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'Money can't buy everything' advice

CHINESE car makers hoping to get bargains from buying struggling overseas counterparts should be aware that it takes more than just money to make an overseas acquisition successful, analysts said.

Media reports have said China's Changfeng Auto may be a possible buyer for General Motors' Hummer unit, while Chang'an Automobile (Group) Co Ltd, a Chinese partner of Ford Motor Co, has been mentioned as one of three potential buyers for Ford's cash-strapped Volvo unit.

"Making the decision to buy overseas is just the first step, but there are great challenges to confront to keep a business afloat and enhancing it after the purchase," Chen Bin, head of the National Development and Reform Commission's industrial coordination department, told at a conference in Beijing.

The assets of ailing overseas auto makers are tempting for their Chinese peers because they offer the opportunity to tap into advanced technologies and consumers in mature markets. But with the auto industry worldwide on its knees, what looks cheap today may turn out to be an expensive mistake tomorrow, industry analysts said.

"More core assets and better prices might be available later, and who knows what problems are still to be revealed at troubled car makers," said Wang Liusheng, an auto analyst at Merchants Securities Co.

Yin Tongyue, chairman of Chery Automobile, China's largest home-brand auto maker, said his company is considering buying a European car brand after it received 10 billion yuan (US$1.46 billion) from China's Import and Export Bank to fund overseas expansion. China's privately owned Geely Automobile Holdings Ltd is also reportedly eyeing overseas acquisitions.

To be sure, Chinese car makers have the financial strength to complete overseas deals with government financing, the analysts said. But overseas acquisitions also require considerable follow-up investment and the ability to understand the culture of foreign markets.

"If Volvo can't make money under Ford management, how could it survive when a Chinese company takes it over?" asked Li Chunbo, an auto analyst at CITIC Securities Co.

SAIC Motor Corp, China's biggest car maker, learned that lesson the hard way. It paid US$500 million for a 49-percent stake in South Korea's Ssangyong Motor in 2004 in China's first overseas purchase in the automotive industry. SAIC later lifted the holding to 51 percent at the end of November and the stake was worth an estimated US$270.7 million. Ssangyong filed for bankruptcy protection last month following a 31-percent slump in sales in 2008 and the refusal of labor unions to accept a restructuring plan. SAIC's hopes of transferring SUV technology from Ssangyong fizzled when unions resisted attempts to build the bigger vehicles in China.

"Chinese buyers need to learn to deal with different management techniques, labor unions and whole new ways of thinking," Chen said. "That can be quite difficult."

The Chinese government also is worried about car makers wasting money on worthless or depreciating assets. The central government has considered halting approval for overseas acquisitions by Chinese car makers unless they can show that a deal is strategically important, the Hong Kong-based South China Morning Post reported, citing unidentified sources close to Li Rongrong, head of the State-owned Assets Supervision and Administration Commission.

The government is now allowing banks to offer merger and acquisition loans for the first time in a bid to help state-owned companies acquire strategic assets, crucial equipment and technology, and staff expertise during the current global financial crisis. So far, most resources have focused on acquisitions in the commodities sector.

Despite the risks, many Chinese car makers are eager to expand overseas. Their strong balance sheets have made them more creditworthy borrowers and their ability to withstand the financial meltdown so far has bolstered their confidence.

And the opportunities for acquisitions are rising by the month.

GM recently said it's reviewing the possible sale of its Saturn, Saab and Pontiac brands as part of restructuring plans to secure more United States government loans.

Media reports said Goldman Sachs Group has been seeking Chinese buyers for Saab, which recently filed for bankruptcy protection amid strong indications that GM will dump the unit.

But Thomas Schiller, managing director of consulting firm Arthur D. Little, urges a go-slow strategy and said it would be wiser for Chinese car makers to acquire minority stakes in foreign firms or to purchase technology in order to limit their exposure to risks.

State-owned Beijing Auto Industrial Corp is in preliminary talks with Chrysler to buy models and engines to help develop its own-brand vehicles, according to media reports. A Changfeng source, who declined to be named, told Shanghai Daily that it has dropped plans for a full purchase of Hummer in favor of buying some of GM's technology.


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