Commentaries

China picks European cars off scrapheap

Chinese carmakers are seeking to step into the gaps left by U.S. companies in Europe — but while acquisitions may give them access to badly-needed technical know-how, global brands and exposure to new markets, the question is whether they have learnt from past failures.

With China now the world’s largest car market, it’s no surprise that Chinese carmakers — which have few if any really solid brands within their home market — want to start making more of a mark.

In theory, foreign acquisitions offer a quick way to do so. Meanwhile the credit crunch has thrown world-renowned but now distressed car marques such as Volvo, Opel or Saab onto the block at what look like rock-bottom prices.

The worry is that Chinese carmakers haven’t always found it plain sailing abroad. SAIC Motor Corp is still feeling the pain of buying into Ssangyong Motor Co of Korea. Ssangyong has struggled to compete as South Korea’s smallest carmaker, failing to develop new models and running out of cash. A debt-for-equity swap threatens to slash the Chinese company’s holding in the South Korean carmaker from just over 50 percent to around 10.

Chinese companies have had more success when they have simply acquired technology and taken it back to China. SAIC had much more success when it bought Britain’s MG Rover. In that case, SAIC closed most of the UK manufacturing and used the know-how to launch a mid-range sedan called the Roewe. This has proved successful in China.

It looks as if Chinese manufacturers are trying to emulate SAIC’s Rover experiment rather than its Ssangyong adventure.

Although Chinese carmakers looked at Opel, they backed away from trying to buy it outright. Geely Automotive has now stepped forward as a possible partner for Opel’s new owner, Canadian car company Magna. But it looks as if its role may be more as that of a supplier of manufacturing capacity than an outright owner of the brand.

Can Magna keep its model juggling act with Opel?

Cries from Volkswagen about pulling its business from Magna if the Canadian car parts maker ended up owning a stake in GM’s former European unit Opel ring somewhat hollow given the success Magna has had in juggling its customers’ different needs so far.

Even so, Magna is trying hard to keep its customers — which also include Toyota, Ford and BMW — happy by vowing to ringfence Opel from the rest of its business now it has won the long battle to buy GM’s former European unit.

Sure, these carmakers will want watertight assurances over the supplier’s tie-up with one of their competitors. But they can’t have it all ways if they want to continue to outsource their parts — and even the construction of whole cars — to keep their costs down.

Given the tortuous journey to agreeing a buyer for Opel, Magna’s customers have had plenty of time to work out what guarantees they will want, although it is only now that a deal has been done that they will get to hear the full details of the arrangements between GM, Opel, Magna and its co-investor, Russia’s Sberbank. Magna will have to show them it can treat its own car manufacturer like any other client.

Magna’s Steyr unit already produces the BMW X3, the Mercedes-Benz G-Class, the Chrysler 300C and both the Jeep Commander and Grand Cherokee for three different customers. So it is in a fairly strong position in any discussions — after all the major carmakers are heavily reliant on their parts manufacturers and switching supplier is not an easy option by any means.

But it remains to be seen for how long Magna retains a clear separation between its traditional parts business and its new car making operation Opel. It may find the move up the value chain to its liking.

Saab and Volvo – made in China?

At this rate it might not be long before Sweden’s once mighty Volvo and Saab car marques come with “Made in China” stamped on the chassis.

After failing in the auction of Opel, Beijing Automotive Industry Holding (BAIC) is set to take a minority stake in supercar maker Koenigsegg, which is bidding to take over all of GM’s Saab. Meanwhile, Geely Automotive’s parent company Geely Holding Group Co plans to bid for Ford’s Volvo.

Chinese carmakers have had mixed fortunes in their attempts to buy overseas brands. SAIC Motor Corp snapped up 51 percent of Korea’s Ssangyong Motor Co in 2004 but made a hash of running an overseas operation and was later forced to write down the investment.

SAIC had more success with the acquisition of the historic British MG Rover. In the case of Rover,  SAIC simply boxed up the machinery, stripped the plants and took all the technology back to China where it produces the cars of the same design far more cheaply. But in MG’s case, the sportscar continues to roll off the assembly line at the UK’s Longbridge plant.

Technological asset stripping rather than a commitment to build cars in Sweden is what some there fear will be in store for Volvo and Saab should the Chinese firms succeed with their bids. But analysts point out that in the case of Saab, the technology is owned by GM

Stockholm is doing all it can to avoid giving either of its iconic carmakers state financing. If it ends up giving any loan guarantees, it will also want to look very closely at the fine print to make sure it does not sign away its carmaking heritage and the jobs which go with it.

That little thing called cash burn

Ford Motor Co, which could be referred to as the Big One after GM and Chrysler’s fall from grace, has investors cheering after it posted a $2.26 billion profit in the second quarter and a smaller than expected operating loss. But it’s still burning through lots of cash. Sure it’s less than before, but $1 billion in a quarter still isn’t anything to sneeze at, especially since it’s been trying to turn itself around since 2005.

From the release:

Automotive operating-related cash flow was $4.7 billion negative during the first half; on track with Ford’s plan.

What would things have looked like without a plan?

Here are all the details. Conference call with execs is at 9am and you can listen in here.