Buyers should beware

The acquisition of Volvo has become more complicated as Chery is rumored to be the latest interested Chinese buyer for the Swedish car brand. Two other Chinese carmakers, Changan and Geely had expressed their interest earlier.

Chery's Assistant General Manager Jin Yibo would only confirm that the company has been in contact with a European car brand.

Insiders disclosed that Chery began to negotiate last July with banks and private equity firms to prepare funds for the acquisition. The Export-Import Bank of China granted Chery a credit line of 10 billion yuan at year's end to support the latter's overseas merger bid.

With 30 billion yuan of assets and 3-4 billion yuan of capital, Chery will have a high asset-liability ratio if it carries out the acquisition with bank loans.

Huang Zeming, finance professor at East China Normal University said that Chinese companies should not make hasty moves in overseas acquisitions. Instead, they should first have a thorough understanding of the policies, laws and culture of the assets' home country.

The Shanghai Automotive Industry Corporation (SAIC) is a good example of the failure to do this. SAIC incurred heavy losses with its $4 billion acquisition of South Korea-based carmaker Ssangyong. The Chinese auto giant has also been troubled by constant local labor disputes that highlighted its ignorance of the business environment and labor union culture of South Korea.

Car is a special product that bears much of a country's national identity and its business culture. Trans-national expansion may not cut production costs and increase market shares.

Car manufacturers are mainly based in developed economies, and China's car industry has had only a few years of fast growth. As new players, Chinese carmakers need to take into account both the liabilities of their target assets and applicable local laws. For Chery, once it merges with Volvo, it has to deal very carefully with the latter's strong labor union.

Volvo's workers in Sweden are paid six to eight times more than their Chinese counterparts, and the production line cannot be moved elsewhere.

Even if Chery can get the staggering 30 billion yuan for the merger, Volvo's labor costs for its 10,000 workers will be hard to sustain for Chery, as will the price of compensation if Chery lays off some of them after acquisition.

In times of global crisis, Chinese carmakers are still not strong enough to take on the financial woes of international giants. The acquisition strategy from the very beginning may be wrong.

www.gmw.com.cn

(China Daily 03/16/2009 page2)