Chinese Acquisitions in the Auto Industry
October 29th, 2009Ford revealed today that Geely, the Chinese automobile manufacturer, has emerged as the most likely suitor for its Volvo unit (see Geely Behind Ford’s Plan to Sell Volvo). According to Motor Trend, the price tag will be somewhere in the $2 Billion range.
Holding aside the sale price, if this deal goes through it would become the third high-profile purchase of a Western automobile manufacturer by a Chinese firm this year (Geely’s purchase of Volvo, Beijing Automotive’s participation in the Saab deal, and Sichuan Tengzhong’s acquisition of Hummer from GM).
Chinese firms are acquiring Western automobile manufacturers in an attempt to upgrade capabilities. They lag far behind the leading Japanese, US, European, and Korean auto manufacturers in technological capabilities, and the acquisition of Western firms represents an attempt to close that gap in R&D, design, styling, sales, marketing, and production.
However, as I noted in a recent interview in the Effective Executive magazine, this acquisitive behavior is not unique to the automobile industry. Chinese companies have increasingly been acquiring Western companies in a variety of industries (e.g., Lenovo’s acquisition of IBM’s PC division and TCL’s acquisition of Thomson’s TV division), all in an effort to close a still significant capabilities gap with developed country firms.
As I mentioned in that interview (see Interview in the Effective Executive):
When I think about China, Japan, and South Korea, certainly some similarities can be drawn. All three followed an export-led growth path to prosperity. However, once a certain level of prosperity had been achieved through trade, the three countries diverged with respect to international investment. South Korean firms have generally followed a more organic growth strategy – eschewing acquisitions of foreign targets in favor of building businesses from scratch. Japanese firms followed a similar strategy up to a point…Insofar as China is concerned, although we are in the early stages of China’s international expansion, it seems so far that Chinese firms are following a more growth-through-acquisition type of strategy…
My sense is that this has a lot to do with the capabilities of the firms from these countries. That is, by the time Japanese and South Korean firms began to expand, they did so from a position of technological strength. For this reason, they were able to organically extend existing advantages to other countries. China, by contrast, is expanding from a relatively weak technological position not only vis-à-vis Japan and South Korea, but also vis-à-vis the rest of the developed world. In this sense then, Chinese firms are embarking on a strategy of acquisition in order to acquire the technological capabilities their firms currently lack.
Seen through that lens, it is obvious why Chinese automobile manufacturers are interested in acquiring Volvo, Saab, and Hummer. However, the fact remains that they are purchasing extremely troubled operations in an industry plagued with overcapacity (even in China) at a time when when the demand for automobiles (certainly in the developed world) looks increasingly uncertain (see Auto Industry’s Big Little Problem).
As a proponent of free trade and globalization, I view the acquisition of Western companies by Chinese companies as a welcome development. However, given the auto industry’s ills, I wonder whether these Chinese acquirers will be able to derive value from their tired, beaten, and battered Western subsidiaries, …irrespective of the price.
Time will tell.
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