Thursday, January 12, 2006

Delphi's Pain, China's Gain?

Last year was a tough year for the American automobile industry. One doesn’t need to rehearse the bad news emanating from the major carmakers, General Motors and Ford. And in October the country’s largest maker of automobile parts, Delphi, filed for bankruptcy. Some predict the same fate this year for G.M.

The Chinese, of course, are watching these developments closely. It is no secret that China wants to develop a world-class automobile industry. Indeed, it already makes and sells more than 2 million cars annually. This month Geely became the first Chinese automobile maker to have a display at the Detroit Automobile Show; the simple little sedan stole the show from the gee-whiz concept cars from Detroit and Japan.

Last year I raised the possibility that some Chinese manufacturer might make a bid for G.M. It has a lot of logic. It fits into the general strategy of the Chinese to buy their way into international brand recognition by picking up venerable but struggling brands. Lenovo led the way in late 2004 when it purchased the PC division from IBM.

In 2005 Chinese interests also bought the venerable Huffy Bicycle Co. in Ohio and made an unsuccessful bid to buy Maytag. Some think that Chinese concerns are eyeing the appliance division of General Electric, although the company denies that it is for sale.

Certainly, the Chinese have the money. The state-owned CNOOC was willing to pay to a sizeable premium to beat out Chevron for the Los-Angeles based Unocal in last year’s brouhaha. It offered about $18 billion for the company, which, coincidentally, was roughly equal to G.M.’s then market capitalization. It has fallen since then.

But after the beating the Chinese took over the CNOOC/Unocal deal last year, they may not want to open another donnybrook by making a direct assault on such an iconic target as G.M. Such a bid would be an earthquake of unprecedented proportions. Beijing would probably not approve the bid, never mind Congress.

It is much more likely that Chinese will look for bargains in the underbelly of the automotive industry, if you will, among the companies that make the parts and tires that the Big Three assemble into automobiles, including the giants in the field, Delphi and Visetron.

Wanxiang (pronounced wahn-shong), China’s largest automobile parts maker, already has a strong presence in America’s industrial upper Midwest. In addition to supplying the major automobile makers, it has invested in six American companies, although the company declines to spell out exactly which companies and how large its stakes are.

Unlike CNOOC, which was a state-owned enterprise though run as a private company, Wanxiang is a private corporation and has no apparent state backing. Wanxiang America however, has built a pool of money, now estimated at about $100 million, that it has set aside specifically for acquisitions.

Wanxiang makes no secret that it is eyeing Delphi closely. “We have a keen interest in acquiring Delphi’s assets,” said Pin Ni, chief of Wanxiang’s American operations, as quoted in the automobile trade press. Delphi’s official response, for the moment, is “no comment.”

In October Delphi filed for Chapter 11 protection under U.S. bankruptcy laws after reportedly losing about $957 million on sales of $1.86 billion. Even before the filing, it had placed several of its operations in a buy-sell or fix category.

Lu Guanqui, who started Wanxiang with his wife and five others with the equivalent of about $500 in the late 1960s, is eager to expand operations and move into more sophisticated technologies in American through acquisitions. Why America? “It’s easier to make money there,” he says smilingly.



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