DealZone

The Car Business: Self-loathing and Chinese Takeaways

September 11, 2009

Nobody hates cars as much as the car industry does these days. The business is crippling some of its biggest players and behold the dearth of industry names queuing up to buy other automakers.

Opel in Germany is being sold yet are Volkswagen, Porsche, BMW or Daimler anywhere to be found? Spot the empty parking lot.

Without the Chinese, auto sector M&A right now is about as exciting as a 1981 Yugo.

Some makers still have money though, so what has everybody racing to get away?

Bad experiences, in part.

The last really big deal where two car companies merged was DaimlerChrysler in 1998. It’s best remembered this way: Spent a lot of dimes, did a lot of crying. Disaster and divorce. 

A great article written years after the deal revealed telltale signs of the troubles in store for that marriage when even the order of the name – which should go first – threatened to break up the talks.

But good old fashioned sectoral M&A is being thwarted by something more than good old fashioned fear and loathing. It’s self-loathing. The industry’s top names have already gobbled up the companies they wanted – Jaguar, Lamborghini, Bentley.

U.S. and European makers are all out of love partly because their long established businesses at home are not making the big bucks. What they want now is emerging market growth, China preferred.

Just look at the reform plans of General Motors. Keep Buick, kill Pontiac. This was an astounding choice from a U.S. marketing perspective.

Pontiac has trounced Buick in U.S. sales forever. Cool people drive Pontiacs, or at least people who used to be cool. Burt Reynolds drove a Trans-Am in Smokey & the Bandit in 1977 and the tyres are still hot.

On the other hand, if you have an uncle who wears white shoes and belt and likes to make out he’s well off but isn’t, he drives a Buick.

He’ll tell you it’s just like a Cadillac. And you’ll ask ‘Then why didn’t you buy a Cadillac?’ He’ll try to avoid saying because he couldn’t afford one. And your mother will ask why can’t the family just get along.

But Buick is GM’s big badge in China, and that’s where it is placing its bets. Why aren’t German carmakers buying German carmakers and Americans U.S. ones? Because they don’t want to be in Germany or the United States, they want to grow abroad.

Don’t be fooled by Fiat. Yes it now has a stake in Chrysler, but it came to the table empty handed. The Obama Administration needed a “front” – an industry buyer to feign deep faith in the future of Chrysler – to make it politically feasible for it to fork over the billions in taxpayer money needed to keep the maker of Dodge trucks on life support.

Fiat boss Sergio Marchionne saw this and stepped forward. He similarly had his eye on European government funding when he put up his hand for Opel. You guys pay and I’ll own it. You have to give the guy credit.

It’s tough under such terms to think of these deals as strategic industrial tie-ups, they’re purely opportunistic. And the Germans at least realised this and thought better of doing a deal.

Fiat, not having sold one of its brand in America since 1983, now returns to a vastly different market from the one it fled from in despair.

If they thought it was tough back then, just wait until they try selling in a market where the Japanese have plants churning out cars and trucks across the country and the South Koreans, a complete non-entity before, now sell about 700,000 cars a year.

European whispering about how Fiat might “introduce” small cars to America misses out the last 35 years of change in the U.S. market.

Which is a good place to turn to the Chinese, who currently are not missing out on anything.

By the time Fiat sells its first car in Ohio, Chinese ships will be docking full of smaller, cheaper rival models that will drive Fiat into the weeds. There’s a chance the Chinese ships could outnumber the Fiats that get bought.

The Chinese have taken years gearing up. They bought the UK’s MG-Rover, want GM’s Hummer SUV maker, and are now eyeing an indirect slice of Saab.

More importantly, they have partnered at home with all the big names – VW, Ford, Daimler, GM, Hyundai – and that has fostered expertise that sets up the next phase of growth – exports of their own brands such as Chery, Geely and Changan.

You may not know these names now, but you will soon. No American knew what a Daewoo or Kia was 10 years ago either. The Chinese will put the wind up the Americans, Europeans, Japanese and South Koreans. India also risks being left behind in its similar yet still nascent dream of dominance in the cheap auto export market.

A good rule of thumb is that any nation that can build nuclear plants, rockets and submarines can export a passable hatchback.

Russia hasn’t, that’s true, but China has one critically important advantage – the ardent desire of Western and Asian firms for a slice of the massive Chinese market.

There’s a quid pro quo there that’s likely to clear the way for more Chinese takeovers and their inevitable export push.

U.S. and European companies want partnerships and a nod for access in China, and in return will tell Washington and Brussels it’s cool with them if Chinese firms come knocking.

China’s makers are about to and the appetite of global automakers for Chinese takeaways is already plain to see.

This post was written by Jason Neely.

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