Foreign brands? Buy now!

There has been a lot of discussion on Gasgoo whether it makes sense for a Chinese manufacturer to acquire a foreign brand. Most commentators were against it. Let me throw in a contrarian view: I’m for it!

Let’s get one thing out of the way first: Buying a foreign brand does not equate buying a foreign car company. I would advise strongly against buying a foreign car company. For more than 30 years, I gave well paid advice to one of the world’s largest car companies. A piece of free advice: If I had the money to buy a foreign car company in trouble, I would buy a tropical island instead and retire there. A much safer, much profitable, hassle-free, and enjoyable investment.

Buying a foreign car company with its legacy costs, union contracts, dealer networks (that can become extremely costly to shut down, especially in the U.S.A.) would border on insanity. And I’m not even talking about the often cited difficulties of merging different cultures. It is no wonder that in the current two takeovers of whole car companies, the buyer brings no money to the table: Fiat – should the deal succeed – pays no money for Chrysler. Magna – should the deal succeed – pays no money for Opel. The governments foot the bill. Which tell you how much a bankrupt foreign car company is worth in real money: Nothing.

The Chinese government cautions against buying foreign cars companies and suggests buying foreign parts companies instead. I agree on both counts. I have advocated buying foreign parts companies a while ago, in order to get closer to the foreign customer.

Far be it from me to advocate buying a foreign car company. However, I strongly suggest to any larger Chinese company to buy a foreign brand, along with designs, patents and intellectual property, if the price is right. As foreign car companies go into bankruptcy, brands can be bought for peanuts.

Take the case of Sichuan Tengzhong and Hummer for instance. We know, the deal may fall through, and Hummer may not the best example for a desirable brand, but take the case anyway.

Sichuan Tengzhong Heavy Industrial Machinery Co reportedly wants to buy Hummer for US$80.5 million. That’s only a little more than the $59 million advertising budget Hummer had in the U.S.A. in 2006. Tengzhong will invest $66 million to set up a new Hummer production line in Chengdu. That’s very close to Hummer’s old annual advertising budget. Sichuan Tengzhong buys (if the deal is approved and completed, which it may not) more than ten years or brand investment for the price of an annual ad budget. And they got the plans for the cars thrown in with the deal.

Building a new brand, especially in the brand saturated West, is very expensive. It costs a lot of time and a lot of money. A factory can be built in a year. To develop a new car usually takes 5 years. To develop a strong brand takes generations. It takes huge advertising expenditures, patience, expertise and, let’s not forget, luck. There are very few successful car brands. There are countless brands that never got off the ground. If someone in Europe or in the U.S.A. proposes to launch a new car brand, he is usually looked at as mentally unstable.

China’s car industry is in the best shape of all the world’s car industries. China’s car market has been the largest of the world in the first five months of this year. I predict China will end the year as the world’s largest car market. GM’s CEO Fritz Henderson agrees. He admitted defeat last week: “China may and unfortunately be the largest market in the world this year -we would prefer that it be the second largest behind a healthy US.” China’s sales are growing again at double digit rates. Sales in the U.S.A. are sliding still at double digit rates.

But let’s face it: There is one area where China can do much better, and that is in whole car exports. This is where an established brand can perform miracles. Ask Chery, or Brilliance, or Landwind, how hard it is to sell cars abroad, especially in Europe and the US. Ask them about unfair treatment with rigged crash tests. Ask them about how difficult it is for them to receive the necessary certifications. An established brand would change all that. It would be the ticket for instant admission.

A lot of analysts think that the automotive landscape is shifting in the developed Western markets: Away from ostentatious luxury, towards low-cost, fuel efficient, utilitarian cars that provide mobility for less money. This is the window of opportunity for a successful Chinese entry. The key for the entry is an established brand. An established brand can unlock these markets immediately.

Take the example of Dacia. Dacia is a car company in Romania, launched by Romania’s deposed dictator Nicolae Ceausescu. Not the best basis for a brand. Dacia was regarded as a joke. 1999, Dacia was bought by France’s Renault. Their best seller is the Logan. Priced at EUR 7300, it is one of the cheapest cars in Europe. It is especially popular in Germany: If you trade in your old car, the German government gives you EUR 2500, which lowers the price of the little Renault to less than EUR 5000. Renault can’t make enough Dacias. In May, Germans bought more Dacias than Benzes. Without the Renault brand, Dacia would be nowhere. With Renault, it had a powerful brand. Mixed with a powerful price, it causes a sales explosion.

Which brand would I buy if it can be had cheaply?

My first choice would be Volvo. But only if I’d be Changan.

A Volvo made by Changan could be sold immediately abroad if Changan would buy the brand (and not the factory.) “Volvo” stands for safety, for common sense, for green, for frugality, for intelligence. Priced competitively, it would sell well.

From here on, it gets trickier. There are no more established brands on the auction block (yet) which are made under joint venture agreements with Chinese manufacturers.

Saab?

Maybe. Hard to implement. They are basically re-badged Opels. Slapping “Saab” on a home-grown make is not as easy as selling a Changan Volvo as a Volvo abroad.

Chrysler?

Forget it. Let Fiat fail. The Jeep brand would have value, but they aren’t selling. They would like to sell the Viper for just $10 million. The best offer they received was $5.5 million. Imagine, for the price of five or six Bugatti Veyrons, you could buy the Viper brand. Take the Veyrons instead.

The “bad” GM brands?

Too complicated. Would make sense only for SAIC. Impossible under current arrangements. Nobody wants a Pontiac in Europe, and if the Americans don’t want an American Pontiac, would they buy a Chinese one? Maybe, if the price is right.

Opel?

From what I hear from Berlin, BAIC still has an outside chance of getting Opel. But it’s a long shot. And it would be buying a car company again, instead of a brand. Leave it to Magna and Russia. If their deal falls apart, wait until after the German elections.

While the idea of buying a foreign brand for cheap is good, the practicable choices are limited. So it’s back to buying foreign parts companies. There will be many bankrupt foreign parts companies this year to choose from, all quite cheap, most with an established presence and manufacture in China.

Go for it.

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.