Last Chance For China To Buy Secrets For Cheap

For more than a year, I had been on my very own propaganda mission in China (and I’m still here in Beijing to tell it.) I had urged Chinese parts manufacturers to go overseas and to buy parts houses at firesale prices. By moving closer to the customer and up the value chain, by turning from contract manufacturer to marketer, the Chinese manufacturers could realize much higher profits. By turning from contract supplier to systems house, they would be about 5 years ahead of the technology curve: A systems house is tied into the development of a car. The Boschs, Magnas, Federal Moguls of this world harbor more secrets than a Tom Clancy novel. A year ago, I wrote in China’s Gasgoo: “While the idea of buying a foreign car brand for cheap is good, the practicable choices are limited. So it’s back to buying foreign parts companies. There will be many bankrupt foreign parts companies this year to choose from, all quite cheap, most with an established presence and manufacture in China.”

Someone seems to listen, finally. But maybe a little late …

Automotive News [sub] reports that “Chinese auto parts makers are moving into the overseas M&A fast lane, eying a distressed global market to close a technology gap with world leaders to meet sizzling demand at home and eventually sell overseas.”

According to the article, seeds are being planted “for a future crop of Chinese titans to compete with the likes of Robert Bosch and Denso.”

In a rare case of diplomacy, Automotive News says the Chinese “parts sector remains fragmented with 20,000 manufacturers.” More than year ago, yours truly put it more bluntly in a Chinese publication: “My biggest grief with the Chinese parts industry is that buying parts in China is very hard. The Chinese parts industry is losing huge amounts of business because the Chinese parts industry remains very inaccessible to many foreign buyers.”

Worse, the alleged “Chinese parts industry” is mostly a foreign industry that has plants in China. Seven of China’s 10 biggest component makers are foreign companies, and about 70 percent of the country’s $160 billion auto supply market is occupied by foreign or joint ventures. The 20,000 plus Chinese manufacturers do the drudge work for the foreign-owned titans.

Supposedly, the Chinese are getting tired of this. According to Automotive News, many Chinese firms are finally hiring investment banks, management consultants and law firms to study possible deals to buy foreign makers of more complex technologies.

“We have been advising a number of Chinese companies, which are actively looking at overseas acquisitions in the United States and European markets,” said Michael Jiang, a KPMG partner and corporate finance co-head of Automotive China.

Some deals already happend. Geely bought Australian gearbox maker Drivetrain Systems International, a supplier to Ford and Chrysler. Nexteer was sold by GM to a Beijing consortium with government backing. In March 2009, Delphi’s brakes and suspension business was bought by a consortium consisting of China’s Tempo Group, China’s Capital Iron & Steel Co. and the Beijing government. GM is a big seller of automotive know-how to China. At the same time, GM complains it is the target of industrial espionage, as China’s Global Times reports.

Jiang Yong, director of the Economic Security Studies Center at the China Institutes of Contemporary International Relations, snidely remarks that theft accusations are “usually made by companies whose technical capabilities are declining.”

No need to spy if whole companies are up for sale.

Who else could be on the sell side? Automotive News: “Ailing global players that could be looking to sell part or all of their operations include struggling U.S. firms like Delphi, Lear and Visteon.” Struggling German systems supplier Continental that found itself caught up in a takeover play gone wrong, has also been repeatedly rumored as a potential candidate. Together with the German auto industry, Continental performed an amazing recovery lately, and seems to be off the target list for the time being.

Continental might not be the only deal that is going away. As seen in Europe, the industry is recovering, and Chinese firms may have to act fast before currently distressed sellers disappear.