Jeep is cashing in big on its decision to build 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 Chinese 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," said Jeep global brand chief Mike Manley 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 last year. But sales surged after Jeep added Cherokee production in October in Changsha. This year through March, Jeep deliveries here have climbed 29 percent to 33,413 vehicles.

 

And that pace may quicken. In April, Jeep began producing the Renegade subcompact crossover at a new assembly plant in Guangzhou, and it plans to add a new C-segment crossover to China production by year end. Soon after that, another new crossover designed for China will be added to 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, Manley said.

 

Capacity conundrum

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

 

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

 

Industry sales in China are forecast to grow 6 to 7 percent in 2016, Manley said. "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 20 percent more of China's crossover customer market, reckons Paul Alcala, vice chairman of FCA's local joint venture.

 

A different way

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 brand has no plans to go local. The company believes that caution is in order in China, where factory overcapacity is a chronic problem.

 

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

 

China is expected to assemble 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 vehicles 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 a complete reliance on imports. Last year, Lexus sales in China climbed 14 percent to 88,500 vehicles, and the company expects deliveries to rise 13 percent to 100,000 this year.

 

"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."