China's Next Target. G.M.?

Nobody believes that the failure of CNOOC to buy Unocal means the end of China’s acquisition drive. The Chinese off-shore oil company withdrew its bid last week in the face of political opposition in the U.S. The question is this: will Chinese companies retreat into buying obscure, non-threatening assets. Or will they make another big move?

If you thought that the CNOOC/Unocal affair was a donnybrook, imagine the upheaval that would occur should a Chinese automobile company make a bid to take over General Motors Corp., the world’s largest automobile manufacturer. The prospect of such a battle is not so far-fetched.

Chinese automobile companies are on the move, seeking worldwide assets and shortcuts to global brand recognition through overseas acquisitions. In late July, the Nanjing Automotive Co.< purchased Britain’s MG Rover Group and its engine-making subsidiary Powertrain Ltd.

Reportedly, the Chinese company picked up the assets of the venerable British automobile maker for a song -- about 50 million pounds (approx. $87 million) -- because the company, Britain’s last indigenous automobile maker, had declared bankruptcy in April. The Shanghai Automotive Industry Corp (SAIC) recently bought a 49 per cent share in South Korea’s Ssangyong Co.

Meanwhile, General Motors looks more and more like a target for acquisition, adrift and vulnerable to the whims of any investor with a few billion dollars to spare. The company’s vulnerabilities are well known: big first quarter losses, plant closings, junk bond rating and big pension and medical costs.

The company’s total market capitalization has fallen to around $18.5 billion, which, coincidentally, is about what CNOOC was offering to buy Unocal, so it would seem G.M. is by no means out of the price range for any big Chinese auto company, especially one with good connections with state-owned banks.

Buying General Motors’ automotive division would fit neatly into China’s strategy of searching out struggling but globally recognized brand names. Lenovo pioneered a winning tactic last year when it bought the PC manufacturing division of IBM while leaving to IBM’s shareholders some of the other more lucrative sidelines.

The American giant’s shareholders might welcome a deal that relieves them of the dead weight of the manufacturing division and leaves them much more profitable assets, such as the GMAC finance unit, satellite television among others. In recent years GMAC has been far more profitable than G.M.’s automotive division.

It would be hard to make much of case against any Chinese bid to acquire G.M. on national security grounds. But it would amount to a huge assault on the American psyche given GM’s iconic status as a symbol of American industry. It would far eclipse the angst that Americans felt in the 1980s when the Japanese made trophy purchases, such as Rockefeller Center.

Presumably, the Chinese company would try to structure any acquisition deal in a way that preserves or seems to preserve American jobs, offering the politicians a Faustian bargain: oppose the sale on “national security” grounds even if it means costing thousands of auto worker jobs.

CNOOC argued that it would save jobs that Chevron would eliminate in a cost-cutting move. But the argument either wasn’t believed, or it didn’t cut any ice with the politicians. Of course, a Chinese purchaser might just pack up the tools and dies and ship them to China, as Nanjing Automotive Group apparently plans to do with the engine division of MG Rover.

Would the Chinese entity find itself in a bidding war with Toyota or some other Japanese company? Not likely. The Japanese would prefer to avoid a head-on assault on G.M. Compared with the bumptious Chinese, the Japanese are older and wiser players in the automotive trade and political wars. Japan has learned not to flaunt its successes in America’s face.

In April Toyota’s chairman Hiroshi Okuda actually suggested that his company might raise its prices in the U.S. to give rival G.M. breathing room to ride out its difficulties. Why so generous? They figure G.M.’s collapse would lead to a political or even a consumer backlash against its own products.

And there may be another reason to help nurse G.M. along. Toyota would prefer that G.M. continue making most of its cars in the U.S. where it may never achieve cost-effectiveness, rather than move operations to China where it could suddenly become very competitive with Japan.