Seeking an international presence, China's auto giant Shanghai Automotive Industry Corp (SAIC) is favored by the market to bid for the debt-laden Ssangyong Motor Co (Ssangyong) of South Korea.

But is it really a good deal?

"SAIC's move is quite understandable, since local automakers are encouraged by the Chinese industrial watchdog -- the State Development and Reform Commission (SDRC) -- to step out and develop into truly global giants with their own brand names. There is a possibility for SAIC to go international with the purchase of an overseas plant, because once if that succeeds, SAIC could witness its export volume surge by a large margin, "Wayne W.J. Xing, a senior automotive industry analyst and publisher of China Business Update (CBU), said last week.

"From this perspective, purchasing the South Korean firm may benefit SAIC in terms of export revenues," Xing added.

However, the analyst showed skepticism towards SAIC's aim at making use of Ssangyong's research and development (R&D) strength after the would-be takeover.

"SAIC would not find it too easy to take full advantage of Ssangyong's R&D strength to roll out products in a bid to fit either the South Korean or the Chinese market.

"It will be hard for SAIC, as a State-owned enterprise (SOE), to dish out cheap and economic sports utility vehicles like the Great Wall Motor Co Ltd, a Hebei-based auto company, since SAIC lacks the flexible production management mechanism as a private auto manufacturer," Xing commented.

There are also many twists and turns waiting ahead if SAIC seeks to dominate the South Korean market with its own brand vehicles adopting Ssangyong's patent technology.

Agreeing with Xing, Ma Xiaohe, director of Industrial development Research Centre of SDRC, also commented that SAIC will find it hard to tap the South Korean market with its own brand products.

"South Korea market is quite mature in terms of technology, manufacturing and pricing. Competition there is tough. Most probably, SAIC will sell products back in China after buying Ssangyong," Ma said.

In eyes of Jia Xinguang, chief analyst with the China National Automotive Industry Consulting and Development Corp (CNAICD), this is what really motivates SAIC and its China venture partner General Motors (GM), to bid for Ssangyong.

"I can not see any reason for SAIC to buy Ssangyong. What can SAIC get from buying the South Korea carmaker, with little more than 100,000 production capacity? In my opinion, rather than it being SAIC's intention to go abroad, the issue has been pushed by GM, which is planning to sell more cars in China," Jia told China Business Weekly last week.

According to the senior auto expert, the reason why GM is quite eager to acquire Ssangyong through SAIC is that the US auto giant knows clearly that South Korean vehicles cater better to the taste of Chinese customers than American vehicles do.

"US vehicles do not agree with the Chinese market very well, because they are too large and they are usually characterized by high emissions. GM's Buick sedan sold in China is actually a very small car back in the US.

Japanese and South Korean vehicles are different from those in the US, Jia said.

"They are warmly welcomed in China and GM's Excelle is a good example. The car actually comes from Daewoo Group, former parent of Ssangyong."

GM just wants more South Korean vehicles sold in China, and that is why it is so enthusiastic to buy Ssangyong through SAIC, Jia analyzed.

Of course, Jia said the international acquisition, if successful, will benefit SAIC's future listing.

SAIC is preparing for a Hong Kong listing that could raise US$1 billion for its expansion, the Financial Times reported recently.

To buy or not to buy?

Shanghai-based SAIC and a US pension fund have been short listed to buy South Korea's Ssangyong, a Chohung Bank official in charge of the deal, said recently.

The insider said that if things go smoothly, Chohung Bank, as main creditor of Ssangyong, will name the preferred bidder quite soon.

"We are looking at not only prices but also the buyer's capability to go along with (labor) union-related plans," the official told Reuters.

Ssangyong was put up for sale after creditors took control of the firm in 1999 when its parent Daewoo Group failed under a mountain of debt.

A deal for selling the troubled automaker to a Chinese chemical firm, Blue Star, fell apart in March because of "price differences."

But many observers argue that it was the lack of support from the Chinese industrial authority that led to Blue Star's failure.

"Price is what everyone is most concerned about, but this is not the only problem ... there's a series of issues that still need discussing," Blue Star spokeswoman Li Aiqing was once quoted as saying by Reuters.

Chohung Bank, Ssangyong's main creditor, said any revised bid should include a letter of support from China's government.

But Li indicated that Blue Star speculated it was too early to ask for Beijing's official blessing.

SAIC, General Motors Corp's main Chinese partner, has argued it alone has received Chinese Government permission to bid for Ssangyong.

"We have submitted the bidding offer, and we are now waiting for a response from Ssangyong's creditor," Xue Hao, spokesman of SAIC, told China Business Weekly last week.

"Without the final decision, no hypnosis can be made. We will not make any comment on the deal," Xue stressed, refusing to release either motivation or the goal of SAIC's bid.

Xing commented that the authority should not interfere too much in market-oriented mergers and acquisitions (M&A).

Of course, the authority is entitled to be responsible for State-owned assets, if the firm involved in is a SOE.

Why buy?

As for SAIC's bidding for the debt-laden Ssangyong, some analysts who were optimistic about the merger said that by doing do, SAIC would have a chance to expand internationally and enhance its research and development capability.

Industrial insiders said that Blue Star was formally more preferred than SAIC, because the former is not an auto company and would not replace the Ssangyong brand with its own after the acquisition.

Some detractors predicted that SAIC would absorb Ssangyong's technology, and then abandon the latter's brand.

Since Xue did not release details, no one can tell what SAIC has in mind.

Xie Wei, auto analyst with CNAICD, commented that the Chinese firm is not big enough to launch aggressive acquisitions against international brands.

"There is no direct competition between SAIC and Ssangyong. Therefore, hostile acquisition is groundless.

"Of course, it is possible for SAIC to promote an auto product of its own brand," Xie said.

Ssangyong, which has capacity to produce 180,000 vehicles annually and has a workforce of 7,500, was put up for sale after creditors took control in late 1999, when its parent Daewoo Group was dismantled due to debt.

The company produces the Chairman sedan, the Rexton, Musso and Korando sports utility vehicles.

GM and partners Shanghai Auto and Japan's Suzuki Corp in 2002 bought a controlling share of Daewoo Motors.

GM expressed recently that it had no plan to bid directly for Ssangyong at this time after it failed to be picked as a preferred bidder for the sport utility vehicle last year.

But the auto giant said it would be very interested in the plant if SAIC's acquisition is a success.

(Business Weekly July 21, 2004)