By on April 14, 2010

Western auto makers in distress are in the cross-hairs of Chinese auto makers that are riding one of the largest car booms in history. When Geely closed its deal with Ford over Volvo, we wrote: “Government owned companies like FAW, SAIC, Dongfeng, or BAIC will watch closely how privately owned Geely will digest the Volvo purchase. If successful, western car companies will be on their shopping list again.” They already are.

According to Reuters, China’s Dongfeng “ said it sees opportunities for mergers and acquisitions in the global auto sector still reeling from the fallout of the global downturn.”

Dongfeng “will closely monitor opportunities for overseas acquisitions,” Chairman Xu Ping told reporters in a news conference today.

He added that a rising Yuan, which many believe will take place in the next few months, would further strengthen Dongfeng’s position in making any acquisitions.

Succumbing to pressure from (or making a deal with) the U.S., China is expected to let its currency float, at least a bit more than now. That will make American union leaders happy. They think jobs will come back stateside in droves. They most likely will be disappointed. A stronger Chinese currency makes foreign sourced products – or companies – cheaper for China. China can go up the value chain. Instead of competing with the U.S. with cheap stuff, there will be competition for more expensive stuff. For instance for cars.

As China visionary Jack Perkowski notes in his blog Managing The Dragon,

“Japan’s exports to the United States continued to increase in the mid-1980s, even after the country allowed the yen to appreciate significantly against the dollar. Similarly, China’s exports to the United States increased by 40 percent from July, 2005 to July, 2008, a three year period which saw the Yuan appreciate by 21 percent.”

A stronger Yuan will add to the inflationary pressure on America while the U.S. printing press is already in overdrive.

Be it as it may, Chinese car makers will translate their cash and possibly a higher Yuan into buying foreign expertise. State-owned Dongfeng, the Chinese joint venture partner of Nissan, Honda, and PSA is sitting on $2.55b in cash. If they need more, the government will provide it.

According to Reuters, “Chinese auto makers are eager to buy technologies and brands from overseas to enhance their competitiveness in the U.S. and European markets.”

Ever since I have been writing for TTAC, China’s #3 Dongfeng has been seen as a player. In November 2008, China’s 21st Century Business Herald said that Dongfeng was interested in buying GM and/or Chrysler. If they only would have. At that time, both companies still had some value, and the U.S. tax payer would have been spared the bail-out cost.

Instead, the U.S. has embarked on silly trade wars about tires and gift wrapping ribbons that have not brought a single job back to the U.S. By insisting on a higher Yuan, the U.S. lowers the price on foreign know-how and assets, and hastens the speed by which the U.S. auto industry will be wiped out by the Chinese.

But explain that to the knuckleheads at the UAW. They only learn one way: The hard way.

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12 Comments on “China’s Dongfeng On The Prowl For Western Beauties...”

  • avatar

    >>Succumbing to pressure from (or making a deal with) the U.S., China is expected to let its currency float, at least a bit more than now. That will make American union leaders happy. They think jobs will come back stateside in droves. They most likely will be disappointed.

    Most of the those labor jobs will move to Thailand, Vietnam, and Bangladesh.

    They won’t return to the US, and they most definitely won’t return to pro-Union states. If you have to think, the biggest threat the UAW has are themselves. If it wasn’t for their rapid-Unions, foreign car makers would have first made cars in Detroit, where there is established supply-chain and trained labor. Now, Mercedes, BMW, VW, Toyota, Hondas, Nissans, etc have established themselves in the South where the infrastructure and supply-chain now exists. And Detroit is in shambles (those could have been factories & jobs for them).

    The higher Yuan will give much stronger purchasing power overseas. I would say even Ford may be a good target, they are looking up, but they are still shouldered with massive debt. A sudden Chinese cash-infusion would help them, the Chinese likely won’t take a majority-stake, but it would be beneficial for both Ford and the Chinese. Ford can further expand in China, and Chinese can expand in the West as well as Latin America.

  • avatar

    I love Bertel’s articles. They provide valuable insight into the Chinese auto industry and I don’t think there are many people out there as qualified as he is to talk about it. It’s a very nice change from the China bashing I am used to see all over and that have been written by people who probably have never been there in the first place. Thank you!

    Herr Schmitt, Sprechen Sie Deutsch?

  • avatar

    “According to Reuters, “Chinese auto makers are eager to buy technologies and brands from overseas to enhance their competitiveness in the U.S. and European markets.”

    I guess we know what’s gonna happen to GM during it’s IPO. SAIC buys GM NA operations.

  • avatar

    There are very plausible scenarios where the yuan gets devalued rather steeply.

    The more I dig, the more the RE bubble in China looks exactly like the bubble in LA, MIA, or, closer to the neighborhood, Dubai.
    We’re now at the monthly ‘greater fool’ flip stage. We’re also seeing preposterous projects being floated – just like the ones Dubai was replete with, right before the tank.

    Anytime one has to rely on a speculative value rise to make money on RE, it’s definitively over-priced.

    While it is possible for the committee to turn off the loans and construction, it seems highly unlikely anyone is going to step-up and ruin their Party career by acknowledging that this year’s determined growth target is not achievable.

    The thing that matters about a RE bubble is that when it pops, construction stops. When construction is ~50-60% of GDP, the knock-on effects on the greater economy are rather spectacular.

    • 0 avatar

      I hope you are right. I’d love a softer Yuan.

    • 0 avatar

      I just don’t see any analysis that provides a scenario that doesn’t involve the bubble popping. From tulip bulbs, beanie babies, and Dubai real estate, it always comes. Especially in real estate.

      There’s fresh news today that after another huge jump in property prices in March, the gov is going to try some new measures. Who knows, they may be able to prevent a nasty crash. In a totalitarian state, all things are (kinda) possible.

      At least the China has a pile of foreign currency reserves – which will be helpful.

      A softer Yuan would certainly make labor sourcing easier (presuming you have the issues that everyone running a plant in China seems to be complaining about currently).

  • avatar

    Why does everyone think that the fixed exchange rate is to hold the value of RMB down?

    I lived in China for 17 years and witnessed the RMB going from $0.5 down to about $0.1. I can tell you, the fixed exchange rate was there to hold the value UP, not DOWN.

    Just look at the USA, if the government wants to de-value the currency, they don’t need to fix anything. Just print more paper money.

    Only governments that face an ever-declining currency would post an official fixed exchange rate and disallow any free exchange. Look at Soviet Union and very recently, Argentina.

    My prediction is: if RMB is allowed to float, it will go up against the USD in the first year (due to propaganda) and then it will be flushed down into the toilet, not unlike the Soviet Ruble.

    • 0 avatar

      The RMB has been pegged to the dollar since July 2008. The US dollar has also been depreciating in value, hence the RMB also depreciates.

      This forces other countries to also devalue, readjust, their currency. Let’s also keep in mind that the RMB is kept low by shouldering more US debt (treasury bonds).

      Also, the RMB isn’t going to be allowed to float, rather China will be ‘easing’ its policy so it can appreciate a bit more.

      Let’s keep in mind, allowing the RMB to freely float will actually hurt the US. It means massive rise in consumer prices, being that everything is built in China. This means an equivalent boost in inflation, a danger being that we are already in a period of extravagant QE.

      This will create a very large implication for the US bond market, and manufacturing jobs will most certainly not be returning to the US.

  • avatar

    Add to my previous post:

    If the Americans really think that the RMB is undervalued, they can invest in RMB. Like, accept RMB as payment for American exports to China.

    But really, they won’t, because they only say it, they don’t mean it.

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