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Saab failure another dent in China's auto dreams

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Saab failure another dent in China's auto dreams

NOVEMBER 26, 2009 06:01 CET

GUANGZHOU, China (Reuters) -- China's automakers may dominate their home market, now the world's largest, but the collapse of the sale of Saab to a Chinese-backed group shows it will be a bumpy ride for them to build a global profile.

Beijing Automotive Industry Holding Corp. ranks 10th among China's automakers, who are looking for a short cut to the global market by snapping up assets from distressed Western giants such as General Motors Co.

The Chinese generally churn out low-end cars for the booming domestic market and lack the technology and management and marketing expertise to handle global brands.

At this week's Guangzhou auto show in southern China, many of these homegrown car makers boasted of record sales this year and more growth next year, but these mainly young manufacturers are not yet ready to take on seasoned global giants such as Toyota Motor Corp., GM and Volkswagen AG.

"Their products are focused on the low-end market and cannot meet requirements of the western world, such as Europe," said Zhang Jing, an analyst at Phillip Securities. "They can't even get an entrance permit and there's still a long way to go."

More tests ahead

Reflecting the difficulties the Chinese face, the BAIC-backed consortium said on Tuesday it was dropping its Saab bid, throwing that venerable brand's future into doubt and leaving the Chinese automaker to weigh its next move.

The next test case will be Sichuan Tengzhong Heavy Industrial Machinery, a little-known machinery maker, which agreed to buy the Hummer marque from GM. It hopes to close the deal by late this year or in early 2010.

Zhejiang Geely Holding, parent of Hong Kong-listed Geely Automobile, is bidding for Ford Motor Co.'s loss-making Volvo cars unit.

While most of China's automakers have focused solely on the home market, some have begun exporting to developing countries in Africa, the Middle East and South America.

Now, the global financial crisis is providing them with a possible short cut to the world market, where well-known brands such as Volvo, Opel, Saab and Hummer are up for grabs as part of a major global restructuring.

BAIC initially wanted to gain access to Saab's vehicle technology via the indirect link of taking a stake in small Swedish luxury car maker Koenigsegg, which bid for the Swedish brand. BAIC would then help revive Saab by increasing its vehicle sales in China.

Analysts say the Chinese firm may still bid for some Saab assets, but was unlikely to go solo on bidding for the company.

Technology hurdles

Analysts reckon Chinese car makers are still 5-10 years behind their global rivals in terms of technology, and it would take even longer to build strong brands with appeal for sophisticated Western buyers.

Geely Chairman Li Shufu acknowledged that that Volvo offers a possible entry to developed markets where the Geely name is unknown. He said very few Chinese automakers have self-developed technologies, and need to learn from foreign companies.

The strategy sounds good in theory, but execution could be a huge challenge to Geely, whose auto assets are believed to be worth less than $5 billion. The company is reportedly prepared to pay $2 billion for Volvo, which lost $1.5 billion last year.

The highest profile Chinese overseas auto acquisition to date has been SAIC's purchase of South Korea's Ssangyong, and is a stark reminder of how wrong things can go.

Ssangyong has been in court receivership since February, leaving SAIC to write off a huge amount of its investment.

SAIC also picked up MG Rover's 10,000-unit Longbridge plant in central England after a merger with much smaller peer Nanjing Automobile Group in late 2007, and aims to make a self-developed MG 6 saloon in Britain late next year. The Chinese company has said it is also eyeing U.K. light commercial vehicle maker LDV.

Battery and car maker BYD, which is 10 percent held by a unit of Warren Buffett's Berkshire Hathaway, plans to go global by exporting its "e6" electric car to the United States by the end of 2010.

"Our measurement is not quantity, and the crux is the fact that we can export (to the U.S.). There's a lot of infrastructure that needs to be prepared before that," Henry Li, general manager of BYD's exports, told Reuters at the Guangzhou auto show.

BYD will exceed its target of doubling its auto sales to 400,000 units this year, but exports made up less than 5 percent of sales, and were mostly to less developed markets in Russia and the Middle East.

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