China Autos: No Quick Fix
Sichuan Auto has just US$150 million in assets to its name—yet this didn't stop it being named as a possible buyer of General Motors' (GM) Hummer brand. The story, quickly denied by Sichuan Auto, is one of many in recent weeks that have billed Chinese carmakers as potential buyers of US auto assets.
As improbable as the Sichuan Auto-Hummer deal seems, one can see the logic. The global auto industry is in tatters; GM shares now trade for less than the price of a gallon of gas in Detroit as the company flirts with bankruptcy. Meanwhile, China sees its auto industry as a pillar of economic development, but state-owned champions struggle to evolve into anything more than skilled assemblers of foreign autos.
However, such marriages of convenience—Chinese capital in exchange for Western technology and expertise—may be wishful thinking given the present capabilities of China's automakers.
"It's the right opportunity at the wrong time," said Michael Dunne, managing director of research firm J.D. Power in Shanghai. "It's safe to say that most Chinese automakers are entertaining the prospects to buy, but the appetite is not that strong."Assessing options
What's not in doubt is that US auto firms are looking for buyers. A spokesman from GM declined to speculate on market rumors, saying only that the firm had been in discussions with unnamed potential buyers. Ford's spokesman in China provided us with an official statement that the firm is "re-evaluating strategic options for Volvo Car Corporation, up to and including a possible sale. It will take some months to assess all of our available options."
Several domestic automakers named as potential bidders for US auto assets declined to comment for this article.
Experts say that a Chinese takeover of a foreign auto brand would be financially difficult. While China's automakers are faring better than their foreign counterparts, they aren't flush with cash. Geely Automobile, which has declared it is seeking investments in foreign brands and has been cited as a potential bidder for Volvo, posted US$41 million in profit in 2007. In 2008, auto sales rose by 6.7%, the weakest growth in a decade. Most analysts expect this figure to remain in single digits in 2009.
These weak numbers mean that should a domestic automaker decide to buy a foreign brand like Volvo, it would likely rely on government loans. Government support is not guaranteed, though.
In early March, Chen Bin, an official with the National Development and Reform Commission, cautioned automakers against acquiring foreign brands. His comments suggest that the government may not back a move it sees as foolhardy, said John Zeng, senior market analyst of Asian automotive research for IHS Global Insight in Shanghai.
Even if Chinese firms were able to secure the funding necessary for an acquisition, they would then have to run the struggling brands. Analysts said that domestic automakers presently lack the sophistication to manage foreign assets. In addition, US brands in particular come with added baggage—the union trouble and pension obligations that have dogged their American management.
"Even if you gave the foreign brands to Chinese automakers for free, they could not run them well," said Jia Xinguang, an industry consultant and commentator on China's auto sector.
Past acquisitions by Chinese auto firms have failed to deliver on expectations. Shanghai Automotive Industry Corp's (SAIC) 2004 takeover of South Korean auto firm Ssangyong has been widely seen as a failure. Ssangyong filed for bankruptcy protection in January, following disputes between SAIC and Ssangyong's unionized workforce, as well as investigations of technology theft.
The assets of bankrupt UK carmaker MG Rover were divided up between SAIC and Nanjing Automobile Group in 2005. Analysts criticized the deal, citing outdated technology and low brand awareness among Chinese consumers.
Nonetheless, Niklas Schaffmeister, the Shanghai-based vice president for Asia Pacific at BBDO Consulting, which specializes in brand management, says that foreign auto brands are still held in high esteem in China. They also have the potential to provide Chinese upstarts with a route to overseas markets.Home game
But such an acquisition would require savvy brand management to be successful, Schaffmeister said. Chinese automakers would have to stress that they were still using the foreign firm's technology, management and global best practices in order for the magic to rub off on them.
The bottom line is that any auto firm must be successful at home before it can set its sights abroad, and in this respect Chinese brands have some ways to go. Foreign brands held a 73.9% share of China's auto market in 2008, up from 72.1% the previous year, according to IHS Global Insight.
In a bid to strengthen the domestic auto industry, Beijing has reportedly drafted a plan to eliminate four of the current 14 major players. The hope is that this will ultimately lead to the emergence of two or three auto giants capable of producing 2 million cars annually by 2011.
This is a not a new goal. Auto industry consolidation has been a government priority since the 1980s, and China released similar plans in 1994 and 2004. "[Now] 20-25 years on, we're no closer to consolidation than we were when they set out so long ago," said Dunne of J.D. Power.
The process is complicated, as automakers provide provincial authorities with tax revenues, prestige, employment and the possibility of future foreign direct investment. There is no incentive for them to back Beijing's plan, Dunne noted.
Nor will consolidation alone be enough for China's state-run automakers. While Korean and Japanese carmakers developed independently in initially closed markets, Chinese companies were encouraged to pursue foreign joint ventures from the start. It was hoped they would learn from foreign partners and produce globally competitive models. Thus far, the wager has not paid off.
"[State-owned carmakers] didn't have to do R&D, but they got good profits…that made them lazy," said Zeng of IHS Global Insight. "You're never going to see a Hyundai or a Toyota grow up from these state-owned companies."
Zeng says private firms like Geely or Great Wall Motor are more likely to succeed than their state-owned counterparts. The road to that destination, however, is long, and there will be no shortcuts.
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