Local firms need to get selective overseas

By Doug Young Source:Global Times Published: 2013-11-18 21:28:01

Illustration: Chen Xia/GT

Illustration: Chen Xia/GT



Chinese firms' addiction to distressed global assets was back in the spotlight recently with word that carmaker Dongfeng Motor is nearing a deal to purchase struggling French automaker Peugeot. This pursuit of a global brand is consistent with the central government's call for Chinese firms to go global, and would certainly allow Dongfeng to quickly expand onto the world stage.

But the case marks yet the latest example of a Chinese firm pursuing a global brand fraught with problems, which could quite possibly represent a dead end for Dongfeng if Peugeot is forced to downsize or even close. To avoid such an outcome, the central government should veto this deal on the grounds that Dongfeng stands to inherit major problems and incur big losses if the partnership goes forward.

At the same time, central leaders also need to educate Chinese companies that their future development can be better served by pursuing younger, problem-free global targets that enjoy a competitive advantage and brighter prospects from their patented technologies and more flexible corporate structures.

Rumors of a Dongfeng-Peugeot tie-up emerged as early as last year, as the troubled French automaker looks for a strategic investor to help it turn around. Peugeot posted a whopping 5 billion euros ($6.74 billion) loss last year, as revenues from its core automotive unit fell 10 percent due to stiff competition and weakness in its home market. The company is in the process of cutting 1,500 jobs as it tries to keep its promise of returning to profitability this year.

While neither Dongfeng nor Peugeot has confirmed any tie-up talks, media reported recently that such a deal was drawing closer. According to the reports, the deal would see Dongfeng and the French government each take between 20 to 30 percent of Peugeot, which would get a 3 billion euros capital injection from the pair.

Sources said the deal is moving forward very slowly, partly because Xu Ping, Dongfeng's chairman, is not yet convinced that such a tie-up would benefit his company. Dongfeng wants such a tie-up to lessen its dependence on existing foreign partnerships with Japanese automakers Nissan and Honda, whose China sales plunged last year during a territorial dispute.

Chinese automakers have a dismal record at global acquisitions over the last decade. The earliest major deal saw industry leader SAIC purchase struggling Korean rival Ssangyong in 2004. But Ssangyong failed to turn around and later became insolvent, forcing SAIC to take massive write-downs. In 2006, Geely purchased 20 percent of storied British taxi maker Manganese Bronze, only to also write off that investment last year when the company became insolvent. Geely continues to struggle to turn around troubled Swedish carmaker Volvo, which it purchased for $1.8 billion in 2010.

Many of China's other major global acquisitions have been equally unsuccessful.  TV maker TCL's purchases of major cellphone and TV assets in Europe ultimately bombed due to big problems at the acquisition targets. Even Lenovo's 2005 purchase of IBM's PC business, considered one of China's more successful deals, was problematic in its first few years and forced Lenovo to launch a major restructuring.

A series of more recent major purchases in the simpler food sector looks a bit more intelligent, and could provide a template for other companies to follow. Bright Food has made headlines with several major acquisitions over the last two years, including its purchase of British breakfast cereal maker Weetabix for more than $1 billion. And earlier this year, meat products maker Shuanghui bought rival Smithfield for $4.7 billion, a record sum paid for a US asset by a Chinese buyer.

Both Weetabix and Smithfield were relatively healthy companies when they were acquired, meaning the Chinese buyers will have one less problem to worry about as they set about the difficult task of post-merger integration. In the more complex world of technology and cars, similarly healthy companies may often require hefty premium that would make them unaffordable for most Chinese buyers.

Instead of targeting such big names, Chinese makers of cars and other technology products should set their sights on smaller, younger targets that hold valuable intellectual property that can assist their global development. These Chinese buyers should realize that cheap companies are cheap for a reason, and central leaders should step in to veto future deals like a Dongfeng-Peugeot tie-up if acquirers fail to curb their appetite for troubled global assets.

The author is a former company news reporter from Reuters. He writes about China's company news at www.youngchinabiz.com. bizopinion@globaltimes.com.cn



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