With Volvo, China eyes M&A abroad to win at home

NINGBO, China - Once Li Shufu, head of China's Zhejiang Geely Holding Group, closes the deal to buy Ford Motor's Volvo unit for up to $2 billion, the sedate, safety-conscious Swedish brand may be in the running to replace the Audi A6 as Chinese state officials' car of choice.

The 47-year-old son of a farmer, Li has been likened to Henry Ford for his ambition to build up a mass manufacturer of affordable cars.

He is already planning a factory in Beijing to make as many Volvos for China as are now made abroad for foreigners.

Li Shufu has made a huge bet and the stakes are extremely high, said John Zeng, an analyst with IHS Global Insight, an industry consultancy.

But he has a chance to win since he can count on the China market, rather than somewhere else, to turn Volvo around.

China last year sped past the United States to become the top auto market and a key source of business for both battered global titans and ambitious domestic neophytes, which are emerging from obscurity to try their hand at global acquisitions.

But despite a fast-growing home market and a deep-pocketed government keen on home-grown champions, the Chinese are likely to find much tougher going than their Japanese and Korean rivals in taking domestically developed cars to the global market.

And before finding success abroad, they still have a lot of catching up to do at home, and it is here, not in the U.S. or European markets, where foreign acquisitions may prove crucial.

STARTING AT HOME

Many Chinese automakers, from SAIC Motor Corp, its biggest, to rising stars Geely Automobile Holdings and BYD, have publicly expressed their aim of selling their own brands in the big developed markets of the West.

But even in their home market, Chinese national brands, mostly specializing in small cars selling for as little as $4,000, make up less than one-third of overall sales. In contrast, Toyota Motor Corp and Hyundai Motor Co dominated their home markets before heading abroad.

SAIC's Roewe sedan is virtually the only local brand to succeed in China's mid-sized and large car segments, still dominated by the joint ventures of foreign majors such as General Motors and Volkswagen.

Chinese branded vehicles are meeting the need for the typically low-priced segment at home. To become global players, (they) need to improve quality, said Stephen Dyer, principal with A.T. Kearney China.

Quality and reliability are the entry-level barriers. If you don't have that, whatever the price, you just won't do well.

Toyota's recent recall of more than 8 million vehicles worldwide has made it even more difficult for new entrants.

Existing players in North America such as Hyundai will be the biggest beneficiaries of the Toyota recall, but the threshold for Chinese automakers hoping to get in there will be much higher, said Qin Xuwen, an analyst with Orient Securities.

Toyota had been synonymous with quality and safety while Chinese automakers are way behind Toyota.

OVERSEAS ACQUISITIONS

Acquisitions of established foreign marques can offer immediate access to both brands and technology, and Chinese automakers are taking advantage of an industry slump to snap up assets from financially strapped global players.

Sichuan Tengzhong Heavy Industrial, a little-known machinery maker, last year agreed with GM to take over the Hummer brand but is still awaiting regulatory approval and has extended the deadline for closing.

Analysts say Chinese regulators may be moving cautiously due to Tengzhong's lack of expertise in autos and the gas-guzzling Hummer's poor environmental record.

Mid-sized automaker Beijing Automotive Industry Holding agreed last year to pay $200 million for three Saab vehicle platforms to be used to develop its first own-brand vehicle.

China's brightest hope in cross-border auto deals is Geely's plan to buy the prestigious but money-losing Volvo brand.

However, skepticism abounds. If Ford could not turn Volvo around, what are the chances for a company with only 13 years in the car business?

It's not easy. Volvo is a good brand, yet it has been challenging whoever the owner has been, said Terry Johnsson, vice president of GM's car venture with SAIC.

But he added: Personally, I wouldn't bet against it. I think they have the ability to fund the investment ... I am guessing their attitude will be it has to succeed so they will bring a single-minded view to that.

Beijing's commitment to the deal's success is clear.

Chinese commerce ministry spokesman Yao Jian has said the Volvo deal would give China access to much-needed technology. Overseas acquisitions would also be a better use of China's $2 trillion-plus in foreign exchange reserves, 70 percent of which are now estimated to be sitting in U.S.-dollar denominated debt.

Volvo may also get a boost from Beijing's plan to support domestic brands, including through government procurement.

The mandate from the government is to build local brands and Volvo is now a local brand. Maybe there will be some special treatment they can take advantage of and gain the hearts and minds of Chinese with a global product but local ownership, said John Bonnell, a senior director with auto consultant J.D. Powers.

The public has been pushing the drive to buy China made, especially after Mercedes and BMW were added to the list of approved official cars for bureaucrats in June 2009, sparking an outcry in Internet chat rooms.

Geely, which has an aggressive target of boosting its sales to 2 million vehicles by 2015 from last year's roughly 330,000 units -- about the same as Volvo's global output -- is exuding confidence.

I'm very excited about the Volvo deal and very sure we can succeed, said a broadly grinning Huang Biao, 27, a team leader at a welding workshop in Geely's auto plant in Ningbo.

(Editing by Lincoln Feast)