China

Beijing Auto: Lucky to Lose Opel


Large and unwise acquisitions are some of the biggest strategic mistakes that any company can make. Beijing Auto should therefore look upon its failed bid for GM's Opel as a blessing in disguise. For the same reasons, discretion may also be the better part of valor with regard to a possible bid for Ford's (F) Volvo.

Abundant evidence tells us the vast majority of acquisitions fail to achieve their objectives or to create value for the acquirer. This is particularly true when it is a cross-border rather than domestic acquisition, when there are vast differences in national and corporate cultures, and when the assets being acquired are technologies, brands, and ongoing operations rather than natural assets buried under the ground. In such situations, a seasoned acquirer engaged in a deal where it is welcomed by the target company's employees may still be able to swing the odds in its favor.

This, however, was far from the reality in the case of Beijing Auto as a potential owner of Opel. In fact, there were four strikes against the deal.

Strike No. 1: Beijing Auto has no experience in mergers and acquisitions, whether domestic or cross-border. Success at postmerger integration requires highly cultivated and deeply embedded organizational capabilities. Such capabilities have to be built through experience. They can be neither bought nor rented.

Cross-Border Experience Needed Strike No. 2: Beijing Auto knows little about managing global operations. True, it operates joint ventures in China with Daimler (DAI) and Hyundai. However, experience at domestic joint ventures doesn't teach a company much about running a global enterprise. Doing so successfully requires the ability to manage a horizontal organization; to connect and coordinate without a heavy reliance on command and control; to navigate cultural, linguistic, and political diversity; and to understand and serve the needs of a diverse set of customers in heterogeneous foreign markets. As a domestically focused enterprise, Beijing Auto has not had the opportunity to build any of these capabilities.

Strike No. 3: Beijing Auto was going after a company bigger than itself. Even after including the output of its joint ventures with Daimler and Hyundai, the Chinese company is only about two-thirds as big as Opel. Excluding the joint ventures, it is much smaller. It is even smaller if we exclude the company's commercial vehicle business and focus on just passenger cars. Unless they come with a stellar reputation and are pursuing a friendly deal, smaller companies face a much tougher challenge in swallowing bigger companies than the other way round. There is no reason to believe that Opel's top talent would have looked to Beijing Auto for guidance on strategic, technical, or organizational issues. Massive organizational resistance was a near certainty.

Strike No. 4: Beijing Auto had publicly stated that its primary goal in buying Opel was to reduce Opel's employment base and cost structure in Europe and to bring Opel's technology to China. Given a potentially unfriendly and hostile workforce at Opel, any such technology transfer would have taken years rather than months, and it would have suffered from considerable loss in translation. In a global auto industry where value chains are highly disaggregated, there are far cheaper ways for Beijing Auto to acquire technology than buying a large operating company. Having ownership of the Opel brand would also not have done much for Beijing Auto in China, where it is relatively unknown. Thus Beijing Auto would have had to invest heavily in building this brand from scratch.

Useful Lessons from Shanghai Auto It is instructive to compare the Beijing Auto-Opel case with the actual history of Shanghai Auto's (SAIC) investment in 2004 of more than $500 million to acquire a 51% stake in South Korea's Ssangyong Motor. Unlike Beijing Auto, SAIC is China's largest automobile group. It also has much greater experience than Beijing Auto at making its own passenger cars. In Ssangyong, it was buying a smaller company. And the acquired company was located in South Korea—next door, both geographically as well as culturally.

Yet, look at the results: bitter disputes over Korean perceptions that SAIC was an exploitative owner, criminal investigations, very little value capture by SAIC, a collapse of Ssangyong into bankruptcy protection, and a complete wipeout of SAIC's investment. It is hardly a surprise that, even though SAIC is the biggest auto group in China with explicitly stated global ambitions, it did not show any interest in acquiring Opel. The SAIC experience has useful lessons for Beijing Auto.

What now? Our advice to Beijing Auto is to refrain from going after Volvo and to focus first on building M&A capabilities by making a number of smaller acquisitions—both domestic as well as cross-border. Given the ongoing restructuring of the global economy and dramatic technological developments, the auto industry will see even greater turmoil over the next 15 years than it has so far. Even though Opel appeared to be a highly desirable trophy, its annual sales of 1.5 million units represent only 2% of the world market and account for less than the annual growth in China's domestic market. A more seasoned Beijing Auto is almost certain to come across many other attractive opportunities in the years to come.
Anil K. Gupta is the Ralph J. Tyser Professor of Strategy at the Smith Business School of the University of Maryland.
Haiyan Wang is managing partner of the China India Institute.

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