle over the Jeep. BJC, which Okab says had grown complacent, was in for a shock — a victim of the market economy.
Sales immediately took a nosedive, as BJC was left with a low quality product nobody wanted. The Cherokee-based product — described by insiders as antiquated, heavy, leaky, and noisy — had no market outside of the government.
Businesses favored other utilitarian vehicles, while the private market remains uninterested. The SUV is not a status symbol in China as it is in the U.S.
DaimlerChrysler hopes its new strategy will rectify the myriad product problems and keep the JV competitive into China's post-WTO era.