Beijing Automobile Speeds up Brand Development by M&A
By Doris Li, China IP,[Comprehensive Reports]
Uproar arose in the Detroit Motor City at a Chinese private company’s proposed purchase of Hummer. However in China, overseas M&A became increasingly popular and domestic auto makers are eager to join in the competition. Since GM, Chrysler and Ford were trapped in financial trouble, Opel, Hummer, Volvo, Saab, etc. started to seek buyers. The Chinese auto companies made deals so frequently that it is bound to “shake up” the global automotive industry!
Heavy thunder with little rain
Early in June 2009, Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd. (“Tengzhong”), a private enterprise located in southwest Sichuan Province, declared with high profile that it intended to purchase GM’s Hummer. The breaking news caused uproar and also attracted the media’s “bombardment” of course. What’s the true story behind Tengzhong? How could it get such a large appetite to swallow this overweight Hummer?
Tengzhong has never set foot in automobile manufacturing; it has not even produced a single wheel. Its registered capital is only several hundred million dollars, which is considered to be a stumbling block for buying Hummer. In the face of voices of doubt, Tengzhong said that it has reached an agreement with Hummer on the purchase plan. Even though, the “marriage” between Tengzhong and Hummer has not obtained approval from their Chinese parents (the Ministry of Commerce and other organs in charge), it remains a question whether Tengzhong will move forward or retreat at the next stage. Still, the success by way of public opinion may satisfy Tengzhong anyway.
Geely expects another hit.
On March 27, 2009, Geely announced that it successfully acquired the world’s second-largest automatic transmission company, DSI (Drivetrain Systems International). Geely made this purchase a big plus for its strategic reform. This deal also made Geely the first automaker to succeed in overseas acquisition this year.
On December 23, good news came from Volvo, which has been chased by Geely for nearly one year. Ford announced that it had reached agreement with Geely on the sale of Volvo. If the acquisition proceeds smoothly, the two sides will sign an agreement in the first quarter of 2010 and complete all transactions in the second quarter. However, the deal still needs to be approved by the relevant departments. Everything is in place, waiting for the signatures of “parents”.
Spokesman on the Volvo project of Geely Holding Group Co., Ltd., Yuan Xiaolin, made the following statements related to IP acquisition in Volvo case: firstly, Geely is the preferred bidder of Ford and its goal is to own 100% of the equity of the Volvo corporation; Secondly, Volvo will retain its ownership for key technologies and intellectual properties, as well as the right to use certain intellectual properties held by Ford necessary for the company’s established business plan; Thirdly, Geely will own the key technologies and intellectual properties via Volvo and keeps the right to use a number of intellectual properties, including Volvo’s IP in safety and environmental protection.
Beijing Automobile put Saab in bag.
On December 23, 2009, a press conference was held in Beijing on Beijing Automobile’s acquisition of Swedish Saab’s IP as well as the release of an independent brand vehicle platform strategy. Beijing Automobile announced that it has acquired Saab Automobile’s intellectual property for USD 200 million.
In the acquisition of Saab, Beijing Automobile took an indirect approach in the first place by buying the stake of Koenigsegg. On August 17, 2009, the Swedish sports car manufacturer Koenigsegg and GM reached an agreement on the acquisition of Saab. On September 9, 2009, Koenigsegg announced that it signed a memorandum of understanding with Beijing Automobile on Saab. Under this MOU, Koenigsegg will invest about USD 800 million to buy a 100% stake in Saab, while Beijing Automobile would make up Koenigsegg’s cash gap with 275 million euros and then hold share in Kenisaike. However, after Saab ended its bankruptcy protection period on August 20th, its production recovered very slowly. The EU examination procedure has not been completed and Saab’s recovery plan has yet to be implemented. Therefore, Koenigsegg Group decided to quit this deal on November 25, which forced Beijing Automobile to adjust its strategy immediately. Beijing Automobile seized the opportunity when Saab was in urgent need of funds to maintain its operation and reached a final agreement on a direct purchase. Beijing Automobile spent USD 200 million on the transaction and obtained the intellectual properties owned by Saab.
Beijing Automobile said that USD 200 million is far less than the value Saab brings. Still, an analyst of auto industry from Minzu Securities Cao He, believes that the price of nearly USD 200 million is a bit high and 150 million would have been more cost-effective. “This is mainly because Beijing Automobile cannot wait,” Cao stated. He believes that compared with SAIC, Beijing Automobile missed the best time for bargain-hunting.
What has Beijing Automobile got?
What did Beijing Automobile exactly buy from Saab with USD 200 million? At the press conference held for the acquisition, Chairman of Beijing Automobile Xu Heyi said Beijing Automobile had obtained the advanced core technologies, which provide favorable conditions for the R&D of vehicles with an independent brand. Both the Saab 9-3 and 9-5 series passed the European five-star safety test and were rated as the safest cars by the Swedish Insurance Company. They were also rated as the car with lowest C02 emissions. The carbon dioxide emission technology of Saab engine also ranks at the world’s advanced level, reaching the EU-V standard.
With this acquisition, Beijing Automobile gained the complete quality and manufacturing process system, including the three major platforms of Epsilon, GM2900 and GM2400, which lays a good foundation for absorption, R&D and manufacturing of product technology. It is expected that in the future, Beijing Automobile will develop two or more car models for each platform. Meanwhile, it has also purchased the three main Saab models: 93 Sedan, 95 Sedan and the 95 Hatchback.
Besides the platform, Beijing Automobile has also bought the Saab 2.0L Series and 2.3L Series (eight engines in total), of which four main models are 2.0T, 2.0T, 2.3T and 2.3T. At present, the performance of home-made 2.8-3.5 engine is not yet comparable to the Saab 2.3T engine. Therefore, the introduction of these engines will contribute to the development of independent brands.
● Complete technical design specifications, standards and processes for vehicle, system and components.
● Experimental / trial plans meeting the design requirements, processes and reports, CAE analysis model, planning and reporting.
● Supplier Development and Management System (SOR) - system, component procurement, technical specifications, requirements and accreditation system.
● Vehicle Quality Management System.
● Vehicle Manufacturing System: stamping, welding, painting, assembly process.
In addition, Beijing Automobile purchased two of Saab’s gearboxes, namely the F25 and F35. The gearboxes will further accelerate the pace of independent brand development.
A senior auto industry analyst, Jia Xinguang still believes that the acquisition of Saab is not so meaningful to Beijing Automobile. Moreover, the Saab 9-5 and 9-3 platforms have been discontinued because of obsolete technology and low practical effect. However, Beijing Automobile has its own understanding on this issue. A great amount of R&D is required for developing an independent brand strategy. It would cost 600-800 million Yuan and 5 years or so to develop a similar car model at home, while it would cost one billion Yuan to commission a foreign company for development. Added up with the follow-up development and technology, the total costs would exceed 1.2 billion RMB. In short, Beijing Automobile spent 1.5 billion Yuan in products worth 3-4 billion Yuan and saved at least 5-6 years of development time.
Chairman of Beijing Automobile Group Xu Heyi spoke highly of the intellectual property purchase. He said: “The composition of these five parts is a housekeeping capability, which is cultivated by the company with several decades of painstaking efforts. It is such a valuable experience that it usually can’t be bought because no one would sell. Based on my experience, the last four parts have never been sold to the Chinese or taught to the Chinese people. Therefore, we divide this IP acquisition into five parts. The first part is essential and the other four parts are even more important.”
Jia Xinguang also thinks highly of the acquisition of Saab’s turbo-charged engine and transmission-related technologies. He said that at present mainstream domestic auto enterprises are obsessed with turbo-charged projects. Saab is quite mature in this technical field, which could be a very good supplement and promotion for the development of a turbo-charged engine in Beijing Automobile.
It is the key to make full use of intellectual property.
Beijing Automobile revealed that in order to fully utilize Saab’s vehicle platform and engine technology, the company will strive to develop 3-4 models and 2-3 car turbo-charged engines in the next three years, covering all the market segments of high-class cars and becoming a strong competitor in the market. The models to be developed include the hatchback, B-level sedan cars, A-level sedan cars and CUV.
Chairman Xu Heyi said, “In the R&D system, our strategy is to open and innovate, to inherit and develop, to grasp the core and maintain our edge and to create a world-class automotive research center. In the operation system, we strive to achieve a higher level, keep our characteristics and build a first class, internationally competitive passenger car operating system with an independent brand.”
It has been revealed that Beijing Automobile has built a comprehensive organizational structure for independent brand cultivation, and established a management team which includes a number of overseas and domestic experts and engineers. It plans to invest 33 billion Yuan within the next three years on model research and development and construction of a manufacture base as well as a power train plant.
So far, Beijing Automobile has already signed an agreement with Tongzhou District on the power train project, which will start construction on February 28, 2010. General Manager Wang Dazong revealed that the power train and vehicle will enter the market after 2011.
It is indubitable that Beijing Automobile will make use of advanced design and R&D technologies, which is conductive to enhancing its own R&D and innovation and speeding up access to the rank of having an internationally independent brand. Xu Heyi stressed that this IP acquisition is all about the ownership of intellectual properties rather than the right to use. Therefore, the intellectual properties now belong to Beijing Automobile unconditionally and without any restriction. Those who want to re-use them must pay for them.
Although Beijing Automobile turned into a “landlord” by this acquisition, intellectual property will also bring in some “additional superfluous” issues. For example, when the passenger cars developed based on these intellectual properties enter the international market, they may face problems related to geographical legal issues of patent rights, infringement litigation, trademark use, license fee and so on. However, since Beijing Automobile has acquired Saab, it must have made full preparations for this. If Beijing Automobile can make full use of purchased intellectual property rights successfully, it may become a role model for China’s overseas M&A!
(Translated by Li Yu)
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