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| China's auto sector has become more active in overseas mergers and acquisitions. |
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As China's auto sector has become more active in overseas mergers and acquisitions, companies should be aware of the post-purchase challenges while appreciating the advantages of taking over international brands.
Quality, safety and credibility
"One big incentive for emerging markets to acquire overseas brands is to gain credibility," says Paul McCarthy, automotive transaction services strategy leader at PricewaterhouseCoopers.
Chinese car makers have made advancement in automotive technology in recent years, but they were rather unsuccessful in promoting reputations for high quality and safety. Insiders doubted whether they are up to the international standard. As a result, the country's auto manufacturers are eager to improve the overall quality of their products by adopting the more advance technologies from the acquired companies.
In addition, Chinese enterprises like Tengzhong can learn from the successful experience of overseas brands in management, marketing and services.
Bumper purchases
Several headline overseas purchases have exposed the aspiration of Chinese car manufacturers to acquire new technology and build more sophisticated and profitable vehicles in recent years.
In 2004, Shanghai Automotive Industry Corporation Group (SAIC), China's biggest domestic automaker, purchased a 48.9% stake in Ssangyong Motor, the fourth largest car maker in the Republic of Korea (ROK). SAIC continued to extend its footprint to take over the collapsed British brand MG in 2005.
This year in March, China's largest independent car maker Geely Automobile acquired the world's second largest auto transmission supplier Drivetrain Systems International.
Among the more controversial deals is the recent buyout of Hummer by Sichuan Tengzhong Heavy Industrial Group from General Motors. It is reported that Tengzhong will assume Hummer's dealer agreements and senior management team. GM and Tengzhong also plan to form a long-term contract assembly and sign a component and material supply agreement.
Meanwhile, Beijing Automotive Industry Corp, one of China's biggest commercial vehicle producers, has expressed interest in buying Ford Motor’s Volvo car unit, adding a new name to a list of potential Chinese bidders for the Swedish luxury brand.
Geely is also purportedly in talks to acquire Ford Motor Co's Volvo Car Corp subsidiary.
Post-purchase challenges
Acquisitions of overseas brands are not always beneficial to Chinese automakers.
SAIC was hoping to lower its reliance on partners GM and Volkswagen AG through the buyout of British brand MG. But GM and Volkswagen vehicles still made up more than 90% of SAIC's sales last year. SAIC's South Korean unit, Ssangyong Motor Co, entered court receivership this February as sales collapsed and cash drained.
Overseas acquisitions pose great challenges for Chinese buyers. These challenges include the integration of business and financial models, as well as the collaboration of different cultures and work styles. Still, the toughest task is how to move on after the purchase.
"It's like moving two oceans together trying to make them flow at the same time," said Paul McCarthy.
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