DaimlerChrysler AG'* Chrysler Group and China'* Chery Automobile Co. have agreed on a plan for the Chinese manufacturer to build small cars to be sold worldwide. The cars, which already are being designed, would be based on an existing model but will be modified jointly by Chrysler and Chery engineers, Chrysler spokesman Jason Vines said Friday. Chrysler is taking the lead on the design and will ensure that the vehicles meet high quality standards, he said.
They will be sold at Chrysler dealerships in the U.*., Europe and elsewhere under a Chrysler Group brand as either a Dodge, Chrysler or Jeep.
Chery will build tiny cars known in the industry as "B-cars," but it also may build something larger for Chrysler, Vines added.
The deal needs to be approved by Chrysler'* supervisory board, which meets next month, and by the Chinese government.
The move gives Chrysler a relatively quick entry into a growing segment of the car market where it now has no significant product, and it prepares the company in case gasoline prices escalate again to above $3 per gallon, said David Cole, chairman of the Center for Automotive Research in Ann Arbor. The average retail price of gasoline in the U.*. ended 2006 at around $2.34 a gallon, or 14 cents higher than a year ago.
Alan Helfman, general manager of River Oaks Chrysler Jeep in Houston, said the pact will give dealers coverage in all segments of the car market. "I think that'* an incredible deal," he said.
Chrysler has been seeking a Chinese partner to build small cars, saying it cannot make money by manufacturing them in the United States due to high labor and other costs.
"We can't build one here in that segment. You can't make any money on it. That'* why we need a partner," Vines said.
He said Chrysler would unveil a prototype "fairly soon," although no date has been set. Production will not start until sometime after 2007, Vines said.
Chrysler would not say how many cars Chery would build or how much they would cost. It also would not reveal the financial terms of the agreement. The letter of intent was signed about two weeks ago, Vines said.
Chery had plans to begin exporting vehicles to the U.*. as early as next year in a joint venture with U.*. entrepreneur Malcolm Bricklin'* Visionary Vehicles, but the deal fell apart in November.
"Both sides agreed a joint venture was not a good idea," said Visionary Vehicles spokeswoman Wendi Friedman Tush, adding that Chery wanted to modify existing cars and Bricklin wanted totally new products.
Visionary Vehicles is now pursuing other Chinese manufacturers and will announce an agreement soon, she said.
The deal with Chery will help Chrysler in the U.*., but it also gives the company small vehicles to sell in growing global markets such as India and China, Cole said.
To be successful, automakers have to be ready with cars and trucks for different economic and fuel price situations, Cole said.
"If you don't have that entry-level small car and we see $3.50 or $4 per gallon, that could be a huge problem of really not having a product in a segment that would be very hot with high fuel prices," Cole said.
Energy analysts predict the $3 level could be within reach in some parts of the country next summer, but that prices in 2007 should mainly be lower than in 2006, when they averaged $2.38 a gallon nationwide.
The agreement also helps Chery by giving it access to design, engineering and manufacturing skills that it doesn't currently have, Cole said.
The Chery-produced cars likely would be sold for $8,000 to $10,000, and would have to be high quality to compete with Chevrolet, Honda (nyse: HMC - news - people ), Nissan (nasdaq: NSANY - news - people ), Toyota (nyse: TM - news - people ) and other automakers that already are selling B-cars, Cole said. Chrysler likely would give Chery more credibility than it would have had selling the cars on its own in the U.*., he said.
Cole said the Chrysler-Chery deal likely won't be the largest one between a U.*. automotive company and a Chinese manufacturer. General Motors Corp. (nyse: GM - news - people ) and Ford Motor Co. (nyse: F - news - people ) already have significant manufacturing deals with Chinese companies that could be larger, he said.
GM spokesman Tom Wilkinson said the Chery cars certainly would compete against Chevrolet'* Aveo small car, which is built by GM Daewoo in South Korea. But he questioned whether the Cherys would be able to carve out a niche in a competitive market.
"The car would have to be good enough to earn its way into the segment," Wilkinson said.
The United Auto Workers union, which has been critical of companies that move manufacturing jobs overseas, would not comment on the Chrysler-Chery deal.
Last year, GM settled several legal disputes with Chery over allegations that it had stolen GM'* design of the Spark minicar, which looks similar to the Chery QQ.
GM had sued to prevent Chery from selling the car in various markets, including Asia and Eastern Europe.
Terms of the settlement weren't fully disclosed, but Chery agreed not to market its vehicles under the Chery name in the United States. GM and Chery also agreed not to take further legal action against each other.
Copyright 2006 Associated Press.
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