Jaguar Land Rover has signed a joint venture agreement with Chinese carmaker Chery for production of Jaguar and Land Rover vehicles at a new $1.7 billion facility in Changshu near Shanghai, due for completion in 2014. It will be the first time that the company has manufactured vehicles from the ground up outside of the UK.

In addition to JLR brand vehicles, the partnership, called Chery Jaguar Land Rover Automotive Company, will also produce domestic brand models tailored specifically to local customer demand said the company in a statement. It will have an annual output capacity of 130,000 vehicles at start up.

“We are delighted to have reached this milestone, achieved thanks to the understanding and foresight of the Chinese authorities and we want to thank them for recognising the potential of our joint venture in the fast-growing Chinese market,” said the companies in a joint statement. "Together, we will now begin working in close collaboration on our partnership plans to harness the capabilities of our respective companies, to produce relevant, advanced models for Chinese consumers."

The news of the go ahead on the joint venture follows an announcement in September that China’s National Development and Reform Committee (NDRC) had given the go ahead for local production of the Evoque and Freelander, either of which could be first out of the new factory. There is also word that these will be followed by a saloon, most likely to be the XF or XJ.
As well as the manufacturing facility, the new company will be investing in a new research and development centre and engine production facility, with local sourcing of components indicating that there will be little, if any, supply of components from the UK. This raises questions about the quality of locally-sourced parts according to IHS Automotive. “Maintaining the quality of locally-sourced parts has been a problem for most foreign OEMs operating in China,” said a spokesperson for the analyst. “Foreign suppliers operating in China have a reason to be there.”

Adding to the point Mohan Sodhi, professor of Operations and Supply Chain Management at Cass Business School noted that it was the first time JLR will be producing outside the UK, which raised issues of how quality would be maintained across the two locations. “This risk is mitigated perhaps by Tata’s own experience but it still remains a significant one,” said Sodhi.

The project also includes the creation of a new partnership brand to assemble models tailored specifically for the Chinese market, including the marketing and distribution, though JLR would not comment further on these plans.

Currently, JLR imports all of its vehicles to China, but import duties are high for UK premium vehicles. Sales of JLR brands in China were reported to have climbed 80% in the first 10 months to October 2012, reaching 60,000. In the 2011 calendar year, the carmaker saw sales increase more than 60%, driven mainly by the Jaguar XJ and XF models, and strong demand for the fuel-efficient Range Rover Evoque. Removing import duties through local production is expected to make it more competitive in the Chinese luxury market.

According to forecasts from IHS Automotive, once the plant is in operation, JLR is likely to increase in-country sales from the 60,000 recorded over first 10 months of this year to 100,000 per annum, though JLR did not verify this.

The move is also expected to boost the international expansion and strategic development for Chery Automobile. Prior to the deal with JLR, Chery was the only major Chinese brand without a joint venture partner.