Thursday, November 20, 2008

When Bailouts Aren't Forthcoming

CDT [China Digital Times] picked up on rumors circulating the blogosphere concerning the possibility that a few of China’s car manufacturing giants were contemplating buying into the current turmoil surrounding the “Big Three” American automotive firms (GM, Ford, and Chrysler). This would not be the first time that Chinese companies have attempted buying major American brands, but all that is left to us is the joy of speculation as to what might transpire as we wait for confirmation of any such deals.

One of those prior deals - China National Offshore Oil Corp.’s, or CNOOC, bid for Unocal – might prove an interesting point of comparison. That particular bid , occurring in 2005, created quite the stir in the American media when it became particularly concerning to Capitol Hill. Politicians became severely concerned by the idea of CNOOC (a largely state-owned oil company) buying up an American oil firm. “National security” was waved all over the place and, given that competition between the US and China over fuel sources is projected to be a serious point of conflict, the panic found quite a few believers far too frightened to sit tight and watch the deal go through. The plan was eventually scuttled when it became too politically sensitive for CNOOC to complete the bid and for Unocal to accept it. Many experts had doubts about the reality of the threat many congressmen were trumpeting, but it made little difference on an issue so particularly sensitive. Especially given that CNOOC is, again, has rather clear links to the central government. The incident was highly instructive in how politically charged economic competition with China really is.

Now the question is what reaction China will get from the Hill in a time of crisis. The car industry is not the same as concerns about oil corporations and access to reserves, but the enormity of these brand names alone may startle people. It may also be enough to push senators into action over the proposed bailouts for the Big Three, for better or for worse. The thought of Ford Motors or GM owned by a Chinese corporation (or anyone for that matter) may prick hearts enough to quicken the debate about whether and how to save Detroit. And it will also give us another glimpse of just how concerned Congress is about the growth of Chinese economic power. Congress likely can’t stop such a deal, but they can make the whole process incredibly uncomfortable.

But all this might not matter if the proposals for said sales do not materialize in the next few days. Rumors are rumors, and the benefit of such a move is not all that clear. , where CDT originally picked up the story, seems to think this to be a no brainer for these Chinese manufacturers:

A take-over of a large overseas auto maker would fit perfectly into China’s plans. As reported before, China has realized that its export chances are slim without unfettered access to foreign technology. The brand cachet of Chinese cars abroad is, shall we say, challenged. The Chinese could easily export Made-in-China VWs, Toyotas, Buicks. If their joint venture partner would let them. The solution: Buy the joint venture partner. Especially, when he’s in deep trouble.

The problem with deep trouble is, when you buy the company you get the trouble. This would be a business equivalent of needing to remember that your fiancé’s nightmare of a mother is part of the deal. China Car Times picks up this argument, noting that the Chinese manufactures would not only be picking up a bill for something they didn’t buy, they already are having problems of their own as domestic demand slows. The site does make another interesting point about skipping the mess of purchasing the companies themselves and just nabbing their suppliers:

What we could see is Chinese players taking over suppliers to Detroits[sic] big three in the USA, this would be an excellent time for the Chinese big players to get hold of a supply chain that is well experienced in designing, producing, and supplying quality components on a strict timetable, this is something that can be successfully [sic] carried over to production of Chinese cars in China, and improving the quality aspects that many Chinese cars suffer from.

Either way, grab some popcorn – this will be entertaining.

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