Scaling back short term goals, Qoros stakes turnround on China

From Fisker to Coda, the car industry is littered with failed startups. Qoros is hoping to avoid the same fate.

The Sino-Israeli automaker made waves when it launched its first car in 2013 with ambitions to simultaneously crack China, the world's biggest vehicle market, and Europe, one of the most competitive.

Since then, it has ejected its chief executive, rung up dismal sales and faced questions from several analysts about its financial viability. Those dreams of being a globally renowned car brand seem more distant than ever and the company's travails highlight the challenges facing new entrants in the capital intensive car industry.

"Nobody knows who Qoros is," admits Phil Murtaugh, a former China specialist at General Motors who ran electric carmaker Coda before taking over at Qoros in February.

Armed with a new five-year business plan, the company - which showed off a new concept car at last month's Shanghai auto show - faces a fraught period as it rebrands itself, seeks to achieve operating profitability by 2018, and then looks to make good on its lofty long term ambitions.

Qoros was set up in 2007 as a joint venture between Chery, a state-owned domestic Chinese carmaker, and Israel Corp, a conglomerate controlled by Idan Ofer, a London-based billionaire.

Mr Ofer, who also chaired collapsed electric car venture Better Place, assembled a crack team of European engineers, including former BMW designer Gert Hildebrand and Volker Steinwascher, once head of Volkswagen in North America.

"Idan thinks big," says a person close to Mr Ofer. "He wants this company to be the first GM to come out of China." Mr Ofer was unavailable for comment.

Its first car, launched at the 2013 Geneva motor show, was declared the year's safest small family vehicle in European tests. Only last week the same car, the Qoros 3 sedan, achieved China's highest ever safety rating.

But safety does not necessarily sell. Despite having a production capacity of 150,000 at its factory in Changshu, Qoros sold just 7,000 vehicles last year. GM, by comparison, sold 3.5m in China in 2014.

As for taking on Europe, Qoros sales in the test bed of Slovakia were just 51.

Mr Murtaugh admits that it was "foolish" to try to crack China and Europe in one shot. "When I joined, I told people, 'Let's put western Europe on hold for a while'," he says. "We're a Chinese company, we have to get China right."

What went wrong? Bill Russo, managing director of consulting firm Gao Feng Advisory, says it was a mistake to launch a car into the ultra-competitive sedan segment at a higher price than most other domestic brands.

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Robin Zhu, analyst at Bernstein says the cars are simply too costly to build and too expensive to buy. "You're trying to persuade consumers in China to choose a brand they've never heard of at the same price point as a Ford Focus," he says.

The Focus, China's second-bestselling car last year, starts at Rmb100,000 ($16,000) versus about Rmb120,000 for the equivalent Qoros 3 Hatch.

Mr Murtaugh is trying to turn things round by launching a wholesale rebranding to put the focus on Qoros as a Chinese company, rather than a cosmopolitan curiosity.

He is also ramping up the dealer network. Qoros has 78 dealers across China. It plans to almost double that number this year.

Playing in Qoros' favour is an emerging trend in which domestic brands in China are gaining ground on foreign rivals.

But the growth is not in affordable luxury sedans but in cheap and cheerful sport utility vehicles. Qoros offers hatchbacks and compact offroaders, but despite the hybrid SUV concept shown in Shanghai, it is unclear what the fourth model will be.

The financial picture is also grim. According to results posted by New York-listed Kenon Holdings, the Israel Corp subsidiary that now controls the half-stake, Qoros made a $175m net loss in 2014 - up from $127m in 2013 - on revenues of $140m. Cumulative losses since 2010 are almost $450m.

The company and investors declined to comment on its level of debt, and Kenon does not declare the figure. The Caixin business website in China estimates Qoros' gross debt at Rmb8.9bn at the end of September.

Over the past 12 months the parent companies have put up more than Rmb2bn in shareholder loans, and both Chery and Mr Ofer - the controlling shareholder of Kenon - have pledged their commitment to the business.

Sales have improved, but only slightly, at 2,500 first three months of the year.

Still, unbowed, Mr Murtaugh says operating profitability is just two or three years away. "There's going to be a bit of pride taken in China that a Chinese company . . . can do it just as good as German companies, American companies, Japanese companies," he says.

"When that becomes known, Qoros will be a success."

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