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back to index backCHINAtalk May,  2005

Confusion in the face of adversity

In the face of adversity some people are impressive. I recently read an account of an rather solid English lady who was kidnapped in Manchuria by bandits in the early 1930s. She wrote to her husband declaring:

'They are going to cut off our ears and I rather want to keep mine. Am filthy and long for a bath. The chow is awful. Please send a powder puff and a lipstick.'

Eventually the bandits freed her. You can appreciate their situation. If that's the note she wrote to her husband, imagine the hard time the kidnappers were getting.

Others however fare rather differently when faced with adversity - take the British government recently during the SAIC-Rover negotiations. People tell me there is a phenomenon known as 'having a China day' - apparently this is when things all get a bit much. It seems that MG-Rover and the British government have had a mega-China Day recently.

Judging from emails I've been getting from the British auto press they weren't too aware of the situation in China's car market. Over there the SAIC-Rover debacle was being covered in what was then the middle of an election campaign and therefore concentrated on election-sensitive issues; primarily jobs. Much navel gazing was observed as is usual at these times in election cycles. Nobody blamed the Chinese as after all Chinese citizens don't vote in British elections and it wouldn't have been fair anyway. However, if an election had been a year away rather a month away this might have been different. It is also the case that the majority of the British press - like most other western countries - continues to pour forth the good news stories on China with little explanation of the slightly more layered complexities of the situation.

However, with the car industry it is a simple case of the numbers telling the story…and as someone who sells numbers for a living those are my favourite stories. The UK press was still reporting the phenomenal growth in car sales in China. However, while sales grew 16% in volume terms 2004, this was a sharp decrease from 81% in 2003. Prices are falling, buyers are cautious, the government has clamped down on state purchasing, auto loans have been stopped and inventory is growing massively. Note also that the carmakers also use volume sales percentages - i.e. the number of cars sold - and rarely value sales. With prices continuing to tumble and production costs rising (oil, steel and other commodities are all more expensive) the margin per car sold is shrinking. On this the carmakers remain silent.

One thing SAIC-Rover showed was the gulf in the perceptions of the deal between the UK and China. China saw the following:

1) A deal negotiated initially during fat times that didn't look so good in increasingly lean times - SAIC is pressured by falling sales, rising costs and increasingly rudderless JV partners (GM and VW);

2) A deal done initially on a rather bright analysis of MG-Rover's financial situation - this changed about 5 seconds after SAIC got access to Rover's accounts;

3) A UK company (Phoenix Venture Holdings - the owned MG-Rover) that chose to leak the details of the deal annoying the Chinese who believed it confidential;

4) A company (MG-Rover) heading to bankruptcy and imminent receivership allowing the Chinese to 'cherry pick' the best (i.e. the badges, R&D and tech) and leave the dross (i.e. a car factory, 6,000 unionised and expensive workers and all the rest of it in the UK) while saving a lot of money on the process;

5) A British government a little too desperate to get the deal done indicating that it might not be the best available - reportedly Blair and Brown were, in the words of one source, 'repeatedly begging senior Chinese officials down the phone to get this deal done.' Salesmen will tell you that trying too hard is mistake No.1;

6) When SAIC got access to MG-Rover's books they could not help but notice that the MG-Rover pension fund had a 68mn deficit on its liabilities of 401mn at the end of 2003. a number that has probably got worse since. Western companies are not keen to accept the pension liabilities of Chinese SOEs when they purchase their assets yet Phoenix and Downing Street seemed to think that SAIC would take on similar liabilities when buying in Europe!

7) Lastly it was also interesting to note in a China currently concerned about rising corporate corruption and a lack of corporate governance that John Towers and his fellow directors at Phoenix had paid ?17mn into their own pension fund (?3mn each) compared to the ?49mn they had put in the workers' pension fund (?8,000 each). An additional 'nest egg' of ?13mn was paid into the directors pension scheme, to be divided among a handful of directors, and ?11mn into the company pension fund for the 6,000 workers. MG is not said to stand for 'My Greed' for nothing while BMW, who previously owned Rover, described the Phoenix management as 'the unacceptable face of capitalism.''

Meanwhile, the UK government who tried so desperately to 'close' the deal saw the following:

1) A Chinese company so hungry for tech and R&D that it would pay a whopping ?1bn for a failing, debt ridden UK car company;

2) A Chinese car market that was the most vibrant in the world based on 2002/2003 figures (news of 2004 and Q1 2005 didn't appear to have filtered through);

3) The chance to save 6,000 jobs at MG-Rover and countless more in the supporting area and supplying companies. There are several marginal Labour seats in the Birmingham area where MG-Rover workers live;

4) A company, SAIC, that appeared to be dithering on a deal - few in the UK realised that SAIC could not complete the deal independently and that under Chinese regulations the State Council in Beijing had final approval or veto - not SAIC management.

The whole slightly seedy approach of the British government in the Rover debacle tells us something about China - it's a clear indication that China is going to be increasingly important on the world stage. The SAIC-Rover deal has become an election issue in Britain and depending on your politics you can point to either the government or Phoenix as the villains. As to what it tells you about the state of the British Government…well, we'll have to leave that to the voters on May 5th. The workers at Rover's Longbridge plant appear to realise that it has been New Labour, Phoenix and the rather slow-of-the-mark UK press that have failed them. Despite all the phone calls to China, the UK government lawyer despatched to Shanghai to talk bridging loans and the hopes of the UK press, a couple of weeks ago a demonstration of wives and children of MG-Rover workers angrily marched to 10 Downing Street to save Rover, not to Zhongnanhai.

Source: - GAI

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Other articles from the same issue (May,  2005).

Confusion in the face of adversity
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Japan and China will hold an auto dialogue in May, but seeds of conflict remain
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Pricing pressure in China set to intensify
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Corporate execs say supply chains a strategic key to their business future; Expected reliance on China is dramatic
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Scarce labor in China
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China's April producer prices jump 5.8 percent
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