Chinese Automakers’ Overseas M&A – From the Perspective of IPR

By Kevin Nie,China IP,[Comprehensive Reports]

  For China’s automotive industry, 2009 can be called the “year of M&A and reorganization”. During this year, China’s auto enterprises not only accelerated the pace of domestic M&A and integration among themselves, but also staged three big shows on overseas acquisitions. All the news regarding these acquisition details was updated quickly and occupied a prominent position in the news reports. An analysis of the three outbound M&As from the perspective of IPRs reveals the different focuses of these acquisitions.
  BAIC’s acquisition of Saab: technology only
  On December 14th, 2009, Beijing Automotive Industry Holding Co., Ltd (hereinafter “BAIC”) announced that it had closed its acquisition of the intellectual property of Saab, a Swedish car manufacturer owned by General Motors (GM), which is the first among the three proposed acquisitions.
  However, not long before that, BAIC was excluded from bidding for General Motor’s Opel unit due to disagreements over intellectual property. GM did not agree to transfer the intellectual property because Opel’s global technology platform was very important for GM and many of GM’s new products in China came from this platform. GM feared that BAIC would obtain its intellectual property through the purchase of Opel and thus would undermine its interests in China as well as the relationship with its cooperative partners.
  Despite the failed bid for Opel, BAIC did not change its original acquisition intention, i.e. “technology first”. In the words of Xu Heyi, board chairman of BAIC, “there would be no negotiation without intellectual property.” The biggest feature of BAIC’s acquisition of Saab is that there is no acquisition of the Saab brand, but the technology only.

  With its background as an aircraft manufacturer, Saab’s technology strength is unquestionable. However, as a car brand, Saab has little international influence and is unknown to the Chinese people. After experiencing years of brutal competition in the international auto market and the cross-border acquisitions, it has lost its brand advantages, which were not very strong. It has been described within the industry as a “disappearing brand”. There is definitely no need for BAIC to waste money on such a brand.
  BAIC has a very strong desire to develop its own-branded vehicle via overseas acquisitions. The reasons are simple, BAIC is a large state-owned automotive group and also the first Chinese enterprise that set up Sino-foreign joint ventures. It has two joint ventures: Beijing Hyundai Motor Co., Ltd., Beijing Benz - Daimler Chrysler Automotive Co., Ltd., and its products occupy a large market share in China. But it has failed to develop a strong brand of its own. As to this, Wang Dazong, general manager of BAIC, made the following statement: “Beijing Hyundai needs to do big and Beijing Benz needs to do better. Having a self-owned brand is our top priority. Our goal is to develop our own brand and enhance our core competitiveness.”
  BAIC’s objective in acquiring Saab is to integrate the Saab technology into its future R&D, form its own technology through the digestion and innovation of the Saab technology and finally make the “Beijing brand” competitive abroad. That is, simply speaking, to build up its own brand by making use of others’ technology.
  From another point of view, what BAIC obtained is not only technology, but also time. As Xu Heyi, board chairman of BAIC, noted in the press conference, BAIC acquired not only the technology property rights to the Saab vehicle and engine but also a set of systems, such as the entire technology R&D, quality management and supplier development and management, which can only be gradually established and perfected after a long period of investment. The acquisition of Saab will greatly save BAIC the time and cost of developing its own-branded vehicle.
  Some experts pointed out that BAIC’s selective acquisition of part of Saab’s IPRs and technologies was a relatively safe mode at present. BAIC obtained what it needed most with a small amount of money, which is widely seen as a case in which independent core technologies are established in the most direct and effective way. This selective acquisition has a high likelihood of success and has achieved a good result, and will provide a new business model for the reorganization and M&A of other automotive enterprises.
  Tengzhong’s acquisition of Hummer: brand-focused
  Tengzhong’s acquisition of Hummer case, which was considered unlikely by the industry from the outset, is still at the “preview” stage.
  Speculation abounds because the details about the proposed acquisition have not been fully disclosed. However, from the perspective of IPRs, it is certain that the focus of this acquisition is on the “brand”.
  Tengzhong’s fancy for the Hummer brand is closely related to its own production scales, technology strength and product types. As a local-based private enterprise that specializes in heavy machinery, Sichuan Tengzhong Heavy Industrial Machinery Co., Ltd. (Tengzhong) has never set foot in automobile manufacturing field to date. It is intending to enter the automotive industry through this acquisition. The downsizing of many large US automakers resulting from the international financial crisis offered the Chinese enterprises like Tengzhong a good opportunity to make acquisitions abroad.
  Under the terms of the final agreement between Tengzhong and GM, Tengzhong will acquire ownership of the Hummer brand, its trademark and trade names, as well as the right to use specific patents necessary for the manufacture of Hummer vehicles. Upon its release, the agreement was questioned by the outside. Concerns and worries revolve around the following three aspects:
  First, there has been much concern about the high energy consumption of Hummer vehicles. The big selling point of the Hummer vehicle is its exceptional off-road capacity, which, however, relies on large emissions and high-fuel consumption. The reason that the Hummer brand suffered one of the largest decreases in sales volume among the GM’s units was the result of natural selection of the market over the high energy consuming technology. The Hummer’s own features do not conform to the development policy of the Chinese industries and the development trend of the automotive industry. With regard to this point, Professor Lu Zhongyuan, deputy director of the Development Research Center of the State Council, expressed his objections: “China is implementing energy saving and emissions reduction. Yet, the Chinese enterprises want to buy Hummer, which is of large displacement and high price. This is inconsistent with the Chinese condition and the law of development. I really don’t know why they want to wade into the muddy water!”
  Second, can Tengzhong really acquire the core technologies it needs through this acquisition? The present “bold horse” (the Chinese pronunciation of Hummer is Han Ma, meaning “bold horse”) is only a “lean horse”. To feed the horse and make it big and fat, you must have “fodder”, i.e. the core production technology. Thus, the key for the effective function of this “bold horse” is the acquisition of the “fodder” formula, i.e. patent rights. According to relevant media reports, the acquisition intention confirmed by Tengzhong and GM is that Tengzhong obtains the right to use the Hummer brand while the manufacturing technology of Hummer is still retained by GM. The so-called “the right to use specific patents necessary for the manufacture of Hummer vehicles” is only a “patent license” rather than the core technology for the manufacture of Hummer vehicles. In this regard, Jiang Zhipei, the former presiding judge of the IP division of the Supreme People’s Court expressed his concerns: “You took out a handful of dollars. But if you are allowed to use the brand only, then the dollars you paid are just royalty, which is different from the real meaning of acquisition.”
  Third, people fear that it is hard to tame the “bold horse”, thinking Chinese private enterprises cannot digest the “bold horse”. After the purchase of this “bold horse”, Tengzhong, the “black horse”, needs to learn how to “ride the horse” as well as how to “feed the horse”. Only through these can it become a qualified “wrangler”.
  Some experts believed that for Tengzhong, who was adept at capital operation, the real goal of the purchase of the “shell” was not making vehicles but just an “investment behavior”. Others maintained that Tengzhong’s proposed acquisition was just speculation or an advertising feast, and by this bid it made a name for itself overnight. Some media even pointed out the Chinese private enterprise’s acquisition of the Hummer brand offered a “counter-example” for the Chinese enterprises’ overseas acquisition.
  To say the least, even if Tengzhong fails in the acquisition of the Hummer brand for various reasons in the end, the acquisition behavior itself is a success because the previously little-known “Tengzhong Heavy Industrial Machinery” greatly enhanced its own “brand” value through this proposed acquisition and is now widely known in both domestic and international markets.
  Geely’s acquisition of Volvo: obtaining both “brand and patent”
  Geely’s acquisition of Volvo is still in progress at present. On December 23rd, 2009, Zhejiang Geely Holding Group Co., Ltd. announced that it had reached an agreement with the Ford Motor Company in all substantive commercial terms relating to the potential acquisition of Volvo Car Corporation. Geely aims to sign a stock purchase agreement with Ford in the first quarter of 2010 and complete the transaction in the second quarter of the year, subject to regulatory approvals.
  Unlike the two aforementioned acquisition cases, Geely will acquire all of Volvo. It is an integrated acquisition. That is, it will buy both the brand and the patents. It is generally believed that Geely’s swallowing of the entire Volvo brand will certainly be a big campaign in that the domestic self-owned brand integrated the international brand.
  As a luxury car brand on par with Benz, BMW and Audi, the 82-year-old Volvo has been known for being “the safest car in the world”. It far exceeds Saab in brand value and technology and has researched and developed many advanced technologies and patents in automobile safety, energy saving and environmental protection.
  Presently, China’s domestic carmakers are encountering competition from international companies in the high, medium and low end markets. Geely’s acquisition of Volvo will make the competition focus on the high-end market and will be helpful in breaking the monopoly of Europe, the US and Japan in the luxury car market and technology and will raise the competition between the Chinese car enterprises and the international companies to a new level. Thus, the media set a high value on Geely’s acquisition of Volvo, thinking that it will rewrite China’s car history and Geely will be the first private enterprise to buy one of the world’s most famous automotive brands in its entirety.
  Amid the universal praise, doubts have been cast on Geely’s chances for all of Volvo’s IPRs.
  Under the agreement that both sides have reached, Geely will buy a 100% stakes in Volvo and Volvo will retain the ownership of its key technologies and IPRs as well as the right to use all of Ford’s IPRs needed for the implementation of Volvo’s established business plans; Geely will have ownership of all of Volvo’s key technologies and IPRs, and have the right to use the bulk of its IPRs, including Volvo’s IPRs in the fields of safety and environmental protection. According to the analysis of professionals in this field, it will likely be very hard for Geely to acquire all of Volvo’s IPRs because of the mutual use of the platform technology by Ford, Mazda and Volvo. Thus, what Geely will get is probably only the right to use the IPRs, which will not affect the entire Volvo operation.
  Does the 100% acquisition of Volvo’s stock mean that Geely will possess all of Volvo’s IPRs? “Not necessarily,” said Tao Jingzhou, a partner with Jones Day. “Many of Volvo’s IPRs are not necessarily Volvo’s and they are probably licensed to Volvo. The acquisition of the stock means that the acquirer becomes an owner and not necessarily means that all IPRs related to the car making belong to the acquirer, which cannot be equated.”
  The lack of self-owned brands and core technologies is the common weakness of the Chinese enterprises participating in overseas acquisitions. Behind each acquisition case is the desire of the Chinese enterprises for large international companies’ brands and technologies. Thus, the ability to acquire IPRs has increasingly become the key factor for judging whether Chinese enterprises are successful in overseas acquisitions.

  (Translated by Zhang Meichang)

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