Chrysler May Expand Chery Ties to New Models, Parts (Update3)

By Jeff Bennett and Jeff Green |

Feb. 27 (Bloomberg) -- DaimlerChrysler AG's Chrysler unit is in talks to buy more parts and car models from China's Chery Automobile Co., people briefed on the issue said.

The negotiations are at an advanced stage, said the people, who don't want to be named because the plans aren't public. DaimlerChrysler is holding separate discussions with potential buyers of its unprofitable U.S. unit.

Chrysler is trying to add fuel-efficient vehicles to stem declining sales in the U.S., and in December agreed to buy small vehicles from Chery to cut costs. The U.S. automaker is deepening a relationship with China that dates back to 1987, when it acquired American Motors Corp., founder of the first foreign venture in the world's most populous country.

``Chrysler has to expand its foothold in China to gain from the nation's low costs,'' said Li Chunbo, an analyst at Citic Securities Co. in Beijing. ``All carmakers will have to take advantage of China's low-cost manufacturing, as well as the nation's increasing domestic market, to be globally competitive.''

Chrysler lost $1.5 billion last year and is cutting 13,000 jobs. DaimlerChrysler is in talks with potential buyers of the Auburn Hills, Michigan-based unit including General Motors Corp., people familiar with the matter said earlier this month.

First Auto Exporter

DaimlerChrysler in December became the first major automaker to announce plans to sell Chinese cars in the world's largest auto market. Chrysler and Chery are now focused on adding models and parts including transmissions to that plan, the people with knowledge of the talks said.

``Chrysler could be hedging its bets and continuing down the same road they had started before talking to GM,'' said Rebecca Lindland, a Global Insight analyst in Lexington, Massachusetts.

DaimlerChrysler Chief Executive Officer Dieter Zetsche said Feb. 14 he's pursuing ``all options'' for Chrysler.

Chrysler CEO Tom LaSorda said Feb. 14 that the unit would expand the use of alliances and partnerships worldwide as part of a plan to return to profit next year. Chrysler spokesman Markus Mainka had no comment on ties with Chery.

Chery President Yin Tongyao, reached by cell phone, wouldn't comment on cooperation with Chrysler, new models or joint production.

Chery's Target

Chery is China's first vehicle exporter and has said it wants to increase sales 29 percent this year to 393,000 vehicles after they rose 60 percent last year and doubled in 2005.

The company, based in Wuhu, Anhui province and owned by the city government, is the first Chinese automaker to assemble cars abroad. It has production agreements with partners in Iran, Malaysia, Bangladesh and Argentina.

GM is still talking to Chrysler about joint engineering of large sport-utility vehicles, the people said. Chrysler said last week it will spend $3 billion on new engines, transmissions and axles to make its vehicles more fuel efficient.

A plan to develop more fuel-efficient transmissions with Germany's Getrag GmbH will result in a U.S. plant, people familiar with that proposal said. Karin Burgmer, a spokeswoman for Getrag Ford Transmission GmbH, had no comment.

DaimlerChrysler will be selective in sharing financial information with potential buyers of Chrysler, spokesman Jason Vines said last week. The company will vet candidates through investment bank JPMorgan Chase & Co., he said.

Magna's Interest

GAZ Group, a Russian maker of cars and trucks, declined to comment today on a report in German weekly magazine Focus that it might bid for Chrysler. GAZ in April bought a license from DaimlerChrysler to make vehicles based on Chrysler sedans.

Canadian auto-parts maker Magna International Inc. is ``seriously considering'' buying Chrysler, Brett Hoselton, a KeyBanc Capital Markets analyst, wrote in a report today.

Tracy Fuerst, a spokeswoman for Aurora, Ontario-based Magna, declined to comment.

The Financial Times today reported that DaimlerChrysler may be considering taking a stake in GM as part of the discussions, quoting people familiar with the situation. Renee Rashid-Merem, a spokeswoman for Detroit-based GM, had no comment.

China FAW Group Corp. may bid for Chrysler, the Shanghai- based Oriental Morning Post reported today, citing an unidentified source. China FAW spokesman Gao Yuan wasn't available for comment

Chrysler might have an equity value of about $5 billion, Ron Tadross, a Banc of America Securities analyst, wrote in a Feb. 14 report. Chrysler could add as much as $9 billion in value to GM, Citigroup analyst Jon Rogers said in a Feb. 20 report.

Design Partnership

Until November, Chery had been working with investor Malcolm Bricklin to build vehicles for Visionary Vehicles LLC. Bricklin said he pulled out of the agreement, in part because Chery was still talking to other automakers about partnerships.

DaimlerChrysler, the world's fifth-biggest automaker, has been working with Chery on preliminary designs, and the vehicles the Chinese company makes would be new models. Financial details and production volumes haven't been disclosed.

``We need a Chinese partner who can help us boost revenue and keep costs under control,'' LaSorda said in November.

DaimlerChrysler is already a partner in Beijing Benz- DaimlerChrysler Automotive Co., formerly Beijing Jeep, which produces Mercedes-Benz, Chrysler, Jeep and Mitsubishi models.

DaimlerChrysler's U.S. shares fell 35 cents to $70.57 at 4:18 p.m. in New York Stock Exchange composite trading. They have risen 9.5 percent since Feb. 13, the day before Zetsche said the company may consider a sale or other options for Chrysler.

Credit-default swaps based on 10 million euros ($13 million) of DaimlerChrysler debt rose less than 0.5 percent to 38,505 euros, according to Credit Market Analysis in London. Credit- default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. A decrease indicates an improvement in credit quality.