A Growth Model for China Automakers

Acquiring foreign brands is not the best road for mainland car companies. They should travel the slow and steady path

by Timothy Dunne

In July, a rumor circulated in the Chinese and Western business media that Chery Automobile was considering purchasing Ford's (F) Volvo luxury car division for more than $4 billion (BusinessWeek.com, 7/7/08). In August, a second rumor went around that another Chinese automaker—Guangzhou Automotive—was interested in Volvo.

I don't know if Volvo is worth $4 billion. (With Ford announcing on Sept. 2 the appointment of Stephen Odell, chief operating officer for Ford Europe, as Volvo's new chief executive, the U.S. company doesn't appear to be interested in selling right now.) What I do know is that based on recent history, I would recommend that Chery, Guangzhou Automotive, or any Chinese automaker eyeballing an acquisition of a foreign automotive brand rethink its strategy. Let's consider what has happened with some major automotive acquisitions over the past 20-30 years:

Ford
Ford bought Jaguar in 1989 (spending $2.5 billion) and Land Rover (another $2.5 billion in 2000), both venerable brands with rich automotive histories. But in May 2008, Ford sold both to India's Tata Motors (BusinessWeek.com, 3/26/08) (TTM) for half their combined purchase price after piling up billions of dollars in operational losses over the interceding years. Now Ford is reportedly trying to offload Volvo for $4.4 billion, though it acquired the Swedish automaker for $6.4 billion in 1999.

General Motors
General Motors (GM) was equally busy buying up initial stakes—and then increasing them—in foreign automakers. GM first bought into Isuzu in 1971, then Suzuki in 1981, Saab in 1989, Subaru in 1999, and Fiat in 2000. Today, GM has sold off or decreased its interest in all of these investments (except the ailing Saab, which no one will touch). While precise figures are not available, the struggling Saab is believed to have cost the company billions in operational losses, while the damage for its dalliance with Fiat is estimated at $4.4 billion.

BMW
Germany's BMW (BMWG.DE) bought Britain's Rover Group in 1994 for roughly $1.3 billion. After six years of massive losses—including an estimated combined loss of $3 billion between 1998 and 1999—BMW broke up the group in 2000 and sold it off in pieces.

Daimler
In perhaps the industry's greatest missteps, Daimler acquired a controlling interest or stake in Chrysler, Hyundai Motor, and Mitsubishi Motors over the last decade. All those ventures stalled quickly, and Daimler has subsequently sold off or pulled out of the majority of its interests in the companies. Total accumulated losses are figured to be in the range of $35 billion to $40 billion, and that doesn't include lost time and diluted resources.

Now, the above are some of the oldest and most venerated companies in the automotive industry.