Will Chrysler get Chery-picked?

Michael Dunne | DETROIT NEWS - - When you look at the history, a Chinese acquisition of Chrysler Corp. would be a form of poetic irony.

Twenty-two years ago, the City of Beijing and American Motors joined hands to form the Beijing Jeep Corporation (BJC), China's first automotive joint venture. The plan was for the partners to build Jeep Cherokees for the army and the government. Politicians in Washington and Beijing had great expectations for this early Sino-American connection.

From the start, though, the Chinese and American managers pursued different objectives. American Motors (later bought by Chrysler) moved in to capture China's promised growth. The Americans were confident that they would control the company, thanks to superior technology and products. The Chinese, for their part, entered the joint venture with one purpose: To learn how to build cars on their own.

Today, China stands as the second largest automotive market on the planet. In 2006, total vehicle sales surpassed 7 million units. Shanghai GM, a joint venture founded a decade after Beijing Jeep, achieved passenger car sales of 412,116 units.

Sadly, BJC has never lived up to its hoped-for potential. In fact, the results have been almost heart breaking. Jeep Cherokee sales in 2006 reached just 4,613 units. The venture has stalled mainly because it never had the right cars to offer Chinese consumers.

Further darkening the picture, the joint venture's American parent, Chrysler, now finds itself on the block. In an era of rising fuel prices and unrelenting competition from Asia, Chrysler is no longer able to leverage once-every-five-year sensations like the 300C to mask a perennial weakness in small cars.

In contrast, Chinese automakers excel at small car manufacturing and they are enjoying tremendous momentum. China's leading domestic carmaker, Chery Automobile, increased production by 60 percent in 2006 and exported 50,000 cars to Russia, Malaysia and Egypt.

Is it conceivable that Chery will launch a bid to acquire Chrysler? Even the wildest scenario is conceivable these days with the newly rich Chinese. But such a deal is unlikely. While seeing Chery pay cash for Chrysler would play nicely in the minds of Chinese romantics, there are three reasons why the deal will not happen -- at least not right away.

First, Chery is a still a very young company, just eight years old. Total production in 2006 barely eclipsed 300,000 units. Chery's top-selling product, the QQ, borrows extensively from the Matiz, a car developed by Daewoo six years ago.

Second, Chery wants to steer clear of older manufacturing plants, and the related weights of labor unions, pensions and health care liabilities.

Third, a Chinese takeover of one of the Detroit Three would be too unpalatable politically. It is one thing to see Made-in-China garment tags at Walmart. It is quite another to envision a Detroit sports venue called Chery Field.

This does not mean we should count Chery out completely.

Chrysler late last year signed a broad agreement for Chery to build small cars and ship them to the U.S. market under a Chrysler nameplate. This agreement will bring Chery much closer, albeit indirectly, to the U.S. consumer.

If a private equity group acquires Chrysler, breaks up the company and sells the assets in smaller parts, look for Chery to make a play for a brand name, a dealer network, or both.

In this still-unfolding yarn, Chery eventually may not own all of Chrysler -- but perhaps just some of its more attractive parts.