International acquisitions are not necessarily to the benefit of Chinese car makers

The landscape of the global automotive industry is undergoing a dramatic change. While the rise of the Chinese auto market has made a structural market adjustment inevitable in the long term, the economic downturn has tremendously accelerated the transformation and surprised many of us by the speed of development.

With the mature markets suffering at the current level, a lot of attention is put on the developments in China’s emerging market, and it is foreseeable that at the end of this restructuring process the mainland will be in a stronger position than ever. Some Chinese auto makers are seizing the opportunity to get into the spotlight, and make them better known in Europe and the US. The talk is no longer about exporting vehicles into these well developed markets, though, but buying into them. It is hard to say how seriously Geely’s offer to purchase Volvo and Saab really aims at an eventual takeover, and it is difficult to evaluate at this point BAIC’s plans when submitting a bid for Opel. Fact is that these Chinese car manufacturers, though small in size compared to most of their international counterparts, present themselves as potential saviours of troubled auto makers with a long standing tradition.

Undoubtedly, at first the thought of buying ailing car makers in this period of economic slowdown is quite appealing as their price tag is supposed to be rather low. However, a second thought may reveal the very risks of such a move for Chinese vehicle manufacturers. The takeover of well-established auto firms nevertheless requires considerable investments which certainly cannot be absorbed by the usual expense account. Significant loans have to be taken out which puts the buying company in a quite vulnerable situation, in particular in rather uncertain times like these. We have seen the negative consequences of the Jaguar/Land Rover acquisition by Tata Motors in India, which has seriously jeopardized Tata’s capability to finance the Nano program. More recently, we have witnessed the financial strain on Porsche in its attempt to take over Volkswagen, as well as the overestimation of capacities by parts-supplier Schaeffler Group when purchasing Continental AG. Both transactions have ended in a considerable weakening of the buying party and a complete reversal of balance of power between the companies.

Another risk of such takeovers is the lack of synergy, and a shortfall of integration of the combined companies. At the end, each acquisition should aim at reinforcing the market proposition and in one sense or another complement a missing link. Does Jaguar really strengthen Tata’s strategic market positioning, and would Opel really support BAIC’s development? You may argue that the acquisition of a well established brand is a short-cut to technological know-how and allows the one who acquires it to quickly buy-into the market. However, there is the challenge of integration of diverse company cultures, not to speak of different cultural mentalities. Who would have thought that Americans and Europeans would struggle to work together when Daimler and Chrysler formed their alliance? To make such cooperation happen, as the Renault Nissan alliance shows, you need a strong integrative leader with international background and excellent management skills. There are not many candidates with the caliber of a Carlos Ghosn out there!

All in all I think that the approach of Chinese auto manufacturers to acquire foreign brands in order to speed up their international standing is not the best way to establish a sound competitive positioning. I would argue that the efforts to integrate a foreign car maker risks to overstretch the capabilities of Chinese vehicle manufacturers at this point, and that such an integration would not bring the expected synergy effects. I believe much more in a consolidation within the Chinese auto industry in the first place, such as the combination of Guangzhou Auto and Changfeng, to optimize technological know-how and product strategies. The entire integration process is not necessarily easy, and the challenge to make Chinese-internal mergers work is still enormous. But a successful consolidation will eventually establish much stronger local domestic auto companies that can then ensure to successfully take on international players, to the full benefit of the Chinese car maker, and the entire Chinese auto industry.

See the Chinese version here.

About the authour: Klaus Paur, Gasgoo's columnist, is Regional Director Automotive for North Asia at TNS China who has over 20 years of experience in marketing and market research, 13 of which have been spent specialising in the automotive industry.