Chinese Carmakers Target Volvo and Saab

Confirmation that Chinese automaker Geely is interested in buying Ford's (F) Volvo unit and that Beijing Automotive Industry (BAIC) has an agreement to help finance Sweden-based high-performance sports-car maker Koeningsegg's acquisition of Saab from General Motors has once again highlighted the global ambitions of China's numerous car companies.

Rumors about Geely's interest in Volvo have been around for months, but yesterday the head of the group's Hong Kong-listed Geely Automobile subsidiary made the news official. CEO Gui Shengyue told Reuters: "I believe if Volvo is for sale and Ford has a global announcement, then our parent company will participate."

On the same day that Gui confirmed Geely's interest in Volvo, Beijing Auto teamed up with a partner in a deal for another Swedish automaker, Saab. In a statement issued Sept. 9, Koenigsegg Automotive said it had signed a memorandum of understanding with the Beijing-based company "to explore growth opportunities in the Chinese and international markets for the products of Saab Automobile and BAIC." The deal calls for BAIC to become a noncontrolling minority shareholder in Koenigsegg, which in turn would take full ownership of Saab.

Safe and Sturdy Image Backers of the overseas expansion reckon that such deals can help the Chinese automakers get footholds in European and U.S. markets, access to advanced technologies, and, in the case of Volvo and Saab, a chance to piggyback on their reputations for sturdiness and safety.

But whether such deals make sense for China's auto industry remains to be seen. While there are successful big-ticket alliances in the global auto industry, such as Nissan and Renault's (RENA.PA) partnership, there are plenty of failures. The teaming up of Chrysler, Daimler, and Mitsubishi Motors (7211.T) is one example.

And while it's too early to write it off, India's Tata Motors (TTM) is finding that the costs of its $2.2 billion purchase of Ford's Jaguar and Land Rover brands last year can quickly outweigh the benefits. On Aug. 31, Tata announced a quarterly loss of $67 million, compared with a profit of $147 million for the same quarter in 2008, thanks largely to red ink at Jaguar and Land Rover. Tata needs to spend $1 billion-plus a year in research and development on new models and making power-hungry Jaguars and Land Rovers meet new European emission standards. Given Tata's experience with the two British brands, it's not surprising that names of other Indian automakers, such as Mahindra & Mahindra, are no longer automatically bandied about when rumors of imminent purchases appear.

The record of Chinese automakers doesn't offer too much encouragement, either. Companies have certainly been active. In June, for instance, Sichuan Tengzhong reached a tentative agreement to buy GM's Hummer brand, although negotiations are still under way. In 2005, Nanjing Auto bought British marque MG Rover and is now making some attractive cars. In 2004, Shanghai Auto spent more than $500 million to buy 51% of Korea's Ssangyong Motor, but in January Ssangyong filed for bankruptcy protection.

Advanced Skills Needed Analysts point out that while marquee deals can be successful, making them work may be even tougher for Chinese automakers, given the challenge of bridging the large cultural and legal differences between China and elsewhere. For instance, following news that Beijing Auto was not going to bid for GM's Opel division, University of Maryland business school professor Anil K. Gupta and Haiyan Wang, managing partner of the China India Institute, wrote in BusinessWeek that the Chinese company was not ready to manage an overseas operation. That would require "the ability to manage a horizontal organization; to connect and coordinate without a heavy reliance on command and control; to navigate cultural, linguistic, and political diversity; and to understand and serve the needs of a diverse set of customers in heterogeneous foreign markets," wrote Gupta and Wang. "As a domestically focused enterprise, Beijing Auto has not had the opportunity to build any of these capabilities."

Smaller, more focused deals for core technologies may make more sense. Leah Jiang, an analyst at Macquarie Securities (MQG.AX), says that Geely's acquisition of DSI, an Australian maker of automatic transmissions, is an example of such an acquisition. She also points to parts maker Weichai's deal for French engine maker Moteurs Baudouin. "These [types of] companies could help Chinese manufacturers break through major technology barriers, [but] the size of the acquisitions will be relatively small," she wrote in a recent industry report. By contrast, some reports put the price of Volvo at $2.1 billion.

Meanwhile, it's perhaps worth recalling that the early international success of Toyota, the world's biggest automaker, and, until recently, the most profitable, stemmed from producing competitive exports rather than acquiring foreign brands. Critics said that Toyota and other Japanese car companies benefited from a weak yen and helpful government. In theory, so could the Chinese. Yet a report on Bloomberg this week pointed out while China's auto market is five times as large as India's, China trails in terms of exports. Moreover, while China's exports slumped 60%, to 164,800 units, between January and July, India's rose 18%, to 229,809. In both cases, the figures would be even smaller if vehicles made by foreign automakers were excluded.

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