Fiat Chrysler Automobiles (NYSE:FCAU) and its Chinese joint-venture partner announced a major expansion of their relationship on Wednesday, bringing FCA's plan for China into sharper focus.
FCA and Guangzhou Automobile Industry Group (also known as GAC) said they had agreed to expand the GAC-Fiat joint venture, adding new Chrysler and Fiat models to an existing plan to start building three Jeep models in China by the end of 2016.
That confirms something that has been apparent since earlier this year: FCA's China joint venture is a significant part of FCA CEO Sergio Marchionne's plan to dramatically expand his newly combined company.
A big plan for huge global growth -- starring Jeep
FCA's current five-year business plan, presented by Marchionne and his lieutenants in May, calls for the combined company's sales to rise from 4.4 million in 2013 to 7 million in 2018.
It's an aggressive expansion plan with a lot of moving parts. But a quick look at these two slides from FCA's May presentation make it pretty clear that Marchionne expects a lot of that growth to come from two big sources: the China market and the Jeep brand.
FCA's plan anticipates a roughly 20% average annual rate of growth of revenues in its Asia-Pacific (APAC) region, from about 5 billion euros in 2013 to 11 billion euros in 2018, with operating margins rising from 7.2% last year to "greater than 10%" in 2018.
While FCA is hoping some of that revenue growth will come from the global relaunch of the Alfa Romeo luxury brand, Marchionne and his team were clear that "the localization of Jeep," as they frequently put it, would be the big driver of revenue and profit-margin growth.
Put another way: FCA is hoping Chinese customers will buy a lot of Jeeps.
Chinese-made Jeeps are coming, and FCA hopes they'll sell big
According to the product plan released by FCA in May, the GAC-Fiat joint venture will start building the Jeep Cherokee in China next year, followed by the subcompact Renegade in early 2016, and a new Jeep that will replace the compact Patriot and Compass later that year.
Those locally made Jeeps will join the Wrangler and Grand Cherokee, which will continue to be imported from the U.S. (FCA has said repeatedly that there are no plans to make the Wrangler outside of the U.S. That's unlikely to change.)
According to the plan, those Jeeps, plus an expansion of Fiat's local lineup and the introduction of Alfa Romeo, will drive FCA's sales volume in China from about 130,000 units last year to around 850,000 annual sales in 2018.
These are extremely ambitious targets. Can FCA pull this off?
Will Jeep's off-road image draw Chinese buyers?
Just as we've seen in the U.S., Chinese customers are moving toward SUVs (and away from cars) in a big way right now. And Jeep -- which has seen its U.S. sales soar 46% so far this year -- is arguably the world's preeminent SUV brand.
It certainly sounds promising. But the devil will be in the details: Will FCA's Chinese dealers be able to deliver compelling service? Will Jeep be set back in China by its still-iffy quality ratings? (Jeep was second to last in Consumer Reports' recent rankings of auto brands by quality, beating only Fiat.) Perhaps most important, how will Jeep's brawny off-road image play with Chinese consumers?
FCA said the best-performing dealers from Fiat's and GAC's existing Chinese dealer networks will "form the basis" of its expanding network of Jeep dealers. But more dealer partners will be needed, as FCA wants to double the size of both the Jeep and Fiat/Chrysler dealer networks by 2018.
Long story short, like many aspects of FCA's five-year plan, the plan to expand Jeep in China sounds very aggressive, maybe even overambitious. But the enduring strength of the Jeep brand makes it at least plausible -- and if FCA manages to get even most of the way to its goals, its bottom line should get a handsome boost. Stay tuned.
John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.