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A 'winner's curse' in overseas auto deals
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While auto makers in Detroit are walking through bankruptcy court one after another, their Chinese counterparts are still enjoying impressive double digit growth rates this year.

In fact, China has surpassed the United States as the largest auto market in the world in terms of sales units consecutively for the last six months. The much-bruised auto industry in the US is now going through a painful downsizing process.

Ford's Premium Auto Group is effectively disintegrating as it is putting Volvo on the block, while the nationalized GM needs to shed Hummer, Opel, Saab, and potentially more.

China's car maker Geely is reportedly involved in talks with Ford to buy Volvo (and this is besides the fact that Geely has already completed the purchase of Drivetrain Systems International in Australia, the world's second-largest automatic transmission supplier).

Ford's partner in China Chang'an Automobile Co, Beijing Automobile Industry Holding Corp (BAIC), and Chery Automobile have also cropped up in news reports lately as potential bidders. BAIC is also reported to have made an offer to GM for Opel.

While it is indeed a good time to scoop up foreign auto assets cheap at a time when the global automobile industry is bloated with high cost and over capacity, my advice to the industry executives is to hold tight and wait a bit longer perhaps, to buy even cheaper. There are a couple of reasons.

First of all, history shows that automobile M&A rarely yields benefits for the acquirer, a phenomenon that I call "auto winner's curse" (in auction theory in economics, there is the winner's curse theory), especially when it comes to premium auto brands.

For example, Jaguar was acquired by Ford in 1989 for US$2.6 billion. After injecting US$6.5 billion investment in total since then, it was sold to India's Tata Group last year for a merger at US$2.3 billion.

Think Tata got a bargain? Since the acquisition, Jaguar continues to be in the red, and now Tata is resorting to the UK government for bailout money.

Ford's did not fare much better with Volvo. Rumor has it that Ford is asking for US$1.5 billion to sell Volvo, an amount that is only a quarter of the original price tag it paid 10 years ago. At this price, even Volvo's former parent company Volvo AB is not interested in buying it back.

Saab is another example. GM bought 50 percent of Saab for US$600 million in 1989. It later increased the stake to 100 percent in 2000.

Over the last 20 years, GM has invested at least US$3 billion in Saab in addition to the initial purchase price. Saab's sales last year was in the paltry ninety thousands, and it has now sought bankruptcy protection.

Though not a premium brand, Chrysler's history shows vividly the winner's curse for every one of its acquirers, from Daimler Benz to Cerberus.

In addition to the "auto winner's curse," Chinese companies' potential acquisition adds other dimensions of difficulties.

First, Chinese companies have not shown a track record of turning around foreign businesses at an operation level, maybe because of cultural differences and unfamiliarity with foreign markets.

For example, TCL's acquisition of Thompson Electronics and Lenovo's acquisition of IBM's PC unit have borne out this theory.

So far successful overseas acquisitions by Chinese companies have mostly shared dividends while leaving the operations to the existing management.

The rationale behind Chinese auto makers' dabbling overseas, often touted in the press, is elevation of brand image and technology acquisition. I find this argument very troublesome.

History shows that in the auto business, rarely does lower-tier company improve its status by acquiring a higher-tier brand.

Honda, Toyota and Hyundai all rose to world prominence via steady organic growth over the long run.

Now let's look at Shanghai Automobile's (SAIC) two different experiences - one with the Ssangyong, and the other with MG.

After years of effort and investment trying to turn around Ssangyong, SAIC now is ready to finally cut losses.

On the other hand, SAIC's holding of liquidated assets of MG (via Nanjing Automobile's acquisition, which was later acquired by SAIC) for a mere 53 million British pounds (US$86.8 million) proves to be a very successful model.

Based on MG's four platform models, three engine series, and advanced manufacturing equipment and technology, SAIC has now successfully established the Roewe brand in a short period of three years.

Together with its venerable MG subsidiary, SAIC has emerged as the most successful indigenous auto maker in China.

SAIC's two overseas ventures in recent years, one successful acquisition buying a liquidated company, and one disastrous acquisition trying to turn around a dysfunctional company, summarizes my storyline: When it comes to buying auto assets overseas with the objective of elevating technology capability, buy only liquidated bankrupt companies, instead of buying ongoing business and trying to turn it around.

There is a curse here that is hard to overcome.

(The author is an associate professor of economics at the University of International Business and Economics. He can be reached at johngong@gmail.com. The views expressed are his own.)

(Shanghai Daily July 6, 2009)

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