“Buying a Sick Horse and Turning It Into a Dead Horse”

Correction: I misidentified the industry website that posted the "Breaking News--Chinese May Buy GM and Chrysler" story. It's "The Truth About Cars", not "All About Cars". My bad. CH

That’s the basic Chinese take on the idea of a Chinese automaker taking over GM.

The tubes of the Internet have been abuzz concerning a report on the auto industry website www.allaboutcars.com headlined “Breaking News—Chinese May Buy GM and Chrysler”.

I took interest in this report because it contradicted my take on Chinese interest in GM—that it was too big and problematic a meal for China to swallow.

I think I'm still on the correct side of this argument. The Chinese appear to have no plans to acquire GM. And perhaps Allaboutcars was getting vigorously massaged by Deloitte-Touche, which has a vested interest in all things M&A, China-wise.

The source for the Allaboutcars post is an article in the 21st Century Business Herald which, as AAC points out, is a respected Chinese language economic newspaper.

And 21st Century Business Herald did run a report quoting an official in the Chinese Ministry of Machinery and Information Technology stating that GM’s troubles might inspire the Chinese automakers to try to acquire some of its assets.

Assets.

Not the company.

And the Chinese version of the article title is上汽与东风有意接盘并购通用汽车等巨头资产 “SAIC [Shanghai Automotive Industry Corporation] and Aeolus are interested in taking over major assets of GM and others”


A truncated form of the article—highlighting the statement that China might purchase some GM assets--was posted on China’s governmental automotive industry website, Autoinfo, which is where AAC might have picked it up through some industry newsletter.

The full text of the article, China’s respect for intellectual property being what it is, has already been posted on about a thousand bulletin boards. It has a different thrust and makes clear that the Chinese government a) sees that China’s machinery industry is headed for restructuring and tough times b) efficient and well-capitalized enterprises might strengthen themselves by acquiring selected assets of GM and c) making a bid to take over GM is virtually inconceivable.

China has swooped in before to purchase valuable assets from beleaguered U.S. auto and steelmakers for decades--entire steel mills, engine plants, etc.. So I don’t see much new happening.

If China decides to make a big move on GM operations, it will start by buying a bigger share or all of the GM joint ventures in China, not trying to take over the whole company.

I suspect that Deloitte-Touche—which is quoted in the article—is interested in goosing its China-related M&A business and may be spreading loose talk of a Chinese bid for GM in order to inspire some rain-making action.

AAC’s man in China, Bertel Schmitt, did run a follow-up post admitting that nobody was confirming the story as he reported it—of a purchase of the company--so perhaps some walkback is in the offing.

Anything can happen. But I don’t think SAIC is going to buy GM. And the article that’s at the bottom of the fuss doesn’t really support it.

I’ve translated some choice excerpts from the article below.

A few points to consider:

1) The article reports that GM wants to sell some assets to Toyota, but Toyota is hesitating. In fact, the lede of the Business Herald article is that Toyota is the most likely beneficiary of GM woes. I haven’t seen anything about this in the U.S. press, however.

2) It’s acknowledged that GM is doing pretty well in China and outside the U.S. And the car business is a world business. It’s a perspective that an obsession with GM’s troubled North America operations obscures.

3) China’s disbursement of its large foreign-exchange reserves will be on a businesslike basis. The Chinese government remembers how Japan pissed away its reserves and clout through its reckless overseas acquisition binge in the 1970s.

If SAIC wants to buy GM, they’ll have to put together an iron-clad business case for the acquisition. I find it difficult to imagine that SAIC or any other Chinese automaker--all of whom manufacture primarily in China--can make a convincing case to a skeptical government that they are ready to take over one of the planet's largest, most complex--and troubled--globalized industrial enterprises.

China’s facing a slowdown of growth of its own and the need to stimulate and restructure its own economy to prevent social unrest. Big strategic expenditures (i.e. money put out without a clear and realistic return on investment) will be domestic and infrastructure/employment-related and probably not for immense, politically sensitive, foreign acquisitions of unprecedented scope and difficulty.

Here are the quotes from the 21st Century Business Herald article:

With the continual worsening of the world financial crisis, GM and Chrysler face the danger of global bankruptcy. As to who will take over their operations in the end, currently the loudest voices are on Toyota's behalf. At the same time, some Chinese car builders are also making proposals to take over operations.

随着全球金融危机日益恶化，通用汽车、克莱斯勒面临全球倒闭危险。而究竟谁来接盘，之前日本丰田呼声很高，同时，部分中国装备制造业企业也打起了接盘主意。

On November 15, Industry and Information Technology Ministry Equipment Industry Division Chief Zhang Xiangmu revealed to correspondents that SAIC and Eastern Motors have interest in taking over some assets. [emph. added--CH]

11月15日，工业和信息化部装备工业司司长张相木向记者透露，国内上汽、东汽等国内大型装备企业有意接手部分资产。

…

Asian Manufacturer’s Association Secretary Luo Jun also stated that the world economic crisis may bring an opportunity for China’s equipment manufacturing industry to upgrade. There’s going to be a shakeout of lower value added enterprises and a group of innovative and financially strong enterprises will emerge. When European and American manufacturers are in difficulty, the resistance to globalization by Chinese enterprises is reduced. Over the next two years it is possible that some Chinese manufacturers will successfully internationalize.
…

亚洲制造业协会秘书长罗军也指出，金融危机对中国装备制造业的产业升级形成了倒逼。大量低附加值企 业在产业洗牌中淘汰出局是一种必然，经过这轮洗牌，国内装备制造业将出现一批自主创新能力强、资金实力雄厚的企业。而在欧美制造企业出现问题的时候，中国 企业进行跨国并购的阻力更小，未来一两年可能出现一批中国装备制造业企业进行国际化并购的成功案例。

During the consolidation, Chinese enterprises could begin by purchasing GM suppliers and GM’s China joint ventures, Deloitte Touche China believes.

“在并购路径上，中国企业可以从并购通用的配套产业和在华合资公司开始。”德勤会计师事务所中国业务发展执行总监金建认为。

…

GM wants to ask Toyota to purchase some assets…but Toyota’s management is taking a cautious attitude.

面对通用的无助和丰田的徘徊，中国装备制造企业似乎有了插一脚的机会。

With GM’s helplessness and Toyota’s hesitation, there would seem to be an opportunity for China’s automakers to get their foot in the door.

“目前美国汽车制造业正处在极度困境之中，这正是中国资本‘抄底’美国汽车制造业的时机。”中国汽车工业协会有关专家表示，“之前已有长丰汽车宣布参与竞购通用汽车旗下悍马品牌的先例。”

…
“…this is an opportunity for Chinese capital to get into the U.S. auto industry ‘on the cheap’”, specialists of the China Automative Association stated. “We already have the precedent of Chang Feng Automotive announcing it will compete to buy GM’s Hummer brand”.
[Note: Apparently GM has been shopping Hummer to India, Russia, and China since August of this year, considering the brand without a future in the age of high gas costs.—CH]

“目前美国汽车制造业正处在极度困境之中，这正是中国资本‘抄底’美国汽车制造业的时机。”中国汽车工业协会有关专家表示，“之前已有长丰汽车宣布参与竞购通用汽车旗下悍马品牌的先例。”

…

China Academy of Social Sciences Deputy Chief and Chairman of the Asian Manufacturers’ Association Cheng Jiagui believes that the chance to buy entire manufacturing lines is “an unattainable dream”. With China’s limited capability and experience in globalization, it could be a case “taking a sick horse and turning it into a dead horse”.

中国社会科学院副院长、亚洲制造业协会会长陈佳贵亦认为，整体并购美国装置制造的工厂生产“对于中国企业还是一个遥不可及的梦”。中国企业的全球化运营能力和经验不足的情况下，可能把“一匹病马医成死马”。

…
Jin Jian [of Deloitte Touche] points out, China could begin by buying GM’s China’s joint venture companies or component manufacturers. GM is unwilling to go into bankruptcy, so it’s realistic to sell some assets in order to get operating capital. Looking at the capabilities of China’s automakers, it’s realistic to begin by buying some assets and buying out GM’s interest in the China joint ventures. It’s just too big a risk to try to take over the entire enterprise and the chance of this happening look slim.

金建指出，可以从并购通用在中国的合资公司或者配套产业开始。而通用方面也不愿意破产，出卖部分资 产换取流动资金是其现实的考虑。从中国装备制造业企业的能力来看，从并购部分资产开始，并购在中国的合资工厂是现实的选择。选择整体性的全面并购，因为整 合的风险将加大，从既有案例来看，也鲜有成功。

China and the American Automotive Follies

Liberated by Barack Obama’s election from the full-time job of belaboring the Bush administration, progressive blogger emptywheel has a very interesting and knowledgeable discussion of China’s possible role in a General Motors bankruptcy.

She floats the possibility that GM’s main Chinese partner, Shanghai Automotive Industry Corp. or SAIC, might scoop up GM brands and technology at a bankruptcy auction and sell cars into the U.S., eventually migrating the production of virtually a full slate of GM vehicles to China, and exploiting and licensing GM’s Volt electric car technology.

But I think that the Chinese are probably hoping that GM will get its bailout and stagger on into the next decade. Picking over the bones of GM might turn out to be an indigestible meal for the Chinese auto industry.

And bankruptcy would be a disaster both for the American economy and GM’s workers and retirees. Especially GM retirees, who are facing the evaporation of the $33 billioin health care benefit package that the UAW had negotiated for them.

Right now, the Chinese automotive industry is anxiously waiting to see if GM funnels profits out of its Chinese ventures back to the beleaguered headquarters, instead of reinvesting them as it has done for the last eleven years.

Today, GM sold its stake in Suzuki for $230 million dollars. The transaction was seen primarily as a symbolic distress signal meant to elicit action from Washington, and not a measure that would offer meaningful help to GM, now hemorrhaging money at a rate of about $250 million a week.

And if GM really goes tits up, I suppose the Chinese will show up to sift through the wreckage.

However, the mantra in the auto industry is “world car”, which presumes large plants selling a few platforms globally to maximize economies of scale.

Currently, SAIC is partners with GM in a world-car production base in Shenyang to produce the Chevrolet Cruze, GM’s belated effort to get the compact car right and save the company with a vehicle that can compete with the Honda Accords of this world.

Daewoo is already making and selling the car in South Korea. India’s supposed to make it, too. GM will try to take a bite out of the European market, especially Russia and the eastern countries by assembling it in St. Petersburg. And then, if GM is still around in 2010, the Cruze comes home to North America, to be made in Lordstown, OH.

China + South Korea + India + Russia is a good recipe for World War III but not a global automotive consortium. GM, for all its faults, is in a better position to handle these myriad bilateral relations than SAIC would be.

The Chinese auto industry also faces plenty of opportunities and challenges on the domestic market.

AFP reports that sales are forecasted to hit a relative trough of 3.8% in 2009 and recover somewhat to 6.4% in 2010. Car dealers are dealing with excess inventory (the highest in four years) and one-third of China’s car dealers might be forced out of business in the coming months.

The slowdown will probably serve as an excellent opportunity for the Chinese government to reduce overcapacity and streamline the inefficient automotive sector, which has over 100 companies, many of which are small enterprises propped up by local governments.

China’s economy runs on a boom and bust cycle. In flush times, local producers pump out cheap, dirty, and profitable vehicles to meet insatiable demand and disregard government handwringing about inefficiency, pollution, and entrenching a technology based on import of a feedstock whose price has seen fluctuations of 50% in the last few months.

Now, in a bust period, local money and credit are relatively scarce, government money is needed and the central government has more levers to channel demand and influence supply.

Fact is, a bailout is probably on the way for the Chinese automotive industry—especially its big, technologically advanced, and well-capitalized sector--and I suspect the government will focus on the infrastructure and environmental constraints of China’s domestic situation, while cutting off the smaller producers and giving lower priority to integrating with an international market that’s falling off a cliff.

China Daily reports:

Speaking at the 2008 International Forum on Chinese Automotive Industry Development held in Tianjin between November 7 and 9, Chen Jianguo, an official from the National Development and Reform Commission (NDRC), China's top economic planning body, said the NDRC has met high-level management from over 10 major automakers to discuss support policies.

"It is possible the government may announce policies" to help revive the industry, Chen said. “China's auto industry is facing severe challenges, and stock market and housing market boosting policies have been launched, but there are still no policies to save the auto industry," he added.

Chinese carmakers have been forced to slash prices, even as steel costs have risen, to compete among the 52 brands on sale, the most in any country.

SAIC Motor Corp, China's biggest automaker, had a 78 percent drop in third-quarter profit. Chongqing Chang'an Automobile Co, the Chinese partner of Ford Motor Co, had a third-quarter loss of 107 million yuan ($15.67 million), compared with a 68.4 million yuan profit a year earlier.

China's auto sales rose 11.11 percent in the first 10 months, compared with a more than 20 percent increase for the whole of last year.

Part of that national restructuring will perhaps involve China’s auto industry taking a step back from globalization as it responds to government demands for more fuel-efficient hybrids and, eventually electric cars.

China’s Minister of Science & Technology, Wan Gang, recently announced that China would promote the development of hybrids and electric cars. Specifically, the Chinese government has abandoned the alternative route of clean diesel, since it would a) involve the expensive retooling of Chinese refineries and b) threaten the supply and price stability of diesel to China’s farmer.

It will be interesting to see if the government’s stated priorities provoke a change in the attitude and investments of China’s big auto manufacturers, the joint ventures with GM, Toyota, Volkswagen, and Ford.

Bonus for American readers:

If GM does go bankrupt, I imagine the courts will have to deal with a hefty $33 billion claim from an aggrieved creditor before any remaining goodies can be divied up.

The debate over whether or not to bail out the U.S. auto manufacturers will probably include an acrid argument over funding GM’s obligations to the VEBA (Voluntary Employee Beneficiary Association) health care trust fund established in an agreement with the United Auto Workers.

A relentless talking point for the automotive industry has been that “legacy health care costs”—their obligations under union contracts to pay the medical expenses of their retired workers—have eroded their competitiveness.

The UAW in its wisdom agreed to accept a payout of $50 billion from the Big Three over the next few years—about half of the anticipated health care expenses over the next few decades—and grow its tax-exempt endowment with the right combination of skill, probity, and luck to meet the needs of perhaps 1,000,000 retired workers.

In return, the UAW agreed to one of those enlightened two-tier systems where the newer employees are treated like dirt wages-and-benefits-wise compared to the older fellas but still recognize that the true enemy is those non-union Japanese transplant operations down south.

Only problem is, GM hasn’t anted up yet—and now it says it’s going bankrupt.

That’s something that the UAW might have thought about when they marketed the VEBA to the rank-and-file as…bankruptcy protection.

A November 10 article with the matter-of-fact title UAW's VEBA Board: Autoworkers’ Health Care Benefits in Peril in Workforce magazine relates:

[I]n July, GM deferred paying $1.7 billion into the VEBA, angering GM retirees.

“What we were promised in the last contract in 2007 in exchange for very deep concessions was that our health care would be guaranteed in the event of bankruptcy,” says Gregg Shotwell, 58, a former GM plant worker and union member who retired last month. “That was a lie. Because no money actually changed hands. Here we are today on the verge of bankruptcy and the VEBA is not funded. I’ve already been at the back of the line with [former GM subsidiary] Delphi. I don’t want to be at the back of the line in my retirement.”


On the one hand, holding back on its VEBA obligations is perhaps a tactic to make sure that labor is pounding down the doors of the soon-to-be overwhelmingly Democratic Congress to make sure that GM is kept afloat.

On the other hand, the UAW is making a politically problematic attempt to piggyback a VEBA bailout on top of the $25 billion or so bridge loan that the auto makers say is needed to keep the doors open until the good times start rolling again.

From the perspective of the Left and Right, there is potential hay to be made.

From the Left’s perspective, the UAW apparently entertained hope that the actuarial illogic of a risk pool composed entirely of aging and dying auto workers that it had agreed to set up would encourage the government to Do Something in the national health care line in order to save the retirees’ bacon and UAW president Gettlefinger’s posterior.

However, I’m afraid that the UAW may have shot itself in the foot by decoupling the health care obligation from the automakers’ political fortunes. With GM’s enthusiastic backing, health care stood a chance in the Clinton administration. With the UAW holding sole, unfunded custody of the auto workers’ health care obligations, the alignment of political forces even in an Obama administration isn’t all that rosy.

Elements of the Right, disregarding the fact that GM is reneging a second time on the health care promises it made to the people who built their cars, and are trying to cast the entire bailout, including both the industry and VEBA elements, as a payday for a gang of undeserving union loafers.

In fact, I read an analysis by the Center for Labor Renewal that the Republicans are gunning for the VEBAs to fail in a spectacular fashion, so that the UAW is pushed into the politically disastrous position of forcing the victims of the underfunded VEBAs to take what’s left of their interest to buy health insurance in the private market..

If even unionized factory workers with negotiated benefits can be sent into retirement with a personal health insurance purchase credit and a farewell kick in the ass, then the dragon of fully-funded healthcare may be slain once and for all