A Growth Model for China Automakers
In July, a rumor circulated in the Chinese and Western business media that Chery Automobile was considering purchasing Ford's (F) Volvo luxury car division for more than $4 billion (BusinessWeek.com, 7/7/08). In August, a second rumor went around that another Chinese automaker—Guangzhou Automotive—was interested in Volvo.
I don't know if Volvo is worth $4 billion. (With Ford announcing on Sept. 2 the appointment of Stephen Odell, chief operating officer for Ford Europe, as Volvo's new chief executive, the U.S. company doesn't appear to be interested in selling right now.) What I do know is that based on recent history, I would recommend that Chery, Guangzhou Automotive, or any Chinese automaker eyeballing an acquisition of a foreign automotive brand rethink its strategy. Let's consider what has happened with some major automotive acquisitions over the past 20-30 years:
FordFord bought Jaguar in 1989 (spending $2.5 billion) and Land Rover (another $2.5 billion in 2000), both venerable brands with rich automotive histories. But in May 2008, Ford sold both to India's Tata Motors (BusinessWeek.com, 3/26/08) (TTM) for half their combined purchase price after piling up billions of dollars in operational losses over the interceding years. Now Ford is reportedly trying to offload Volvo for $4.4 billion, though it acquired the Swedish automaker for $6.4 billion in 1999.
General MotorsGeneral Motors (GM) was equally busy buying up initial stakes—and then increasing them—in foreign automakers. GM first bought into Isuzu in 1971, then Suzuki in 1981, Saab in 1989, Subaru in 1999, and Fiat in 2000. Today, GM has sold off or decreased its interest in all of these investments (except the ailing Saab, which no one will touch). While precise figures are not available, the struggling Saab is believed to have cost the company billions in operational losses, while the damage for its dalliance with Fiat is estimated at $4.4 billion.
BMWGermany's BMW (BMWG.DE) bought Britain's Rover Group in 1994 for roughly $1.3 billion. After six years of massive losses—including an estimated combined loss of $3 billion between 1998 and 1999—BMW broke up the group in 2000 and sold it off in pieces.
DaimlerIn perhaps the industry's greatest missteps, Daimler acquired a controlling interest or stake in Chrysler, Hyundai Motor, and Mitsubishi Motors over the last decade. All those ventures stalled quickly, and Daimler has subsequently sold off or pulled out of the majority of its interests in the companies. Total accumulated losses are figured to be in the range of $35 billion to $40 billion, and that doesn't include lost time and diluted resources.
Now, the above are some of the oldest and most venerated companies in the automotive industry.
If they can't make an acquisition work, what makes us think that a Chinese automaker—most likely founded less than 10 years ago—can do any better?
The answer, most likely, is that it can't.
The problem is it is extremely difficult—nearly impossible, in fact—for one manufacturer to take over another car company and make it work. Companies' cultures, processes, people, and personalities are just too different. They have different histories, different values, and a different world view. To get the two cultures to work together in a constructive manner is often a Sisyphean endeavor.
Japanese Model for Growth
Yes, a successful acquisition can be achieved, as is the case with Renault's (RENA.PA) turnaround of a debt-ridden and moribund Nissan (NSANY). But this is the exception, rather than the rule. It required the steady hand of Carlos Ghosn—himself a force of nature—to steer Nissan out of trouble.
Instead of acquisition, Chinese automakers might be better served to follow the Japanese model for growth. While Western automakers were busy buying up various companies in the last 20 years, how many major acquisitions did Japan's Big Three—Toyota (TM), Nissan, and Honda (HMC)—make? The answer is zero. None. (Toyota did buy 5% and 10% stakes in Subaru (7270.T) and Isuzu (7202.T)—from GM—in 2005 and 2006. But each investment was only about $350 million.) Instead of trying to leapfrog the competition, Japanese automakers rolled up their sleeves, and did the heavy lifting of developing their own products, manufacturing facilities, supply bases, distribution networks, dealer networks, etc.
Results Speak for Themselves
Successful Japanese automakers initially concentrated on two or three core products, making sure that their quality, durability, and ease of use were market-leading. For its core offerings, Toyota launched with Corolla and Camry; Honda launched with Civic and Accord; and Nissan went to market with the Sentra and Maxima (and later added the Altima). These products are still their core today, and among the leaders in their segments. Later they began to add complementary vehicles, like SUVs, minivans, pickups and crossover vehicles. And when Japanese automakers wanted to move upscale, they didn't buy another brand. They developed Lexus, Acura, and Infiniti.
This approach is not particularly awe-inspiring, and is not necessarily quick. But the results—in the China market and globally—speak for themselves. If the experience of Western automakers serves as any indication, the best choice for Chinese automakers may be the slow and steady path.