SAIC ‘in pole position’ to buy Opel

Industry analysts have suggested that Chinese OEM Shanghai Automotive Industry Corporation (SAIC) is in pole position to purchase GM’s Opel European operations. If the speculation that a large Chinese OEM is in position to purchase such a large European firm turns out to be correct, it also raises questions about what such a trend might mean for the tyre industry.

According to financial analysts from Morgan Stanley, a strong revival of the parent company and a stabilization of the European business create “ideal conditions to pursue strategic options for Opel” and because it is “one of the weakest links in GM’s global strategy.”

Their view is that Opel’s current cost/brand/product position is “simply not sustainable” as Opel’s EU market share has dropped from 12.5 per cent in 1995 to near 7.5 per cent today. While GM Europe may achieve break-even on an accounting basis in 2011, the Morgan Stanley analysts estimate “chronic cash burn leaves a value of around negative $5 billion.” And closing Opel down is not considered to be an option: “We estimate a full closure of Opel would cost $15 to $20 billion..with enormous reputational damage to GM.”

The suggestion is that an outright sale of Opel wouldn’t meet all of GM’s objectives and therefore the “a more viable solution” could be some kind of alliance or joint venture as the two firms already cooperate (SAIC Motor Corp. is a 1 per cent owner of GM shares and have a cooperation and distribution deal that sees it sell MG cars through GM’s UK dealer network). GM and SAIC also cooperate in the SAIC Motor Corp./Liuzhou Wuling Motors Co. Ltd Chinese joint venture they are co-owners of.

Those at Morgan Stanley are not alone in this prediction. On 22 June Nissan Motor chief executive Carlos Ghosn said a Chinese automaker could rise up from the nation’s fragmented industry to emerge as a global competitor within the next five years through an acquisition of an established automaker.

Ghosn, speaking at a Thomson Reuters Newsmaker event in Tokyo, said Nissan expected one or two Chinese automakers to emerge as a “global champion” for Beijing’s aspirations: “The Chinese government says this is a huge industry. We want to have a Chinese champion,” Ghosn said. “It’s normal. It’s logical. We were expecting this.”

Apart from Nanjing Automobile Group’s purchase of bankrupt MG Rover assets in 2005, there is form for this kind of move. (And don’t forget Nanjing subsequently was bought by SAIC and became part of the larger automotive group). Geely, for example, bought the Volvo brand from Ford Motor Co in 2010, which leads industry observers to suggest a bigger deal is possible.

Could something similar happen in the tyre business?

Could it? Yes. Will it happen? It is very unlikely that is would happen in the same way or to the same scale owing to the fact that, despite the negative effects of the recession, none of the top five tyre makers are in any way as bad shape as the auto industry. However the leading Chinese tyre makers are already hovering around the top 10 level now and – judging by the hundreds of millions these fast growing players are willing to commit to expansion and research and development – there is nothing to suggest they wouldn’t take up an opportunity to grow significantly by acquisition is the appropriate option presented itself.

What is clear is that, for the reasons stated above, it is unlikely to be the comparable with what is currently being discussed in the car market. However, consolidation in the Chinese domestic market and possible growth by acquisition elsewhere has long been foreseen. And whether or not a Chinese firm is able to – or even wants to – engage in a strategic acquisition of another tyre firm (large or small) outside the People’s Republic, the fact that a volume player like Opel could potentially be owned by a Chinese OEM means put the leading Chinese tyre makers in pole position to supply the rubber.

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