Nanjing Auto's Rover Buy Shows Foreign Market Drive

[HenryTo]

The end of an era for British car manufacturing and why Nanjing Auto is desperate to gain a foothold in the European markets. Huge overcapacity in the car manufacturing world in China even as the Chinese economy reported 9.5% GDP growth during the last quarter. Is 9.5% growth really that impressive if companies make little to nothing in profits?
----------------------------------------------------------------------------------
Nanjing Auto's Rover Buy
Shows Foreign Market Drive

By PETER WONACOTT
Staff Reporter of THE WALL STREET JOURNAL
July 24, 2005 2:26 a.m.

SHANGHAI – Nanjing Automobile Group's announcement on Friday that it will acquire British car maker MG Rover Group highlights another example of how competitive pressures in China are driving a round of risk-taking ventures overseas.

Under the deal, Nanjing Auto purchased the assets of MG Rover, a venerable maker of sport and luxury cars that had entered bankruptcy. The assets include Rover's engine producer, Powertrain Ltd.

Nanjing Auto has said it plans to shift an engine plant and some car production to China while maintaining some manufacturing and research and development facility in the U.K., according to a statement from PricewaterhouseCoopers, the joint administrators. Other terms were not disclosed.

Nanjing Auto's purchase of Rover follows months of negotiation, and a brief bidding battle with Shanghai Automotive Industry Corp. for the assets. SAIC's bid fell short because of "the level and conditionality," Tony Lomas, a joint administrator at PricewaterhouseCoopers, said in the statement. A spokesman reached for Nanjing Auto declined to elaborate on details of the deal.

Both SAIC and Nanjing saw something similar in Rover – a stepping stone into Europe and the global auto market. For Chinese automakers, the pressure to take such steps has mounted in recent months, as China has come off a car boom and multinationals have introduced new models to a crowded market. To carve out space, a number of China's government-owned carmakers have sought to build brands apart from foreign partners.

SAIC, which is the country's biggest auto company by output, has car-making joint-ventures with Volkswagen AG of Germany and General Motors Corp. of the U.S. Meanwhile, Nanjing Auto, China's oldest car maker, has teamed with Italy's Fiat SpA and affiliate Iveco to produce sedans and vans.

Nanjing Auto's overseas stake is not the first by a Chinese car company. Last year, SAIC agreed to buy a controlling 48.9% stake in South Korea's Ssangyong Motor Co. for about $500 million.

SAIC also last year acquired some intellectual property rights for the Rover 25 and Rover 75 models. Honda recently repossessed equipment and blueprints for making the Rover 45, according to an executive at Nanjing Auto. Those moves have injected some uncertainty into Rover's sale to Nanjing Auto – it remains unclear how two Chinese car companies, which have competed fiercely, will resolve those ownership rights.

The competitive pressures in China go beyond the auto industry. A range of Chinese companies are now seeking deals overseas to meet challenges at home. Among them: falling prices, dwindling resources, old technology and obscure brands.

In recent months, Chinese computer maker Lenovo Group Ltd. has bought the personal-computer division of International Business Machines Corp.; Oil concern Cnooc Ltd. has approached U.S. energy company Unocal Corp. And before backing off last week, home-appliances maker Qingdao Haier Ltd. teamed up with two U.S. private-equity firms to try to outbid Ripplewood Holdings for U.S. washing-machine maker Maytag Corp.

TCL Corp., a conglomerate based in Southern Guangdong province, has acquired the television and mobile phone handset businesses from two French companies, Thomson SA and Alcatel SA.

Nanjing Auto's foray is perhaps more urgent than most. Assembly lines at two plants in Nanjing and Wuxi have operated below 40% capacity because of slack sales, says the Nanjing Auto executive, who asked not to be named.

As passenger car sales rocketed over the last few years, Nanjing Auto has been hemmed in by regional rivals, SAIC in Shanghai, Geely Automobile Holdings and Chery Automobile Co. in Zhejiang and Anhui provinces. Nanjing Auto's foreign joint ventures haven't provided much sales support, either, according to Ashvin Chotai, director of Asian Automotive Research in London at consulting firm Global Insight.

"The company needed to take some aggressive action if it was to kick start its independent auto strategy, said Mr. Chotai. Considering the company's recent track record, he added, "I'm not convinced this will really become anything significant."

Nanjing Auto executives acknowledge long odds for the venture. They will be trying to fit different companies on two continents into an untested sales model. By keeping some operations in the U.K., Nanjing Auto will try to maintain Rover's thin slice of sales in Europe. But the company will also seek to shave costs with production in China, and boost sales by introducing modified Rover models at home. Production is likely to begin next year, according to the Nanjing Auto executive, who is familiar with the plans for Rover.

"We succeeded in buying [the company], but it's hard to say now whether we can really make it profitable," he said. "The risks come with the deal."