Chinese Automakers' Overseas M&A Strategy: Think Twice Before Moving In

The characters on the red part means Chinese auto market is booming, and the characters on the grey part means the overseas auto market is suffering. The characters under the central steering wheel are China.

Chinese automakers must keep calm and think twice before they venture into any merger and acquisition deals abroad, even as they face tempting acquisition opportunities brought by the current global industry slump.

As the global economic downturn bites into the industry, a series of international brands, including the Hummer SUV line, the Swedish brand Saab, and the German brand Volvo, have been consecutively put up for sale. And this seems to have offered a once-in-a-lifetime opportunity for Chinese automakers who crave improvements in technology and access to overseas markets.

But Chinese automakers should first ask themselves two questions: One, what kind of risk will they be facing in and after an overseas merger and acquisition? Two, how can they reach the necessary management required for a successful overseas M&A deals?

Financial pressures should be considered in the first place. Brands that are ridden with huge debts, like Volvo, are already devalued.

Other things in the follow, like medical insurance and pensions, given the different standards required in different countries, can also be hidden traps for Chinese investors.

Lastly, given a different social context, Chinese automakers often lack the experience they need to deal with foreign workers unions and that can also pose a serious threat.

The Shanghai Automotive Industry Corporation's (SAIC)'s painful, unsuccessful acquisition of S. Korea's Ssangyong Motor is a lesson taught at a high price.

The length, frequency and intensity of local workers' union strikes went beyond the expectations of its Chinese management, and even their hired-western executives.

The cultural-collision and incompetent handlings of it cost SAIC not only a large amount of money, but also opportunities to grow.

Past experience, if not forgotten, is a guide for the future.

Chinese automakers should think first what value they can bring to their targets before inking the deal, because if they could not salvage their gains in the short-term, they are likely to be dragged down and drowned in the long-term.

Nor should Chinese car manufacturers be pessimistic and sit there doing nothing. They should walk out of the protective shields offered by the government and learn to operate their own businesses in the more competitive overseas markets.

A good M&A offers many benefits: valuable assets, good branding, strong R&D team, advanced technology and extensive, global sales channels. A good M&A deal should result in at least one of these benefits. And a potential Chinese buyer can adopt a selective procurement strategy to buy what they need most.

And in doing so, they can start their expansion plan from a limited-scale.

Small-scale purchasing has several advantages.

Firstly, it can minimize the pressure the buyer would face in its cash flow. Even if it fails, its damage is limited.

Secondly, it can be a good way for Chinese automakers to nurture talents with global vision and cross-cultural communication and management skills. The company can also accumulate relevant experience. This is what China needs most under the current circumstances.

Thirdly, being small-sized in M&A means that it is unlikely to be involved in international politics and therefore less expensive and more practical.

On March 27, Chinese private carmakers Geely announced that it has acquired Australian automatic transmission supplier - Drivetrain Systems International (DSI). This is seen by many as a down-to-earth way of doing business like that.

The acquired, DSI, is a world's leading OEM (original equipment manufacture) supplier for leading automakers like Ford, Chrysler and Ssangyong Motors. It has an annual turnover of 180,000 automatic transmission systems.

It's an encouraging attempt by Chinese automakers, said Chen Wenkai, CEO of gasgoo.com. Local producers like Geely can boost their development capability in core parts technologies through the acquisition.

However, Geely still has a long way to go after the acquisition. It has to break through the bottlenecks of technology management and innovation capacity to make the acquired technologies their own.

Now on the global market there are many ailing but valuable companies like Australia's DSI, and it takes insight and courage to dig them out.

But some advice still applies to China's automakers, that is, to think twice before moving in.

Source: CRIEnglish