BEIJING LOOKS TO AMASS DISTRESSED CAR ASSETS

Published on December 8, 2009 by brooks | This story has been viewed 70 times

A quarter of a century ago, China set out to create a modern car industry, almost from scratch. It seemed a daunting prospect.

But now the global financial crisis has catapulted China into poll position as the world’s largest car market, and the financial strength of China’s carmakers has made them bidders of last resort for some of the western world’s favourite distressed car assets.

Is China’s car industry at a turning point, poised to launch out on the great global venture Beijing has always dreamt of?

Beijing must have been pleased to see that yesterday China’s biggest carmaker, SAIC, gained control of Shanghai GM, its car-making joint venture with General Motors – and one of GM’s most attractive businesses.

GM insisted that the deal, which gives SAIC 51 per cent of Shanghai GM, was worth it, since it paved the way for a potentially profitable joint venture between Detroit and Shanghai to sell low-cost vehicles to emerging markets starting with India. With a new $650m joint venture in India, this would give SAIC-GM joint ventures in all the important Asian markets bar Japan (where foreign carmakers do not normally get much of a look in).

Then came news that another big state-owned Chinese carmaker, Beijing Automotive Industry Holding Corporation (BAIC), had arranged a Rmb20bn ($2.9bn) line of credit with Bank of China. BAIC has made no secret that it is interested in GM’s Saab brand, which the Detroit carmaker plans to sell if it can find a suitable buyer by year end. BAIC, which has already approached Saab’s management about buying machinery to produce its outgoing 9-5 model, now has the money to buy the brand, should GM be ready to sell to a Chinese competitor.

Earlier in the week, banking sources said Geely, one of China’s largest privately-owned carmakers, had arranged $1bn in finance for its bid for Volvo.

Many car market analysts remain sceptical of whether Chinese carmakers can make a success of distressed brands that failed under US or European management. Some question whether the deals will ever get done: the Volvo sale has dragged on for months, and GM said this week it would give its attempt to find a buyer just one more week after a bid led by Sweden’s Koenigsegg that included BAIC as a minority partner fell apart.

The only such deal yet signed – in which GM will sell its Hummer unit to the heavy equipment maker, Sichuan Tengzhong for about $150m – has not yet gained Chinese government approval.

But SAIC’s deal with GM to sell cheap cars and mini commercial vehicles to India could be different. It’s strong financial position could help GM take a bigger share of the Indian market, while giving SAIC a foothold in one of the world’s fastest growing car markets.

“This could be what China always wanted: forget BAIC and Saab, Geely and Volvo – what SAIC has done is potentially much bigger,” said one Shanghai-based car analyst. It is still early days in the quest for global power of the Chinese carmaker. But yesterday was a potentially significant day in the story of foreign carmakers in China, at the very least.

Many analysts were baffled by GM’s decision to give up control of one of fastest growing and important joint ventures. “It’s ceding precious ground,” says Mike Dunne, a car analyst who focuses on Asian markets. “Nobody in the industry wants to give up ownership”.

But Ashvin Chotai, managing director of Intelligence Automotive Asia, a UK-based consultancy, said that the decision to team up with SAIC in India – which unlike China does not require foreign carmakers to take a local partner – could be interpreted as a sign of GM’s confidence in the two companies’ relationship.

“GM doesn’t have to work in India with SAIC, but it has chosen to,” he said. “Without any government pressure or restrictions, they’ve chosen to work in India with a partner.”

He said that the two companies’ move into India was a significant development for the commercial vehicles market, which is dominated by local producers.

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