HONG KONG SPECIAL ADMINISTRATIVE REGION, People’s Republic of China
Written by Marc Courtenay
Thursday, 14 May 2009
– As deep as the U.S. auto industry’s financial crisis seems to be, there may actually be a fairly simple solution. Sell out to China. Nearly a decade ago, I warned that Detroit’s Big Three – General Motors Corp. (NYSE: GM
), Ford Motor Co. (NYSE: F
) and Chrysler LLC
– had better learn to speak Chinese if they wanted to survive. I’ve repeated that warning many times since. Now, it appears that the idea is finally entering mainstream thought. China may well be Detroit’s lifeline. From some – chiefly those who don’t understand that Detroit has largely failed to make a passing grade in an increasingly global economy – my warnings have attracted a lot of criticism. That’s unfortunate, because by adopting such a defensive posture, these critics have missed the real point I was making: Chinese companies would initially have no interest in taking over Detroit, but over time would likely demonstrate a deep interest in acquiring key parts of the U.S. auto sector “value chain” that could support the expansionist efforts of their domestically produced brands. Distribution channels would be very attractive. And so would auto-parts producers, since they are a key element of such post-purchase “aftercare” initiatives as maintenance and repair. The only real question, I noted at the time, was how big the lag would be between China’s acquisition of the U.S. auto-parts companies and the international expansion of its own brands. Absent the current financial crisis, I estimated the lag would have been five to 10 years. Now, however, that lag time has dropped to as little as five years. The reason: The financial crisis has eviscerated the market values of so many Western companies, creating bargain-basement opportunities for cash-rich Chinese companies
that are so alluring that they were unfathomable a decade ago. Events are playing out just as I predicted.
Enter the (Red) Dragon
Back in November, as GM and Chrysler tottered on the bring of complete collapse – and after Japan’s Toyota Motor Co. (NYSE ADR: TM
) had reportedly considered, and ruled out, the purchase of one, or both, of these carmakers – China’s SAIC Motor Co. Ltd
. and Dongfeng Automobile Co. Ltd
. – were reportedly working on a play to buy the two embattled U.S. firms
, Huliq News
and the 21st Century Business Herald
both reported. Said one China auto-industry executive (who requested anonymity): “We really want to acquire some of our global counterparts’ core technologies now, because prices are so low.” His sentiment was echoed by Xu Liuping
, chairman of Chongqing Changan Automobile Co. Ltd
., Mainland China’s fourth-largest automaker, who recently said that “the longer the [global financial] crisis lasts, the bigger the chance of [a] failure or [of] a scale-down of some American and European carmakers.” For the most part, Chinese companies are still learning to do business overseas. They are not yet comfortable leading the charge in overseas markets, which is why so much of their overseas expansion efforts and shopping sprees remain largely confined to natural-resource sectors
and, in the auto sector, auto-parts players. Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their company’s domestic competitiveness. And with a market as big as Mainland China, that’s logical. But what might not occur to Western business leaders is that Chinese executives don’t yet view themselves has having global-branding expertise, particularly when it comes to the so-called “design elements.”
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For instance, as my friend, Kishore K. Sakhrani
, director of Hong Kong-based ICS Trust (Asia) Ltd., noted during a presentation to our investment group: “In the past, when a Westerner wanted a product in sea green, you often got something that was lime green. But many Chinese companies are now establishing Western design shops and closely consult [with] Western marketing experts, and the results will be obvious.” Indeed, in a sentiment that closely echoes my own philosophy, Sakhrani said that “there isn’t an industry on the planet that the Chinese won’t dominate – or at least materially affect – in the next 20 years.” My experience suggests that the biggest changes and the most dramatic expansion will occur when Chinese executives become comfortable in assuming leadership roles that push them far beyond the manufacturing stage of the value chain and into product development. And while 10 years ago I thought that process might take another two decades, the financial crisis has dramatically accelerated the timeline. And we’re seeing that now – particularly with China’s automaking industry.
China’s Shopping List
Just this March, Geely Automobile Holdings Ltd. (PINK: GELYF
) bought Australia-based Drivetrain System International
– a supplier for Ford, Chrysler and Ssangyong Motor Co. Ltd
. – for $42.55 million (HK$329.79 million). More recently, the company has denied rumors that it’s ready to purchase Ford’s Volvo passenger car unit for between $1.3 billion and $2 billion, which would represent a catastrophic loss for beleaguered Ford, which paid $6.45 billion to buy Volvo in 1999. Three of the most prominent Chinese car makers – Geely, Dongfeng and Chongqing – are reportedly in the hunt for GM’s Saab and Opel units in deals that could be worth as much as $200 million. Clearly, the Fiat SpA
(OTC ADR: FIATY
) transaction complicates things a bit
, but there’s still plenty of room for surprises. Said another Chinese executive, who also chose to speak anonymously: “We view [buying parts-makers, for now] as a viable alternative to acquiring good brands that have suffered from terrible management. We don’t know enough – yet. We have to build our competency in the meantime.” And you can bet that they’ll do just that – build a world-class “competency” that just adds more muscle to the growing China business juggernaut. My contacts tell me that transmission systems, hybrid technologies and power-gearing systems are at the top of the list in the immediate future. Actual manufacturing plants and assembly lines are running a distant second until Beijing gets comfortable with the suitability of overseas manufacturing as part of China’s business value chain. Many Westerners who recall the Japanese acquisition spree of the 1980s will not react favorably to this. But it’s not a one-way Street. As troubled as Detroit is, it’s clear that their representatives have been working quietly in China for months now, which is entirely logical. Chinese companies remain some of the healthiest on the planet in financial terms, and most continue to demonstrate strong domestic growth despite the softness of the overall global economy. It also doesn’t hurt that the Chinese government is backing many of these initiatives. China has a world record $2 trillion
in foreign reserves, which gives it a lot of financial credibility with any deals that country’s companies may wish to pursue. In an interview with the South China Morning Post
, Geely Automobile Holdings Executive Director Lawrence Ang said that “we’re constantly approached by bankers about the possibility of mergers and acquisitions [with international auto makers].”
A Long List of Deals
The auto sector has already been bustling with deals. Here are just a few that have transpired in recent years:
- 2004 – SAIC Motor Co. spends $500 million to buy an initial 48.92% stake in South Korea’s Ssangyong Motor Co., and then boosts its stake to a 51.33%.
- 2005 – SAIC purchases the design rights to the super-looking MG Rover 25 and 75 models for $99.97 million (HK$775.33 million) from kaput British carmaker MG Rover.
- 2005 – Competitor Nanjing Automobile Group buys the rest of MG Rover’s assets for $87 million.
- 2007 – Working together, SAIC, Chery Automobile Co. Ltd., and First Automotive Group Corp. (FAW) band together in preliminary buy out talks with Chrysler. No deal.
- 2009 – January - SAIC learns the hard way not to buy brands when Ssangyong goes belly up and files for bankruptcy.
- 2009 – February – Beijing says it will slow down global acquisitions and concentrate on competencies that boost local strength.
- 2009 – March – Geely purchases Australian parts-maker Drivetrain System International for $42.55 million (HK$329.79 million).
- 2009 – April – Chongqing Changan Automobile Co., Geely Automobile Holdings, Dongfeng and Guangzhou Automobile Industry Group Co., Ltd. (GAIG) announce their desire to purchase global assets from international brands in trouble. Geely’s chairman also notes at the much publicized Auto Shanghai 2009 auto show that he sees Geely being a major global brand by 2015.
At the end of the day, many Americans will fear the acceleration in China’s pace of global acquisitions. But there are two key reasons that I’m glad to see this happening. First, history shows that the markets continually weed out the financially weak in a form of financial Darwinism that is as inevitable as the dawn of a new day. And with the financial crisis serving as an extinction-level event, the imminent arrival of Chinese companies on the global scene is an opportunity. It’s also part of the solution however reluctantly people might want to view that. And second, while there will be short-term pain and probably more than a few dented egos in Detroit, I will be glad to see the era of greedy, incompetent and overcompensated executives who summarily fleeced the last of America’s once proud automotive industrial complex for all its worth is coming to an end. It will be nice to see the industry return to doing what it does best - making great cars and great parts even if it ultimately takes on a form that we cannot imagine today.
If that happens, we may look back and see that China was, in fact, Detroit’s lifeline.
[Editor's Note: Money MorningInvestment Director Keith Fitz-Gerald has just completed his investing tour of China. His conclusion: Every investor has to have a China strategy. As this essay shows, the global financial crisis has re-written the rules for global investing. It’s also generating a whole host of new profit plays, having created what Fitz-Gerald likes to call "The Golden Age of Wealth Creation." Investors who ignore this "New Reality" will get left behind. But those with the courage and conviction to press ahead could well find this to be the greatest profit opportunity of their lifetime. China’s just one such opportunity. To find out about the others, click here. ]