It’s been a fascinating couple of weeks watching the Rover-Shanghai Automotive deal fall apart, writes Paul French of Access Asia. Shanghai has been abuzz, at least the press have, about the comings and goings of the deal: the will it, won’t it, the ‘it’s on’ and then the ‘no sorry it’s off’. I got to witness all this as an observer here in Shanghai. With no CNN or BBC available in my apartment and the city’s Internet playing up for who knows what reason getting news of the deal from Britain has been patchy at best.
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Few of us here in Shanghai really believed the deal would ever go through. There were too many obstacles – obstacles with Chinese characteristics. First off SAIC agreed an original deal with an extraordinarily high price – even for, at the time anyway, a company as cash rich as SAIC was. However, immediately two flies landed in the soup. Rover leaked the deal to the press and the famous billion pound price tag became public. This did not best please the Chinese who though the agreement was secret. Secondly, the State Council, the exceptionally powerful government body in Beijing that ratifies these deals, was wavering and that is never a good sign.
Shanghai Out of Fashion
Both SAIC and Shanghai itself had got on the wrong side of the State Council. China’s new leadership of Hu Jintao and Wen Jiaobao are most definitely not Shanghai men. The previous leadership of Jiang Zemin and Zhu Rongji most definitely were. Jiang and Zhu stood for rapid growth based on high levels of foreign investment with little attention paid to the peasantry, a lot of attention paid to the urban masses and most attention paid to Shanghai. Shanghai rose anew and became the model for the rest of China. Then the new guys came along with a different message – compassion and a balanced society. Fast growth is out, sustainability is in and Beijing is not convinced that the Shanghai growth model is sustainable. That Hu has only visited Shanghai twice, and both times briefly, since taking power is indication enough that Shanghai’s privileged days are over. Shanghai is not popular in Beijing and being shunned is a very Chinese way of showing it.
SAIC is not much more popular these days. Already its rapid growth appears to be dwindling in falling sales and price cuts. Many on the State Council did not think SAIC’s purchase of South Korea’s bankrupt Ssangyong was very clever. Buying Rover, which many consider another dog of a car company, is not raising Beijing’s level of confidence in SAIC.
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By GlobalDataA Whole New World
However, the main problem, which is often not fully appreciated outside China, is that the Chinese car market has changed massively since the deal was first muted. 2002 and 2003 were fat years for the Chinese car market and the manufacturers – it seemed their long awaited dream of China’s car revolution was finally happening. China’s entry into the WTO had lowered prices and allowed the banks to lend to prospective car purchasers. The flood gates opened and pent up demand appeared to boost the market. Easy money and an eager yearning for a car meant good sales at high prices and some of the best margins in the business on sales. SAIC profited from this as did their two major joint venture partners GM and VW. The cash rolled in and SAIC realised that now was the time to acquire technology – in common with all Chinese car companies SAIC has virtually no proprietary technology. Ssangyong was acquired after Ford and GM had passed on it during South Korea’s fire sale of assets after the Asian financial crisis. This was the environment that the original deal was negotiated in.
In 2004 things changed. The banks stopped lending due to higher than expected default rate by borrowers – in 2003 30% of car sales in China were financed by car loans, in 2004 less than 5%. Sales started to dry up and the manufacturers, who had all ramped up production in anticipation of good times ahead, went into a vicious war of price cuts that still continues. Customers, unable to borrow, sat back and waited to see how low the prices would go. Sales growth was still 16% in 2004 – very healthy, except when compared with the 81% growth figure in 2003. It was a considerable slowdown – even the luxury brands enjoying good sales saw slowdown – BMW sold 16% less cars in 2004 than 2003. No carmaker hit their sales target, all cut prices, margins were slashed. Geely, a private Chinese carmaker that produces very cheap cars, was one of the few who claimed an increase in sales – 20% to 101,000 cars in 2004. However, their original sales target was 160,000 – they missed by 59,000 cars. The pattern was repeated across the industry.
What this means is that in 2005 we have a market continuing to slow and 450,000 cars made but not sold parked up around China. Even as the manufacturers roll back their ambitious production plans this year we could have 750,000 unsold cars in China – in a market with virtually no second hand sales. And still the car companies launch new models at lower prices – GM alone is launching 10 new models at this week’s Shanghai Auto Show. Little wonder that the CEO of GM China rapidly resigned a couple of weeks ago citing ‘family reasons’. The general consensus is that he has seen the writing on the wall and decided to leave the mess to his successor.
Cherry Picking
So to many of us here in Shanghai the sharp change in the dynamics of the Chinese car market meant that SAIC was never going to go for the original deal despite the pleadings of British ministers, the personal visit of Towers or the government’s bridging loan. SAIC has its own problems – lower sales, higher steel prices, rudderless foreign joint venture partners. With Rover heading into receivership SAIC are hoping that they can cherry pick the bits of Rover they really want – namely the engine division. The idea that they ever really wanted Longbridge was farcical. When over a dinner recently I mentioned the potential challenges Longbridge could offer a Chinese management team, the SAIC people at the table nearly vomited at the mere thought of it. R&D, tech was all they wanted.
So I don’t know exactly what Patricia Hewitt, Tony Blair and John Towers have been saying in the UK but here in Shanghai there is an immediate problem with falling sales and rising costs and China throwing a billion quid Britain’s way was about as likely as fish and chips becoming China’s national dish.
Paul French is a Shanghai-based consultant with market research and business intelligence consultancy Access Asia – paul@accessasia.co.uk
