The Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry (3)

The forces shaping the third of the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry were addressed in my article entitled "The Path to Globalization of China's Automotive Industry" (GLG News May 18, 2009). The principal focus of this piece was to explain the challenges faced by Chinese Original Equipment Manufacturers (OEMs) when trying to accelerate development through "inorganic" acquisition of the assets of foreign manufacturers.

TREND #3: Acquisition of Foreign Assets and Key Development Competencies by Chinese Companies

The highly fragmented nature of the domestic Chinese auto industry presents challenges to the longer-term development of the domestic industry. The fact that that there are over 150 registered manufacturers is an outgrowth of a start-up phase for China’s auto sector. Provincial governments, with the support of the central government, were encouraged to develop industrial bases to create investment opportunities and jobs in order to accelerate China’s economic development. However, the highly fragmented industry that results from this creates enormous inefficiencies in the area of capital investment. This fragmentation also makes it very difficult to focus and allocate resources to the development of critical technologies related to safety and fuel economy. This is an area of particular weakness for Chinese OEMs who have relied on their foreign partners to lead the development of key component technologies.

While the China policy makers have prioritized the need for strengthening its industry via consolidation of the domestic players, the simple fact is that the global financial crisis has created a need to rethink the global allocation of automotive assets. As noted in theprevious article in this series, many non-Chinese manufacturers are shifting their focus from their domestic markets to the growth markets like China. However, many are in a position to dispose of assets that are no longer critical to the business going forward. The historic restructuring underway in the global automotive industry will undoubtedly result in a redistribution or liquidation of automotive OEM assets. Whole companies, brands with installed dealer networks, product platforms and associated component technologies are all available for a mere fraction of the investment needed to create these assets. It stands to reason that such an "inorganic" approach to development could significantly shorten the time frame for going global.

While Chinese firms have learned very quickly how to assemble cars and develop supply chains, they are very inexperienced at the vehicle development and synthesis process. An automobile is a complex engineered system requiring advanced technology and know-how in order to test and validate the achievement of benchmark targets in the areas of performance, fuel economy, safety and quality. It is in this area that Chinese firms are weakest. Chinese vehicles, while improving rapidly, are still not up to the world-class standards required to compete in the mature markets of the world. As a result, numerous Chinese firms are seeking opportunities to acquire foreign assets for a fraction of the cost of their original development. Many noteworthy examples include the potential sale of Ford's Volvo brand, GM's Opel and Hummer brands, and Chrysler's discontinued products and powertrains.  While China's policy makers have urged caution in bids with the Big 3, they remain supportive of deals that bring critical technologies to the domestic industry.  Such a deal was Geely's $58M acquisition of Australian transmission manufacturer Drivetrain Systems International.