The public has dismissed Beijing Automobile Industry Corp.'s last-minute offer for General Motors' Opel business in Europe, but in fact this is not such a daft proposal.
For GM (GMGMQ.PK), selling Opel to a big carmaker in China, the world's largest auto market and one that continues to grow robustly, looks to make far more industrial sense than flogging it to one of the unit's suppliers. It is hard to see what the Canadian auto parts company Magna (MGa.TO) will really bring to the business. Its hazy business plan is based on tie-ups with Russian partners and future sales to that country. All this matters because GM will retain a stake in Opel, whichever deal it chooses.
In this regard, Beijing Auto looks a better bet than the Russians. It expects to produce 1 million vehicles this year, or about 10 percent of total sales in the country. By comparison, total Russian car output is only expected to be 700,000 units this year (down more than 50 percent from 1.5 million in 2008).
Moreover, Beijing Auto offers more upside for GM in another respect. It allows GM to hang on to a 49 percent stake in new Opel, while Magna's takeover bid with Kremlin-backed lender Sberbank (SBER.RTS) only gives GM 35 percent of the venture.
Western auto makers need to cut costs ruthlessly if they are to sell into Asian markets, which is where the growth is, rather than engage in cut throat competition in sluggish developed markets. One way of doing that is to reduce their dependence on expensive Western workers and shift production to lower cost regions.
Beijing Auto, which already has joint ventures with Hyundai and Daimler to make Mercedes cars, is keen to get access to GM technology as Opel shares the same platform with other GM cars such as Chevy and Buick or even Cadillac. While it has traditionally been an inward-looking manufacturer, it has become more outgoing since Wang Dazong, a GM veteran with a PhD from Cornell, joined late last year.
Chinese automakers and customers have a great deal of respect for German products. With Opel, Beijing Auto gains a powerful brand with big presence in Europe. Unlike Hummer, the well known but small U.S. brand which China's Sichuan Tengzhong is negotiating to buy, Opel is mass market with high volumes.
Money is not a problem for Beijing Auto, which is offering to inject 660 million euros ($923 million) in equity. Beijing Auto would only ask for 2.64 billion euros in government loan guarantees, less than the 3 billion asked by Magna.
There are plenty of sticking points that may still thwart Beijing Auto's ambition. The biggest one is politics. Beijing Auto says it wants to move factories to China after 2012. The plan might please Beijing, which is keen on developing a strong domestic auto industry, but is hardly likely to delight the German unions or indeed German politicians, who face an election in September in which unemployment will be a major issue.
Beijing Automobile also needs to convince Beijing, which wants auto makers to consolidate, that spurning domestic consolidation in favour of adding capacity is a good idea. It's hard to know how big an obstacle this might present. Beijing Automobile is a state-owned company located in the capital. One might think it had checked things out with the authorities before launching such a high-profile bid.
It looks as if GM's strategy is to use Beijing Auto's interest, along with that of Belgian investment firm, RHJ, as a way of getting Magna to tickle up its bid before July 15 -- the target date set for a deal to be signed with the Canadians.
Beijing Auto may not be a serious contender at this point, given the preferred position Magna has been given. But if no deal is sealed with Magna in the next 8 days, that might change.
-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund --
(Editing by David Evans)