Dongfeng Courts Peugeot, Ford Zooms
New reports are saying that Dongfeng Motors (HKEx: 489), one of the nation’s top automakers, remains committed to diversifying beyond its 2 core Japanese partnerships by seeking a major new equity tie-up with France’s Peugeout (Paris: PEUP). Dongfeng’s worries are easy to understand, since most of its sales come through its joint ventures with Japanese automakers Honda (Tokyo: 7267) and Nissan (Tokyo: 7201). That dependence has made its sales quite volatile over the past year due to boycotts of Japanese brands by Chinese buyers during a territorial dispute between Beijing and Tokyo. The pain being felt by the Japanese titans has provided a strong opportunity for US rival Ford (NYSE: F), a longtime laggard which is on track to match or even pass the 2 of Japan’s big 3 automakers in China this year.
All of this shows just how fluid the Chinese auto market is, unlike more mature markets like the US and Western Europe where the position of major players changes much more slowly. Homegrown Chinese automakers have become caught in the middle of this volatile market, with today’s superstars often finding themselves struggling just a year or 2 later due to stiff competition and lack of brand loyalty among Chinese consumers.
Chinese automakers with big-name foreign joint venture partners are somewhat protected from the volatility, since those foreign partners can often provide the technology and marketing savvy to stay competitive as times change. Dongfeng thought it had found such stability through its Honda and Nissan partnerships, but got a big surprise when sales of those 2 brands in China plummeted last fall at the height of a territorial dispute between China and Japan.
Now media are reporting that Dongfeng has entered talks to buy 30 percent of struggling Peugeot through a 10 billion yuan ($1.6 billion) investment. An unnamed source said the talks are still in very early stages, following reports in September that the pair were exploring a possible tie-up. Dongfeng already has a small joint venture with Peugeot. It also was reportedly in discussions with Peugout’s French rival Renault (Paris: RENA) last year to form another joint venture (previous post). But presumably those talks never produced any results, since no joint venture was ever announced.
From my standpoint, I do think that Dongfeng is smart to look for non-Japanese partners to protect itself from the volatility caused by this kind of political dispute between Beijing and Tokyo. But its choice of partners in first Renault and now Peugeot looks misguided to me, as both of these companies are relatively minor players and Peugeot is struggling. I do like the fact that Dongfeng only wants to buy a minority stake in Peugeot instead of the whole company. But even so, it could discover such an investment could be costly if and when Peugeot’s prospects continue to slide.
From these 2 struggling companies, let’s turn our attention quickly to Ford, which is moving in the opposite direction amid a major China build-up over the last few years. Despite its global prominence, Ford has always been a relatively small player in China due to its late arrival to the market. But that has changed in the last few years amid a multibillion-dollar investment campaign in new factories with local partners like Chang’an Auto, many of which have been coming on stream these past 2 years.
Media are reporting that Ford now expects to sell from 900,000 to 1 million cars in China this year, about 50 percent higher than a year ago. (English article) By comparison, Toyota and Honda are targeting 900,000 and 750,000 vehicle sales, respectively, while Nissan is targeting 1.25 million. Ford’s rapid rise, together with the Japanese automakers’ tumble, underscore the fact that China is a market with huge opportunity. But it also shows the market is fraught with both commercial and political risks that can cause a company’s prospects to quickly change.
Bottom line: Dongfeng’s pursuit of an equity tie-up with Peugeout looks good conceptually, but the French automaker is a poor choice of partner.
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