Don't bet on China rescuing foreign car makers
Publication date: 28 May 2009
Don't look for China to drive consolidation in a global auto industry bloated with too much cost and capacity, analysts and executives say, despite a recent rash of reports and speculation that say otherwise.
The Chinese, burned by past acquisitions that backfired, lack the know-how and stomach to buy car makers' entire operations, and are more likely to be bargain-bin shoppers for technology, design and other assets being sold off in secondary sales.
Beijing Automotive Industry Corp is the latest name in the frame, with Germany's Economy Ministry confirming the Chinese firm made an offer for Opel, the German unit of General Motors.
The offer now presents a fiercely contested four-way battle for control of a carmaker that traces its roots in Germany back to the 19th century.
BAIC can be added to a string of Chinese automakers said to be interested in buying an international asset in an industry undergoing a major overhaul as recession and tight credit cripple sales.
Other Chinese names that have cropped up in mostly unconfirmed reports include Geely Automobile Holdings and Chongqing Changan Automobile Co, as potential bidders for Ford Motor's Volvo cars, and Geely for GM's Saab. Dongfeng Motor Group Co and Chery Automobile have also been mentioned as interested buyers in overseas assets.
"It doesn't make sense for them to take over the entire operations, which is of little value for them. We had enough production capacity in China already," said Qin Xuwen, an analyst with Orient Securities in Shanghai.
"What we do need is brand and technology."
An executive inside one of the major automakers expressed similar sentiment: "Chinese automakers are indeed interested in the foreign brands out there for sale, but few would want to take over the entire operations," he said, speaking on condition his name would not be used due to the sensitivity of the situation.
"What we want is the brand, technology or select platforms which we can then use to raise our own profile."
Others agree the companies are keen on getting access to technology and innovation, but running an overseas business is another matter.
Accordingly, Chinese automakers are more likely to pursue deals like SAIC Motor's purchase of the Rover 750 and 250 platforms from failed MG Rover in 2005. That deal enabled SAIC to develop the Roewe, its first in-house designed saloon, without the baggage of inefficient manufacturing.
While the BAIC offer is likely to stir up the ongoing Opel auction, it remains in question just how serious BAIC is about owning and operating the business.
"It's tough to see an Asian buyer," said a Hong Kong-based investment banker who covers the industry, when asked about the various auctions of U.S. and European auto assets.
Instead of BAIC, he used the case of Geely, another Chinese car maker often touted as chasing overseas assets. Executives there have no experience owning an international entity and all the things that come with it, he said.
"It's not just a case of buying it and hanging on. You have unions, politics, communities," he said.
China's automakers are powerhouses at home, but have little experience selling their cars overseas and even less turning around ailing auto assets in other countries.
The recent bankruptcy of Ssangyong Motor, a struggling South Korean automaker owned by China's SAIC, is a textbook case of an ailing auto asset the Chinese thought they were buying for a bargain only to get burned.
Tough times at UK brands Jaguar and Land Rover, now owned by India's Tata Motors, are probably also giving any acquisition minded Chinese automakers second thoughts about overseas M&A.
In addition, some wonder why Chinese automakers would drive overseas just as their domestic market is the hottest in town. Shouldn't they be focused on local opportunities? they ask.
Another Hong Kong-based investment banking source, who was also not authorized to speak publicly, said part of the upswing in China's auto market is being fed by the government's fiscal stimulus.
"Why would they want to go into a slower market when China's market is the fastest growing?" said the source.