2010-08-03 10:19

HONG KONG - Chinese auto parts makers are moving into the overseas merger and acquisition (M&A) fast lane, eyeing a distressed global market to close a technology gap with world leaders to meet sizzling demand at home and eventually sell overseas.

Several major deals have already been inked and more are expected in the months ahead as the global industry retrenches, planting the seeds for a future crop of Chinese titans to compete with the likes of Robert Bosch and Denso.

But missteps, typical in many of China's major M&A deals to date, could also leave the sector saddled with headaches that drove foreign parts makers into difficulty in the first place.

China's automotive sector has grown at breakneck speed in the last decade, passing the United States last year to become the world's top auto market.Yet its parts sector remains fragmented with 20,000 manufacturers lacking the capital needed to invest to meet higher quality and emissions standards and move up the value chain.

Many Chinese companies, eyeing technologies ranging from engines to braking and transmission systems, are now hiring investment banks, management consultants and law firms to study possible deals.

"We have been advising a number of Chinese companies, which are actively looking at overseas acquisitions in the United States and European markets," said Michael Jiang, a KPMG partner and corporate finance co-head of Automotive China.

Jiang forecast the coming wave of purchases could see a deal that breaks the $1 billion mark. That would be more than double the largest deal to date, the purchase of General Motors' Nexteer steering components unit by a joint venture of Beijing's Tempo Group and the Beijing government for a reported $450 million last month.

Seeking scale

Other notable deals include Geely Automobile paying $40 million last year for Australian gearbox maker Drivetrain Systems International, a supplier to Ford Motor Co, Chrysler and Sangyong Motor.

And China's largest independent automaker Wanxiang Group, which owns Shenzhen-listed Wanxiang Qianchao, has also been active, buying more than 20 companies in North America, Europe and Australia over the last few years.

Other major independent parts makers that could drive consolidation include Weichai Power, which bought French engine producer Moteurs Baudouin last year, Nasdaq-listed SORL Auto Parts and Zhejiang Wanfeng Auto Wheel Co.

Ailing global players that could be looking to sell part or all of their operations include struggling US companies like Delphi, Lear and Visteon.

Jiang mentioned Visteon as one company that was rumored to be in talks to sell assets to Chinese buyers, though a Visteon spokesman declined to comment on market speculation.

Most Chinese parts companies currently lack the size to foot it on the global stage.

Seven of China's 10 biggest component makers are foreign companies, and about 70 percent of the country's $160 billion auto supply market is occupied by foreign or joint ventures

Of the three Chinese companies in the top 10, all are units of the country's leading automakers - SAIC Motor Corp, FAW Group and Dongfeng Motor, KPMG said. Most of those specialize in lower-end parts.

"The market is becoming so significant, so large and the auto supply industry is lagging a little bit behind in terms of building the necessary size and scale," said Ivo Naumann, managing director of business advisory firm AlixPartners. Global leader Bosch posted revenues of nearly $50 billion in 2009, even as few independent players in China logged sales of more than $1 billion.

Reuters