Overseas drive riddled with obstacles for domestic firms

By Li Fangfang (China Daily)
Updated: 2009-09-10 08:41

Mergers and acquisitions are nothing new in the global automotive industry, but what is truly groundbreaking is that, for the first time, Chinese firms are playing a pivotal role in this process.

The most noteworthy case is that of Sichuan Tengzhong Heavy Industrial Machinery Co Ltd, a small, unknown local company with no background in automobile manufacturing, which announced plans in June to take over top off-road vehicle brand Hummer just one day after its parent firm General Motors filed for bankruptcy protection.

Meanwhile, in July, Beijing Automotive Industry Holding Co (BAIC) was one of the early bidders for GM's Opel brand.

Although BAIC didn't make it to the final round of bidding, its presence sent the clear message to industry players in the West that it's only a matter of time before a Chinese automaker makes a major international acquisition.

Swedish business daily Dagens Industri reported at the end of August that Geely Automobile Holdings Co Ltd was so far the only candidate to have filed a concrete bid for Volvo Car Corp.

The newspaper also said that a decision was expected this month from parent firm Ford on which bidder it had selected to conduct final takeover negotiations with.

But industry analysts caution that, while buyers from China, the world's biggest auto market, have been potential or likely bidders for ailing foreign brands, it's still too early for the nation's automakers to make significant overseas acquisitions.

After a short period of excitement and pride that a Chinese company would own a premium automotive brand, the Tengzhong-Hummer deal soon aroused suspicion.

The biggest question was how Tengzhong, a local company established in 2005 with registered capital of just 300 million yuan, could take over international brand Hummer with a price tag 10 times that.

"It will be a challenge for Tengzhong to attract and retain top staff after the acquisition," said Garry Wang, China M&A specialist with consulting firm Mercer LLC.

"I am not optimistic about Geely's chances for Volvo. Is a small Chinese company capable of paying such a big sum for Volvo?" said Zhong Shi, a Beijing-based independent auto analyst.

He said that it's simply "not worth it" for Geely, which is enjoying rapid growth in the domestic market, to "pay billions of dollars for an ailing foreign auto brand".

Geely's total assets are just over 14 billion yuan, and it earned a profit of 1 billion yuan last year. However, Chairman Li Shufu admitted earlier this year that the firm was in debt to the tune of around 10 billion yuan.

"Although the acquisition would be a shortcut for Geely to enter Western markets and help meet its ambition of having a high-end brand and products, the Chinese company still faces a series of big challenges," said Jia Xinguang, chief analyst with the Chinese National Automotive Industry Consulting and Development Corp.

"I cannot find any convincing reason for Chinese automakers to buy waning foreign brands, although I admit that some of them have ways to collect funds for such expensive deals," said Cheng Yuan, a senior auto industry columnist with the Economic Daily.

"Do Chinese automakers need to buy production lines to boost capacity? Can they maintain the brand value after the handover? And how can they cut costs if they manufacture overseas?" asked Cheng.

Moreover, "the US auto giants are only divesting their burdens. Chinese enterprises should be prudent," said Hui Yumei, an analyst with auto consulting firm Sinotrust.

"It's very risky for Chinese automakers to acquire foreign auto assets and brands now. These acquisitions might plunge Chinese firms into hot water, since they could be beset with financial and management problems in the future."

Chinese automakers "have to consider the possible problems in terms of management, localization, employment and technology", said Jia.

"Are they capable of solving all the questions?" he asked.

"Even Ford, the century-old US auto giant, could not manage Volvo profitably," added Zhong.

And it's worth recalling that China's automobile industry has already witnessed a failed overseas acquisition.

In 2004, China's Shanghai Automotive Industry Corp (SAIC) paid $500 million for a 49 percent stake in South Korea's Ssangyong Motors. The latter went bankrupt this January, making SAIC's investment a total failure.

"SAIC's failure was nothing to do with its ability to support Ssangyong financially. It was due to a misunderstanding of different cultures and management styles," said Chen Qingtai, deputy director of the Development Research Center under the State Council.

Fu Yuwu, secretary-general of the Society of Automotive Engineers, said that Chinese automakers should focus on acquiring comparatively smaller foreign enterprises.

In March, Geely paid $56 million for Australian automatic transmission supplier Drivetrain Systems International (DSI), to boost its capability in automobile parts technologies.

"It's a smart deal. Geely did not pay very much for DSI. And it obtained the core technology of the transmission supplier - something that's needed in China's auto industry," Fu said.

"It's easier for Chinese automakers to deal with a low-profile foreign company," Fu said.

"Before Chinese automakers decide to go ahead with overseas acquisitions, they should think long and hard about the long-term consequences," said Chen of the Development Research Center under the State Council.

"Instead of merely considering the purchase price, they have to pay more attention to the workforce, distribution, management, and research and development."