Auto Industry

Two-way traffic

America’s GM and ZAP in Chinese M&A transactions

One of ZAP’s early electric cars, named, you guessed it, the Xebra

Auto industry history was made earlier this month when ZAP, a US electric car company, announced that it had signed an agreement to purchase a majority stake in Zhejiang Jonway Automobile Company from its parent, Jonway Group.

What makes the acquisition special is not the deal’s size (ZAP is only paying $29 million) nor the size of the target company (Jonway Auto employs 800 people).

More significantly, it is the first time that a foreign firm has bought a Chinese car company. The Wall Street Journal reports that ZAP will acquire 51% of Jonway, with an option to acquire the remaining 49% in the first quarter next year.

The idea is to combine ZAP’s technological know-how and Jonway Auto’s manufacturing capabilities to take advantage of China’s fast-growing car market.

That is, if the deal goes ahead. There is more than a degree of uncertainty on whether it is even permissible. Naturally, Jonway Auto’s chairman, Wang Gang, thinks he is fine to proceed. He told the Economic Observer that the deal is small enough that it only needs approval from local authorities: “We had consulted [them] before. There should be no problem.” Jonway is privately-held, but some still believe that the deal is impossible in principle: “As long as the deal involves a vehicle business, foreign ownership cannot exceed 50%, which is a policy red line,” one analyst told the Economic Observer. Another said that it “runs counter to China’s auto industry policy”.

A US company purchasing a Chinese car firm might sound somewhat anomalous. But Chinese companies continue on an acquisitive spree of their own overseas.

For instance, General Motors recently sold its steering unit, Nexteer Automotive, to Pacific Century Motors, a joint venture between local car part producer Tempo Group and the investment arm of the Beijing local government. Although the financial details were not disclosed (one source told Bloomberg that the price could be around $450 million), Nexteer is a sizeable M&A target. It employs 6,200 people and had revenues of $2.1 billion in 2008.

“GM doesn’t need to be the expert in steering, they can buy that from someone else,” is how one US analyst explained the deal’s rationale to Bloomberg. “For some of these Asian parts companies, it makes sense to get into other parts businesses.”


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