GADFLY

Great Wall's Better Path

Acquisitions in India or elsewhere in developing Asia hold more promise than Jeep.
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Photographer: Tomohiro Ohsumi/Bloomberg

It's OK to steal from a competitor's playbook when it makes sense. Just be sure to copy the right play.

Great Wall Motor Co.'s recent flirtation with buying Fiat Chrysler Automobiles NV’s Jeep division evoked parallels with a rival Chinese carmaker whose overseas purchases have stoked success: Geely Automobile Holdings Ltd. shares are up 600 percent since its 2010 acquisition of Volvo Cars and it's been the best performer in Hong Kong's Hang Seng Index this year.

Instead of lusting after a Volvo or a Jeep-like automaker well traveled in developed markets, Great Wall might consider another example set by Geely: its purchase in May of a 49.9 percent stake in Proton Holdings Bhd., Malaysia's former national carmaker.

While China remains the world's largest car market, posting stronger growth than North America and Europe, auto sales in India, Indonesia, Malaysia and the Philippines are all rising faster.

The Proton purchase not only gives Geely inroads to the Malaysian consumer market but also access to production plants in the region that could be used to manufacture other car brands. Being closer to the end customer would lower production costs. While Proton's Tanjung Malim plant has the capacity to churn out one million cars annually, it made only 72,000 last year, according to the Malaysian government.

Right now, 99 percent of Great Wall's sales come from China but the business is actually well suited to emerging markets, where controlling costs to keep prices down is paramount.

A lean company, analysts estimate Great Wall makes 60 percent of its parts in-house. It spends little on marketing and is the fourth-most-profitable automaker globally by net margin and return on equity. Its return on invested capital ranks number one among 40 manufacturers tracked by Bloomberg Intelligence.

Great Wall could consider poking around Indian carmakers such as Mahindra & Mahindra Ltd., whose sales have doubled in the last five years, or Tata Motors Ltd., whose non-Jaguar revenue last quarter fell by 7 percent from a year earlier. Tata's Indian business could be suffering a case of neglect as it now gets close to 80 percent of sales and 96 percent of operating profit from its Jaguar Land Rover subsidiary.  

India has no major Chinese car player and any tie-up would be influenced by relations between the the two nuclear-armed powers, which are engaged in a serious border dispute.

Great Wall could also dig deeper in China, which is saturated with dozens of car manufacturers, car parts makers, and battery and electric vehicle aspirants all fighting for market share. 

Many of China's traditional auto builders are state-owned enterprises, but Great Wall could consider an investment in one of them as Beijing pushes more private involvement to enhance performance. Inefficiencies at state-run automakers make them obvious targets. 

Great Wall retreated from its M&A ambitions with Jeep on Wednesday, saying there are "big uncertainties" over a deal, in a filing with the Shanghai stock exchange. That's good news. 

Buying a trophy asset with the branding punch of American heritage and quality is tempting, especially since the window allowing Chinese companies to buy overseas firms can close quickly.

But as Gadfly has argued, Jeep would only make Great Wall a bigger company, rather than a smarter one. A wiser bet would be to stick closer to home.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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