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While the American administration and Capital Hill are debating if and how to bailout the US Big Three carmakers in Detroit, China is lending huge to one of its own auto manufacturers, Chery. With China’s domestic auto producers also experiencing a difficult year, analysts suspect the Chinese government is set to bailout its fledgling auto industry.
The China Export and Import Bank (ExIm), China’s policy lender, granted Chery a 10 billion yuan export credit on December 7 to support its overseas expansion. Industry insiders are disputing whether this can be regarded as a government bailout.
The auto industry is experiencing a hard time, and the biggest home-grown producers, Chery and Geely have it hardest. The situation worsened in November due to the continuing slide of the overseas market and shrinking domestic consumption. November statistics show total car sales volumes dropped by over 10% year on year, and the year-on-year sales decline of 22 mainstream auto makers reached 16%, the most drastic drop in past recent six years.
According to the ExIm agreement, the credit granted by the bank will be used to support Chery’s exports, including export credit, technical equipment import, international settlement, and trade financing business. A securities company analyst has said the 10 billion yuan credit certainly promotes Chery’s overseas business, but also helps to relieve Chery’s fund pressure, though not immediately.
Exports occupy a major part of Chery’s business. Chery’s turnover in 2007 totaled 380, 000, among which 119, 800 went to overseas markets. At the beginning of 2008, Chery’s plan for this year was to sell 300, 000 cars domestically and 180, 000 cares overseas. It succeeded domestically by October, but its overseas business ran into the global financial mess. Chery declared that it would not reach its 480, 000 car target since its exports would total only 140, 000.
Yin Tongyue, Chery Chairman and General Manager, said the total value of the company’s car exports in the first ten months was about $813 million. According to China Association of Automobile Manufacturers statistics, in the first ten months of 2008, Chery’s domestic sales volume totaled 301, 000, ranking fifth in China.
Chery has always been known for its economy pricing. But low margins are thought to have led to low cash reserves. In 2007, a Guotai Junan analyst said the profit for every Chery car was only about 500 yuan. With the 10 billion yuan credit, doubts over Chery’s cash flow and reserves have emerged yet again. Jin Gebo, assistant to Chery’s general manager, said the 10 billion yuan credit could only be used for the company’s export business, not its domestic business.
Chinese car makers have failed so far in their development of a high-end car, and most of their products are at the low end of the spectrum, attracting price-conscious consumers. Profits and reserves are common problems in the domestic industry.
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