China's Chery Capitalises on Western Exit, Seizing Control of Russian Factories

China’s leading automaker Chery has initiated vehicle assembly at three factories in Russia, which were vacated by Western manufacturers such as Volkswagen and Mercedes-Benz. These production facilities are now being used to supply the Russian market, filling the gap left by Western companies following their withdrawal due to the Russian aggression in Ukraine.

Chery’s move, reported to Reuters by five sources familiar with the matter, is the latest example of how Chinese automakers are expanding their influence in Russia’s automotive industry. Chinese brands have already captured over half of Russia’s car market in terms of sales since Moscow’s invasion of Ukraine in February 2022 led to the exit of numerous Western firms.

The expansion of Chinese automakers into Russia’s domestic production highlights the increasing role of Beijing in reshaping the country’s industrial landscape. Chery, which now accounts for almost 20% of all passenger car sales in Russia, is not only importing fully assembled vehicles but also importing nearly finished cars and completing the assembly at three Russian factories.

This marks a strategic shift for Chery, which has benefitted from Russia’s strained domestic manufacturing capabilities. The country’s automotive sector has struggled with underutilised production capacities and limited output since Western companies pulled out.

The details of Chery’s assembly operations have been closely guarded, with four of the sources, including car dealers involved with the factories, declining to be identified due to a lack of authorisation to speak to the media. However, they confirmed that Chery is betting on strong demand in Russia, where the market is constrained by limited supply.

No Ownership of Russian Factories

Despite its growing presence, Chery has stated that it does not intend to build or acquire its own factories in Russia. Instead, it is partnering with existing facilities that were left idle after Western automakers exited the Russian market. This approach allows the Chinese company to avoid significant capital investment in new production sites while leveraging the infrastructure left behind by Western brands.

In a written statement to Reuters, Chery confirmed it supplies passenger cars to the Russian market, but it did not respond to questions about the assembly operations taking place at these factories. The company’s production in Russia had not been publicly announced before now.

Incentives for Localisation

Russia is raising tariffs on imported cars, which could further encourage foreign automakers to localise their production in the country. Chery’s current assembly operations in Russia offer a model for how foreign companies can meet local demand while avoiding the increased costs associated with importing fully built vehicles.

This strategy could prove crucial as Chery looks to strengthen its position not only in Russia but in other global markets as well. In July, Chery Vice President Shawn Xu outlined the company’s ambitious expansion plans, stating that the automaker aims to enter more than 60 new markets in the next three years.

However, Chery’s global expansion efforts face challenges, particularly in Europe. The European Union has introduced tariffs on electric vehicles (EVs) made in China, which will affect Chery’s EV exports to the region. This decision is part of the EU’s broader strategy to protect its domestic car industry from an influx of Chinese-made vehicles.