Auto Industry Interview

One of our good friends from the Chinese media was gathering background information for a story she was writing on the auto industry and came over to speak with me. We sat down and discussed a wide range of issues that dealt not only with China, but also with global trends. Apart from any insight that the answers provide, I find that the questions themselves provide a glimpse into what the Chinese press, the government and industry executives are thinking about.

Here is what we discussed.

Question: In July, Porsche acquired a majority stake in VW, and BMW signed a contract with Fiat regarding small vehicle production. It seems that another wave of acquisitions in the auto industry has begun. Can you please tell me what the differences are with this latest trend compared to acquisitions by the Big Three in the 1990s?

Answer: In the 1990s, Daimler and Chrysler merged, and Ford put together its Premier Auto Group by acquiring Jaguar, Volvo and Land Rover. These acquisitions were primarily done for market reasons—Daimler wanted to create a truly global footprint with Mercedes in Europe; Chrysler in the U.S; Mitsubishi in Japan; and both Chrysler’s and Daimler’s presence in China. Ford wanted to add a luxury car segment which it believed would pull up the technology and quality image of the company overall.

This latest round of acquisitions and strategic cooperation’s appear to be done for reasons of cost and technology, not market. Fiat already has twenty-nine alliances with other auto companies that are designed to spread its research and development and other platform costs across a wider vehicle base. Adding BMW to this list of alliances is in keeping with that strategy. In addition, BMW can gain access to Fiat’s development efforts in small cars, enabling BMW to enter this market more cost effectively.

The same is true for Porsche’s acquisition of a controlling interest in Volkswagen—at least to a certain extent. Though highly profitable, Porsche is less than one tenth the size of Volkswagen and has far fewer vehicles over which to spread development costs. Given high energy prices, demands for more fuel efficient engines and cars will be high, and all car companies will be required to meet the needs of the marketplace. This acquisition gives Porsche greater access to new engine and fuel technologies as they develop.

In the case of Porsche/Volkswagen, though, there are two other factors at work—history and family. Both Porsche and Volkswagen trace their ancestry to Ferdinand Porsche, whose engineering studio designed the first VW “people’s car.” The first Porsche roadsters, credited to Ferdinand’s son Ferry Porsche, had an air-cooled motor that was a more powerful Volkswagen engine. In recent years the Porsche family’s ties to Volkswagen have been upheld by Ferdinand Piëch, Ferdinand Porsche’s grandson and chairman of VW’s supervisory board. In one sense, the acquisition of Volkswagen by Porsche is merely putting the family business back together.

Question: What is the impact to the China Automotive Market of this trend of acquisitions?

Answer: Other than creating healthier global auto companies with a greater ability to bring their products and technologies to China, I don’t believe that either transaction will have much impact on the China Automotive market.

Question: Since the Big Three’s performance is getting worse and worse, are there more opportunities for Chinese companies to take this opportunity to go abroad and make acquisitions? So far, just South Auto and Shanghai Auto acquired Rover successfully. There is more buzz around me now that some Chinese companies would like to acquire Volvo from Ford, etc. What’s your comment?

Answer: Due to economic conditions in the United States and spiraling energy costs, the US auto industry is in a state of disarray. Anytime this happens, it creates acquisition opportunities for companies from other parts of the world, including China. Apart from access to the United States market, the biggest benefit to considering such acquisitions is the technology and the brands that Chinese companies might gain.

Against these benefits, however, Chinese companies have to weigh the possible negatives to making such acquisitions. I have heard someone equate making an auto acquisition in the United States to buying a “melting ice cube.” All things considered, Chinese companies should be opportunistic in reviewing possible acquisition candidates and recognize that we still don’t know where the market bottom is and how the industry will shake out. Having said that, Chinese companies should view the current situation opportunistically and proceed with caution if assets become available that might bring needed technology to their China operations, or add a famous international brand. If a Chinese car company could, in fact, acquire a famous brand like Volvo, it could accelerate greatly the acquirer’s development in the car industry.

Question: What kinds of capabilities are required if Chinese companies want to seize these acquisition opportunities?

Answer: Similar to a foreign company coming into the China market, a Chinese company that is seeking to make acquisitions and enter the US market must gain as complete an understanding as possible of the US economic, market and legal landscape. Any acquisition in this industry will require a thorough understanding of the customer and entail a wide range of legal and financial issues. Fortunately, there is no shortage of legal and financial experts who are willing to help. Also, many private equity firms that deal with these issues on a daily basis would be more than willing to team up with strategic buyers from China to consider possible acquisitions.

Question: With soaring oil prices, the non-energy saving vehicles do not have a good business in the States now. The Big Three, BMW and the Japanese companies have all turned their interest to smaller economy vehicles. Will these smaller, economical vehicles be the main-stream model in the future?

Answer: There is no question that small, economical vehicles will be main stream models in the coming years, assuming of course that oil prices remain high. I realize that high oil prices seem to be a foregone conclusion, but we shouldn’t forget that the oil crisis of the 1970s caused a similar rush to small vehicles. When the crisis passed, and the long lines at the gas pumps vanished, the gas guzzlers returned. Having said that, most people would say that the industrialization of China and India’s development have created such large new demands for energy that this time is different, and high energy prices are with us for good. If that is the case, then small, economical car models are certainly here to stay. If you want a glimpse into the future, you only have to travel to countries like France where tax policies have kept gas prices high to see what tomorrow’s passenger car population will look like.

Question: In the small, economical vehicle sector, will energy-saving hybrid and electrical vehicles be the main-stream models?

Answer: Energy saving vehicles will certainly play a role in the future development of the global auto industry. The biggest impediment to their acceptance by the marketplace to date has been their high cost. In the end, consumers will consider the initial price of the car and the operating costs, including the price of fuel. If the cost is too high, and the fuel savings do not justify the higher price, then many consumers simply won’t buy. Therefore, the big challenge for the auto industry is to make these new technologies more affordable. This is where China automakers can play a large role.

Question: China vs. Japan? Which do you think has more advantages in making small, economical vehicles? Why?

Answer: Assemblers from both countries have an important role to play. The trick to making small, economic cars popular is to design them so they still have the features that consumers want. Cars with engines under one liter have a very limited market in China—even though they are cheap—because consumers want the features they can get when they buy a car with a slightly larger engine. China automakers know how to make cars at the lowest possible cost; Japanese automakers know how to design in the quality and the comfort. Some combination of these two skills is needed to produce economic cars that will be widely accepted by the marketplace.

Question: Other than cost-savings, are there any other capabilities the car-marker should have in order to produce small, economical vehicles?

Answer: As mentioned previously, the ability to produce these cars to the highest quality standards and to incorporate the features that the consumers want are the keys to success. In the end, cars are consumer items. Most consumers want more than just low cost. They want a total package which includes an affordable price, the lowest possible operating costs with an acceptable level of comfort, style and features. While each consumer may weigh each consideration differently, they all have an optimal combination in mind when they consider purchasing a car.

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