Chairman Mao Gets Into The Car Business (SNP)(PBR)(TM)(HMC)(GM)(RTP)

The Chinese government has become more aggressive about buying foreign assets.  Chinese leaders recently said they would begin to make investments in Europe through their sovereign wealth fund. The country has capital available to buy assets driven down by the recession.

Chinalco, China’s huge metals company, recently spent $19.5 billion buying into global mining giant Rio Tinto (RTP). Rio needed the money to decrease its debt. There is speculation that China wanted to secure access to minerals. To that extent, the investment was a “strategic” one on China’s part. The Australian government considered blocking the deal but did not. Perhaps debt-laden Rio made the case that it needed the money too much to help it through the economic downturn.

In a move that may be even more important to the long-term interests of the mainland, the China Development Bank agreed to loan Brazil’s oil giant Petrobras (PBR) $10 billion for exploration projects. The South American oil company also apparently agreed to sell China-controlled oil company Sinopec (SNP) crude supplies for the balance of the year. It does not take detective work to come to the conclusion that the two arrangements were related. In late 2007, Petrobras said it had discovered new fields far off its coast that contain as much as eight billion barrels of oil and gas which would make it one of the largest reserves in the world. China will need a substantial part of that oil for its internal use over the next two or three decades. Brazil needed the capital now.

China then has the oil to provide fuel for automobiles, the metal to build them and the country seems to be ready to shop for car companies. According to Reuters, the chief of China’s large Chongqing Changan Auto Co. is prepared to take a vulture fund approach to buying assets. He said, “The longer the crisis lasts, the bigger the chance of failure or a scale-down of some American and European automakers.” It is a brutal but honest assessment of the industry and a clear and public sign that China believe that “money talks.”

China can afford to be in any business for the long haul if it is convinced that it is in its national interest. That cannot be said about any other nation in the world, especially, the United States. The American government is putting its money to work trying to save the financial system and millions of jobs.

Japanese companies were able to aggressively move into the US and European car markets in the 1970s and 1980s to a large extent because of their low labor costs. The Japanese auto firms created brands, instead of acquiring them. Toyota (TM) and Honda (HMC) developed reputations for quality and service that often eclipsed those of their competition in the West.

China plans to compress the decades that Japanese companies needed to build large branded auto firms.  It plans to complete the process in a year or two by simply acquiring existing, well-known brands. There is no reason that a Chinese car firm cannot use government money to bid for Chrysler’s assets if it is forced into bankruptcy. In France, Citroen and Peugeot are facing financial problems that could get much worse if car sales remain anemic. GM’s (GM) Opel unit in Europe needs immediate capital and may be sold at a loss for the No.1 US car company. The Chinese could pick up brands, manufacturing assets, product development personnel, and dealer networks on both sides of the Atlantic.

The only hurdle that stands in the way of China’s interest in buying car company assets in the West is the potential desire of governments in the US and EU to block buyouts. That could cause trade friction, but it raises a much greater issue. When there is not enough money to go around, which assets will be protected ? The economy has created a situation where many critical industries will have to suffer a substantial number of bankruptcies unless their governments step in. Or, their governments can let the Chinese buy them which would likely preserve jobs and the tax income from the businesses.

The US and EU may fairly quickly learn that when they finally run out of options, it is time to sell the family farm.

Douglas A. McIntyre