SAIC’s Weak Overseas Stomach 上汽对海外投资风险承受能力弱
Domestic auto giant SAIC (Shanghai: 600104) may be the king of China’s car market, but it clearly has a sensitive stomach for overseas activity as reflected by its recent decision to largely abandon its wobbly India joint venture with longtime partner General Motors (NYSE: GM). I have to admit that I’m a bit mixed on my feelings about this latest news, which has seen Shanghai-based SAIC sell most of its stake in the 50-50 India venture back to GM just 3 years after the venture’s formation.
On the hone hand I can understand SAIC’s reluctance to continue investing in a poorly performing overseas joint venture. But on the other hand, Chinese companies like SAIC will need to learn that overseas investments often don’t produce immediate big profits, and sometimes they may need to take a longer-term view for such expansions if they really want to succeed. Media reports say SAIC’s move will leave GM with 93 percent of their Indian joint venture. (English article). No financial terms were given, but presumably SAIC will receive much less than the $500 million it put into the venture when the 2 partners first announced the initiative in December 2009.
Let’s take a closer look at the reports, which attribute SAIC’s withdrawal decision to the joint venture’s poor performance and also to its failure to produce any SAIC-branded models. Clearly the poor performance is the bigger part of the equation, as SAIC surely wouldn’t abandon a joint venture that was doing well and bringing in big profits.
GM’s China sales dropped 21 percent in the six months through October, even as the broader Indian car market was down a much more modest 0.3 percent. GM has been assembling cars for a long time in India by itself, and it appears that this year’s faltering growth could be largely due to the US company’s previous operations before the joint venture’s formation.
In fact, SAIC’s withdrawal seems to come just as the joint venture is rolling out 2 models that have done well in China. Last month the venture began producing the Chevy Sail, GM’s lower-end car developed specifically for the China market which has quickly risen to become one of the country’s best selling models. The joint venture also plans to introduce an SAIC- developed minivan by the end of the year, which will also be branded under the Chevy name.
With these newer, China-developed models coming into the mix, it’s a bit puzzling why SAIC is pulling out of the joint venture now. SAIC’s withdrawal also bucks a broader trend that has seen many other Chinese auto makers recently step up their exports and overseas investment to offset slower growth in their home market.
The media reports cite SAIC executives saying they see little potential for profits from the India venture in the near-term, along with the fact that the venture’s cars are all being branded with names from GM’s stable. From my perspective, SAIC seems to be withdrawing from the venture much too early and needs to show it can persevere for a while before making this kind of decision.
I’m guessing the Chinese company may still be jittery about overseas investments, following its disastrous 2004 purchase of South Korean car maker Ssangyong, which ultimately ended up filing for bankruptcy 5 years later. Perhaps the brand issue is also a legitimate one for SAIC, since the company’s success to date has come almost exclusively on the strength of GM and Volkswagen-branded (Frankfurt: VOWG) cars produced under joint ventures with those 2 western giants.
SAIC has been trying to develop its own brand to boost its operations outside its joint ventures, and may truly be disappointed that GM is insisting on use of the Chevy brand for 2 of the India joint venture’s first models that were developed in China. Whatever the reason, I have to say that this kind of behavior certainly isn’t a positive sign for SAIC and more broadly for Chinese companies looking to expand abroad.
I’ll admit that I haven’t exactly been a strong supporter of many Chinese global expansion deals in the past, mostly because nearly all of those involved acquisitions of struggling foreign brands that looked unlikely to return to health. But this India joint venture looked like a much stronger bet, pairing SAIC with a capable partner in the form of GM to produce and sell models that had enjoyed strong success in China.
If SAIC is going to ever succeed as a truly global player, it will need to develop a stronger stomach for shorter-term setbacks and focus more on its longer-term chances for success. Otherwise, it could find itself taking a permanent back seat to more aggressive domestic rivals with a bigger appetite for risk, and remain indefinitely dependent on the China market and its foreign joint ventures.
Bottom line: SAIC’s decision to pull out from its India joint venture with GM seems premature, and reflects the company’s lack of long-term vision and low tolerance for risk.
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