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Caution urged in bids for US Big Three
By Li Fangfang (China Daily)
Updated: 2009-07-20 14:44

Caution urged in bids for US Big Three
Models pose next to the Chery Faira car at an expo. Chinese carmakers including Chery are aggressively expanding overseas. [Bloomberg News]

As the ongoing financial crisis pressures Western automakers to consider selling some of their assets, Chinese vehicle producers are seeing more opportunities to enter the global market through overseas acquisitions.

Sichuan Tengzhong Heavy Industrial Machinery Co Ltd signed an initial agreement with General Motors (GM) last month to buy the latter's most celebrated off-road vehicle brand, the Hummer.

Then Beijing Automobile Industry Corp (BAIC) announced a last-minute offer for GM's Opel business in Europe, although GM now is in talks with other potential buyers, Canadian auto parts company Magna and Belgian financial investor RHJ International.

A number of Chinese companies, including Geely and Dongfeng, are on the potential buyer list for brands such as Volvo and Saab.

However, unlike the positive responses to purchases such as China's Lenovo acquiring IBM's PC business in 2004, bidding for assets from ailing Big Three automakers has attracted more criticism.

"I cannot think of any reason for Chinese automakers to buy waning foreign brands, although I admit that BAIC has reinforced its capability through a series of domestic expansions in recent years," said Cheng Yuan, a senior auto industry columnist with Economic Daily.

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

Dong Jianhua, an auto industry analyst with Southwest Securities, expressed caution, too.

"It's very risky for Chinese automakers to acquire US auto assets and brands now," Dong said.

"The acquisitions might plunge Chinese firms into hot water, since they could be beset with financial and management problems in the future," Dong said.

Hui Yumei, an analyst with auto consulting firm Sinotrust, agreed.

"The US auto giants are only divesting their burdens, not the profitable and competitive units. Chinese enterprises should be prudent," Hui said.

Related readings:
Caution urged in bids for US Big Three China to encourage overseas investment with easier procedures
Caution urged in bids for US Big Three Hummer acquisition: Off-road or way off track?
Caution urged in bids for US Big Three GM says Chinese company bidding for Opel
Caution urged in bids for US Big Three Geely buys Australian auto parts supplier

Western automakers can find it difficult to blend different cultures and management styles. In some cases, heedless acquisitions can lead to huge losses.

Ford acquired the luxury brand Jaguar with $2.6 billion in 1989, and spent another $6.5 billion to develop and operate its new business.

Then Ford in 2008 sold the Jaguar brand to India's small carmaker, Tata, for a mere $2.3 billion.

Now the future of Jaguar and Land Rover, another brand Tata purchased, remains clouded. Neither brand has contributed profits to Tata.

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 failure.

"SAIC's failure did not indicate that its financial capability cannot support Ssangyong. We should attribute the failure to a misunderstanding of different cultures and management styles," said Chen Qingtai, deputy director of the Development Research Center under the State Council.

"Chinese automakers, before they make an acquisition decision, should think about what might happen over the long-term following the merger," Chen said.

Hui of Sinotrust said other factors should be considered.

"They have to pay more attention to employees, distribution, management and research and development - outside just the payment price - if they really want to buy," Hui said.

Chen suggested Chinese automakers consider paying more attention to comparatively smaller foreign enterprises.

"In such situations, it's much easier for Chinese automakers to deal with a low-profile company," Chen said.

Fu Yuwu, secretary general of the Society of Automotive Engineers, told China Business Weekly that Geely's acquisition in March of Australian automatic transmission supplier Drivetrain Systems International (DSI) is a good example of a smart overseas purchase.

"As far as I know, Geely did not pay very much for DSI. Yet, Geely obtained the core technology of the transmission supplier - a technology that's needed in China's auto industry - through this smart deal," Fu said.

"Chinese companies should make clear that the assets they are considering are assets that they really need," Fu said.


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