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back to index backEUROtalk August,  2005

Nanjing Automobile's purchase of MG Rover IS significant

Asian M&A activity signals global, not regional ambitions

It is easy to be dismissive of Nanjing Automobile's agreed purchase of the battered remnants of the MG Rover group for £50m last week.

The brand itself is largely played out, the products are outdated, and it looks as if it will take at least a year for production to restart, if all goes well, and it looks as if the decision could be challenged in the courts - rival Shanghai Automotive Industry Corporation owns the rights to an unclear amount of the former product portfolio of MG Rover.

And even if the deal is essentially confirmed, Nanjing faces a significant managerial challenge in shipping the production, tooling and know-how for the development of body production of Rover's products to China, and faces a delay of a year or more before it can re-enter the market with products based on its new acquisitions technology.

Rover's existing supply base will be reluctant to restart for production of what must seem a still highly risky production volume in Europe with very limited growth prospects.

The potential savings from shipping some of the costs of components to China of perhaps $1500 per car (on the evidence of rival Shanghai Industry Corporation) are outweighed by the marketing costs that the company will face in re-establishing its presence in the UK or European markets, but that is not the significance of the deal.

Signal of emerging Asian Confidence

The significance lies in the signal it makes of the level of ambition and degree of confidence in the Chinese automotive industry. The Chinese auto industry believe that it has history on its side.

Automotive executives in Europe, North America and Japan know that weight of business will grow there, and the future competitive balance in their sector of the industry may well be decided by who wins in China. European suppliers at the Shanghai Show were clearly fearful of the challenge from Chinese copiers and almost universally impressed by the pace of the development of the local suppliers.

"They're like the Koreans, but twice as fast", said a senior executive at one leading European automotive supplier.

Buoyed up by several years of surging growth, the Chinese industry sees very broad vistas opening up for future growth And the Chinese are not alone.

The Indians, with an economy 40% the size of China, believe that fresh opportunities are opening up and their own take-off is just around the corner, and wish to secure the technologies and customer contacts to grow.

Nanjing's acquisition of Rover has followed two smaller acquisitions by Indian automotive suppliers in the US - Bharat Forge's acquisition of Federal Forges in June - and in Europe Amtek's acquisition of turbocharger housing manufacturing Zelter in July.

….while Europeans and North Americans lose confidence growing slowly

With developed economies growing slowly, the industry in more mature markets is facing a crisis of confidence.

The Germans are concerned about growing competition from east European production locations, and we reported last week that the French supplier industry fears falling sales in 2005.

The North American industry is perhaps in its deepest depression ever, Wall Street openly discussing possible bankruptcy of General Motors or Ford, and some leading investors appear to have written off the sector and no longer follow it, because of its lack of long term prospects.

The two leading North American manufacturers face a seemingly inexorable decline in domestic market share, and intractable labour and indirect costs.

The North American industry, or at least large swatches of it, appears to have lost its faith and confidence in the future.

The caution of the developed established industry is clear to see in the subdued merger and acquisition market.

Despite rebuilt corporate balance sheets and plentiful acquisition opportunities the widely expected pickup in automotive M&A has not happened.

The activity in this sector is still dominated by financial sponsors looking to profit as much from the restructuring of the financial assets of suppliers, as much as from rebuilding the operational side of the business. In contrast with the second half of the 1990s when a merger and acquisition wave hit the industry, the current focus of many European and in particular North American supplier companies appears to be much more defensive.

There seem to be fewer and fewer international suppliers with the confidence and ability to try to dramatically reshape their sectors - although there are a few such as Johnson Controls, BorgWarner and Magna in North America -and Continental, Siemens VDO or Bosch in Europe.

The difference may reflect a different philosophy and strategy for growth in the last few years - a focus on technology and closely targeted acquisitions and away from bulking up businesses and putting together complementary operations.

This may be a passing phase.

Perhaps the improved outlook for the fourth quarter discussed elsewhere could mark the start of an upturn.

But there must be a danger that this difference between emerging Asia and mature Europe and North American sectors in strategic visions could become self-fulfilling.

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Source: SupplierBusiness - GAI

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