Why Buy? The Chinese sequel

Yesterday’s post profiled (mainly) Indian firms on the prowl for strategic assets in the international arena. The overnight news brings a further example from the other BIG emerging market – China.

Beating fellow vehicle manufacturer Chery to the punch (in terms of picking up some of the wreckage from the collapse of the US auto giants), privately owned Sichuan Tengzhong Heavy Industrial Machinery has scooped up that symbol of US extravagance – Hummer – from GM.

The world’s ugliest faux military SUVs will continue to be produced on US soil for now, but presumably this play is about accessing the underlying technology and production standards (and a recognised, if somewhat tarnished, brand) to fuel Chinese production in the future.

This certainly wont be the last acquisition by cashed up Chinese auto aspirants (Holden, anyone?). This is a buyer’s market for strategic assets.

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Is advertising enough?

The power of marketing is a hotly debated topic among strategic management scholars (and, of course, out there in the real world). It remains highly contentious whether efforts to persuade consumers of the newness and uniqueness of your offerings can overpower the reality of the underlying offering.

An interesting case in point is the current US campaign by Nissan for their Cube vehicle. As the New York Times article explores, the firm is going out on a limb and trying to present the car as a “mobile device”. They have built a campaign around a range of familiar jargon from the online world – “search engine, storage capacity” etc – in the hope that this will appeal to a different audience and differentiate this product in what might well be the harshest buying climate for cars in a century.

Here’s some of the promo material.

It strikes me that in the end this is just a slightly quirky and boxy car with no particularly innovative features. Surely consumers want more than an oh-so-cool tagline?

Volvo to head East?

A fascinating prospect has emerged from the drawn-out demise of Ford’s international network of operations (and perhaps the firm itself). It seems they may sell their Volvo business to a Chinese suitor.

In an auto world where consolidation is the buzz word for all, a major international play from the overpopulated Chinese manufacturing sector was only a matter of time. This would give Geely a huge boost in size. They will more than double in size immediately.

Picking up Volvo for a pittance is surely attractive, especially given the Swedish firm’s competencies in safety and design. It will allow Geely to learn very quickly about exporting vehicles into developed markets (something which is still pretty rare for Chinese auto manufacturers).

The huge challenge will be extracting the Volvo manaufacturing out of Sweden, untangling labour relations and trying to transplant what is surely a very advanced production facility into an unfamiliar environment.

This takeover is being compared with Tata’s acquisition of Rover. The big difference is that Geely is unlikely to be paying substantially over the money for the assets. This is yet more evidence of businesses going cheapin the current crisis.

How will multinationals protect themselves?

There is a growing realisation across the business press that the Global Economic Crisis is transforming the international trade environment to one that is much more protectionist than we’ve seen in recent decades.

The general push for freer trade has been a strong driver of globalisation since the mid-1970s at least. Tariffs have tumbled along with other barriers to trade and investment. Through the GATT and WTO, and a huge swathe of other multilateral and bilateral trade agreements, goods and services have been easier to move around than ever before (particularly once we factor in lower transport costs).

While the US in not alone in imposing some trade-restricting provisions within their proposed stimulus packages, they certainly have the biggest flow-on effects in terms of triggering likely tit-for-tat responses from other governments.

The bailouts and nationalisations were seeing around the world in banking and auto sectors are conceivably just the tip of the iceberg in terms of measures that would certainly be seen as subsidies under any sensible definition. They are trade-distorting and trade-preventative in terms of impact.

As the IMF is already reporting a huge decline in international trade over the past three months, and the World Bank is forecasting more declines.

The question that is too often ignored in these discussions is what likely impact this will have on the behaviour of multinational firms. It perhaps shouldn’t surprise given the complexity of their choice sets.

Much of the protection push revolves around shielding industry and jobs in domestic economies. A sizable chunk of the firms being protected and subsidised are themselves firms who trade goods across borders, both as exports and also via imports of inputs, intermediate goods (and sometimes final goods).

Increased protection at home may shift the balance back towards domestic activity. Any advantage in international markets derived from subsidies may be undone by retaliatory responses from other national governments (lobbied by their own local players). Any rises in tariffs and other trade barriers may serve to untangle existing value chain configurations as multinationals abandon internationally distributed production processes as too costly, unwieldy and/or unpredictable.

For so long the movement of productive activities around the globe was derided as a race to the bottom. What will we call a retreat to home base?

And what about those multinationals for whom home is but a small portion of their global markets? Are they part of the protection plan of other nations? That would certainly seem to be the case in Australia.

Network externalities & electric cars

Further to my post of last week about US electric companies potentially boosting the sales of electric cars through bulk orders, the state of Hawaii’s has endorsed a proposal to develop the network of recharging stations necessary for large-scale adoption of the technology.

Hawaii joins a list of countries and locations reportedly jumping on board, including Israel, Denmark, San Francisco, Renault-Nissan, and Australia (through yet another Macquaire consortium).

The driver of all this is Shai Agassi and his Better Place startup. The firm clearly has a very strong grasp on the need to build partnerships when dealing with products so reliant on network externalities. Put simply, unless consumers can be convinced that shifting to electric vehicles is not a hastle, then most won’t bother. Likewise, until they can be sure there will be enough consumers, most providers of the necessary infrastructure, like “filling stations”, won’t bother either. Better Place is trying to break this impasse. Now let’s just hope they are backing the right technology, and also, are not just building monopoly via technology lock-in.