Jeep's push to produce in China is paying off

BEIJING -- Jeep is cashing in big on its decision to manufacture vehicles in China, starting with the Cherokee last October.

Doing so has allowed the American brand to hold down sticker prices and make Jeeps more competitive against surging domestic brands and locally built foreign rivals.

The timing couldn't be better to tap China's newfound love for SUVs and crossovers.

"To transition into a local player really did come at an important time for us," Jeep global brand head Mike Manley said at the auto show here. "We are now able to position our vehicles where our competitors were positioned."

Jeep's sales in China fell 28 percent to 63,783 vehicles in 2015. But sales have surged after Jeep added production of the Cherokee at a factory in Changsha in October. Jeep's sales here climbed 29 percent to 33,413 vehicles this year through March.

And that pace may quicken. In April, Jeep began producing the Renegade subcompact crossover at a new plant in Guangzhou, and it plans to add a new C-segment crossover to China production by year end. Then, soon after that, another new crossover designed specifically for the Chinese market will be thrown into the mix.

China's crossover boom is being driven by sales of vehicles built locally by Chinese and global brands. By contrast, import sales are falling, said Manley.

The Cherokee plant has annual capacity of 246,000 vehicles, but it also makes cars for Fiat. The Renegade plant has capacity of 160,000.

Both plants are operated by GAC Fiat Chrysler Automobiles, FCA's joint venture with Guangzhou Automobile Industry Group Co.

Industry sales in China are forecast to grow 6 to 7 percent in 2016, said Manley.

"We're going to grow significantly more than that," he said. "We're looking for significant double-digit growth."

Producing Jeeps locally helps the brand duck China's 25 percent tariff on imports. That enables Jeep to capture a wider band of the crossover and SUV segment, Manley said.

The addition of the entry-level Renegade helps Jeep cover about 20 percent more of China's crossover customer base, reckons Paul Alcala, vice chairman of FCA's local joint venture.

Localizing production in China is a tactic pioneered in the luxury field by the big German premium players. Mercedes-Benz aims to out-compete Jeep and Lexus by adding another crossover to local production on top of the GLA and GLC crossovers already built here, IHS Automotive predicts.

BMW, which makes the X1 crossover locally, will add more crossover capacity, as will Audi. Cadillac has begun producing the XT5, while Acura and Infiniti also have outlined plans to add crossover production.

But local production is not for everyone.

Toyota Motor Corp.'s Lexus line has no plans to go local. The company believes that caution is in order in China, where factory overcapacity is a chronic issue.

"We are aware of brands that started local production, but it turned out they had to reduce their volume," Tetsuya Ezumi, executive vice president of Lexus China, said at the Beijing show.

China is expected to assemble some 25.3 million vehicles this year and still have unused capacity to build another 12.5 million, according to PwC Autofacts. Excess factory capacity is expected to stay well above 10 million units through 2022 while the overall utilization rate will bob below 80 percent that entire time, according to PwC.

Lexus appears to be doing fine despite relying 100 percent on imported product. Lexus sales in China climbed 14 percent to 88,500 vehicles last year, and the company is targeting a 13 percent gain to 100,000 in 2016.

"We work in a different way from our competitors," Ezumi says.

In keeping with Toyota's strict business philosophy of "pulling" inventory forward only as needed, Lexus is combating price competition by minimizing inventories, Ezumi says.

The average inventory among luxury brands in China is 2.5 months, Ezumi says, but Lexus has trimmed its dealer stocks to an average of just half a month.

The lean inventory means Lexus can better hold the line against incentives being doled out by rivals, all while building brand value that further feeds into higher sales volume.

"If I simply could double volume by doubling output, I'd ask for it," Ezumi says. "But China is not such a simple market."