Li ‘s lesson: it pays to buy German
“Western wind, Northern tide, when will the worship of foreign might end?
Chinese cars, flying high, becoming giant eagles in a-decade-long-strive!”
Li Shufu, founder of Zhejiang-based carmaker Geely, penned this verse in 2006, seven years into his project to manufacture what he rather dismissively described as “four wheels plus a sofa”.
But Li was also frustrated that Chinese consumers were shunning homegrown brands for foreign models. So he courted overseas automakers – first buying Volvo, the Swedish brand and later Manganese Bronze, the maker of London’s iconic black cabs. Last year he scooped a controlling stake in UK-based Lotus Cars and a 49.9% interest in Malaysia’s Proton Holdings, in another flurry of acquisitions (see WiC368). And on February 23 the serial dealmaker Li (see WiC22) made another dramatic move by acquiring a 9.7% stake in Mercedes-Benz maker Daimler, becoming its single largest shareholder. The $8.9 billion transaction sent its Hong Kong-listed shares 6.5% higher the following trading day.
Some think Li made the investment in a bid to fend off the industry’s public enemy number one: tech firms which are trying to elbow their way into the sector with predictive algorithms and autonomous driving (think Google and Uber and their Chinese equivalents Baidu and Didi Chuxing, all of which are engaging in autonomous driving technology.) “No current car industry player will be able to win this battle against the invaders from outside independently,” he said. “In order to succeed and seize the technology highland, one has to have friends, partners and alliances and adapt a new way of thinking in terms of sharing and united strength. And we have to act now.”
Through Stuttgart-based Daimler, Li is entangling Geely with state-owned Chinese automaker BAIC Group, which produced 71% of the Mercedes sold in China last year. Daimler has also partnered with Warren Buffet-backed BYD to sell electric vehicles under the Denza brand.
But Steve Man, an analyst at Bloomberg Intelligence, reckons that Geely’s stake in Daimler was steered more by its desire to tap into China’s commercial vehicles market, as opposed to passenger cars. “If you look at the recent flurry of Tencent acquisitions – Yonghui [a supermarket operator] and Vipshop [an online apparel retailer] – that’s a good signal that e-commerce activity, logistics and shipping activity is on the rise,” he said. “There’s a greater need for commercial vehicles, specifically heavy trucks.”
Man speculated that Tesla’s launch of an all-electric truck had got Geely’s attention. Mercedes-Benz has also announced plans to trial its own battery-powered trucks this year, and Geely bought an 8.2% stake in AB Volvo, which focuses on trucks too (see WiC 392).
It remains to be seen what Li has in store for Daimler – an important consideration in Germany where there is a wariness of Chinese investment (see WiC396). Certainly, the local press was concerned by Li’s investment, asking how he was able to build up his stake in the open market without going public along the way. Investors must disclose when they cross regulatory thresholds on voting rights. But those rules do not apply to all types of financial instruments and Li seems to have accumulated some of his stake by buying derivatives.
“Against the backdrop of the current case, the federal government will examine whether the existing rules are sufficient to provide an adequate level of transparency, or if further guidelines are necessary,” admitted an Economy Ministry report to the German parliament.
Meanwhile Daimler says it will ramp up production of electric plug-in and hybrid vehicles to meet China’s new electric vehicle sales targets, which stipulate that new energy models must comprise 10% of all cars made in China starting from 2019; rising to 12% from 2020.
The regulatory requirements also explain Daimler’s decision to co-invest $1.9 billion in its second factory in China with its partner BAIC to produce both conventional Mercedes cars and new electric vehicles. (China is already the German premium group’s biggest market, accounting for 26% of its Mercedes car sales last year.)
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