With Volvo, Chinese eye M&A abroad to win at home

RELATED NEWS Poland to see spike in M&A deals soon Market strength tempts India back into M&A fray Japan tech needs M&A but patent war more likely Merger activity to show tepid recovery in 2010

Once Li Shufu, head of China's Zhejiang Geely Holding Group, closes the deal to buy Ford Motor's Volvo unit for up to USD 2 billion, the sedate, safety-conscious Swedish brand may be in the running to replace the Audi A6 as Chinese state officials' car of choice.

The 47-year-old son of a farmer, Li has been likened to Henry Ford for his ambition to build up a mass manufacturer of affordable cars.

He is already planning a factory in Beijing to make as many Volvos for China as are now made abroad for foreigners.

"Li Shufu has made a huge bet and the stakes are extremely high," said John Zeng, an analyst with IHT Global Insight, an industry consultancy.

"But he has a chance to win since he can count on the China market, rather than somewhere else, to turn Volvo around."

China last year sped past the United States to become the top auto market and a key source of business for both battered global titans and ambitious domestic neophytes, which are emerging from obscurity to try their hand at global acquisitions.

But despite a fast-growing home market and a deep-pocketed government keen on home-grown champions, the Chinese are likely to find much tougher going than their Japanese and Korean rivals in taking domestically developed cars to the global market.

And before finding success abroad, they still have a lot of catching up to do at home, and it is here, not in the US or European markets, where foreign acquisitions may prove crucial.

STARTING AT HOME
Many Chinese automakers, from SAIC Motor Corp, its biggest, to rising stars Geely Automobile Holdings and BYD, have publicly expressed their aim of selling their own brands in the big developed markets of the West.

But even in their home market, Chinese national brands, mostly specialising in small cars selling for as little as USD 4,000, make up less than one-third of overall sales. In contrast, Toyota Motor Corp and Hyundai Motor Co dominated their home markets before heading abroad.

SAIC's Roewe sedan is virtually the only local brand to succeed in China's mid-sized and large car segments, still dominated by the joint ventures of foreign majors such as General Motors and Volkswagen.

"Chinese branded vehicles are meeting the need for the typically low-priced segment at home. To become global players, (they) need to improve quality," said Stephen Dyer, principal with A.T. Kearney China.

"Quality and reliability are the entry-level barriers. If you don't have that, whatever the price, you just won't do well."

Toyota's recent recall of more than 8 million vehicles world wide has made it even more difficult for new entrants.

"Existing players in North America such as Hyundai will be the biggest beneficiaries of the Toyota recall, but the threshold for Chinese automakers hoping to get in there will be much higher," said Qin Xuwen, an analyst with Orient Securities.

"Toyota had been synonymous with quality and safety while Chinese automakers are way behind Toyota."