This one was a shocker to me, but makes all to much since....
China is Changing its Currency and Trading Strategy. Will it Buy General Motors?
by Nic Duquette
The very idea that one of the iconic corporations of American manufacturing could be bought up by Asians may strike most Americans as impossible. However, it is not only feasible, but the recent revaluation of the Chinese currency suggests that this may be exactly what China is planning. Like the auto worker in the Johnny Cash song, China's government and manufacturers may be assembling all they need one piece at a time.
General Motors -- like its Detroit neighbor, Ford Motor Co. -- is not doing well. It is deeply indebted, and its recent downgrade to junk bond status means it pays very high interest on that debt, with a limited marketplace to borrow more. Its obligations to its unions are very high, and its health care liability is expensive and growing very rapidly. Its cars are unexciting, poorly branded and have a reputation for poor quality and high maintenance costs. GM has been offering deep discounts just to get people to buy all these bad, ugly cars, even offering them at the employee discount rate in a recent promotion, with the result that their auto business has not made money in quite a while. GM's profits come not from cars but from the financing packages they bundle with the cars. GM is no longer primarily an auto manufacturer, but a bank.
If you don't think General Motors is takeover bait, think again. Though it controls over a third of the American auto market, the total market value of GM stock is a paltry twenty billion dollars. That may sound like a lot of money, but Anheuser Busch, for example, is worth $36 billion, as is Apple Computer. Colgate is worth $27 billion. Electronic Arts, the video game designer, is worth $19 billion. UPS is worth $80 billion, and they just deliver packages. General Motors' mythic stance in the American mind is a great exaggeration.
Even though GM is bigger than Toyota, Toyota could buy GM up without too much trouble if it wanted to. Toyota's stock is valued at $124 billion, and its credit is sterling. If the world's number two automaker hasn't bought up GM, it's mostly because with Toyota's reputation, desirable vehicles, stylish design and affordable labor, it's better off continuing to invest in its own development.
Chinese manufacturers, on the other hand, are eagerly pursuing growth by acquisition. As Daniel Gross explained very well in Slate, struggling American businesses are worth a lot to China simply by virtue of being American. China is trying to grow its economy at about nine percent every year though export manufacturing. There are 1.3 billion people in China waiting to get angry and overthrow their government as soon as the wealth stops spreading and the manufacturing jobs stop sprouting up across China's industrial belt. That rate of growth simply can't be sustained by artificially low currencyand cheap labor forever. For this reason, Chinese appliance firm Haier made an aggressive offer for Maytag, since the simple acquisition of the dying appliance firm would let the Chinese bidder start manufacturing under a famous American brand name, with American distribution channels and contacts already in place, immediately, rather than languish as a no-name brand for decades and slowly building market share. The recent CNOOC bid for Unocal may be driven as much by a hunger for refinery work as for oil.
China has been keeping the value of its currency artificially low for a long time relative to the dollar. If the Chinese central bank did not buy large amounts of US government debt, the dollar would normally become very weak, while China's heavy exports would make its currency stronger. The Chinese strategy so far has been to keep the dollar artificially high and the Chinese currency artificially low so that Chinese goods are artificially cheap in America. As a result, Americans have been buying up Chinese goods and Chinese manufacturing has expanded very rapidly.
If China is revaluing its currency now, after years of truculent refusal, I don't believe it's simply because it's caving in. China is the most isolationist player on the world stage. The Bush administration has consistently overestimated its willingness to do anything about, for example, the despotic maniac developing nuclear weapons next door in North Korea. If China is revaluing its currency now, I do not think it is being diplomatic, but changing its strategy from one of being mere suppliers of low-cost goods to one of acquisition of American firms with readymade brand names and distribution channels. A more valuable yuan will make it easier for Chinese firms to buy American firms, since a billion yuan will buy a lot more dollars. Acquisitions will let Chines firms not only to compete at the factory level but all the way to the storefront.
There's one more piece to the puzzle. Why did I pick out General Motors? Because Chinese auto manufacturer Chery may have already reverse-engineered the design of GM's most popular car in China. The Spark doesn't look like anything GM makes in the USA, but as I understand it, GM's business plan is dependent on reusing undercarriages and other designs across nameplates. The Chery QQ could very well be an attempt to learn how to make GM's vehicles in a Chinese factory before Chery even owns GM. Am I too suspicious? Perhaps. But if you hear of Chery ripping off GM's light truck designs, buy General Motors stock and wait for China to make you an offer.
China is Changing its Currency and Trading Strategy. Will it Buy General Motors?
by Nic Duquette
The very idea that one of the iconic corporations of American manufacturing could be bought up by Asians may strike most Americans as impossible. However, it is not only feasible, but the recent revaluation of the Chinese currency suggests that this may be exactly what China is planning. Like the auto worker in the Johnny Cash song, China's government and manufacturers may be assembling all they need one piece at a time.
General Motors -- like its Detroit neighbor, Ford Motor Co. -- is not doing well. It is deeply indebted, and its recent downgrade to junk bond status means it pays very high interest on that debt, with a limited marketplace to borrow more. Its obligations to its unions are very high, and its health care liability is expensive and growing very rapidly. Its cars are unexciting, poorly branded and have a reputation for poor quality and high maintenance costs. GM has been offering deep discounts just to get people to buy all these bad, ugly cars, even offering them at the employee discount rate in a recent promotion, with the result that their auto business has not made money in quite a while. GM's profits come not from cars but from the financing packages they bundle with the cars. GM is no longer primarily an auto manufacturer, but a bank.
If you don't think General Motors is takeover bait, think again. Though it controls over a third of the American auto market, the total market value of GM stock is a paltry twenty billion dollars. That may sound like a lot of money, but Anheuser Busch, for example, is worth $36 billion, as is Apple Computer. Colgate is worth $27 billion. Electronic Arts, the video game designer, is worth $19 billion. UPS is worth $80 billion, and they just deliver packages. General Motors' mythic stance in the American mind is a great exaggeration.
Even though GM is bigger than Toyota, Toyota could buy GM up without too much trouble if it wanted to. Toyota's stock is valued at $124 billion, and its credit is sterling. If the world's number two automaker hasn't bought up GM, it's mostly because with Toyota's reputation, desirable vehicles, stylish design and affordable labor, it's better off continuing to invest in its own development.
Chinese manufacturers, on the other hand, are eagerly pursuing growth by acquisition. As Daniel Gross explained very well in Slate, struggling American businesses are worth a lot to China simply by virtue of being American. China is trying to grow its economy at about nine percent every year though export manufacturing. There are 1.3 billion people in China waiting to get angry and overthrow their government as soon as the wealth stops spreading and the manufacturing jobs stop sprouting up across China's industrial belt. That rate of growth simply can't be sustained by artificially low currencyand cheap labor forever. For this reason, Chinese appliance firm Haier made an aggressive offer for Maytag, since the simple acquisition of the dying appliance firm would let the Chinese bidder start manufacturing under a famous American brand name, with American distribution channels and contacts already in place, immediately, rather than languish as a no-name brand for decades and slowly building market share. The recent CNOOC bid for Unocal may be driven as much by a hunger for refinery work as for oil.
China has been keeping the value of its currency artificially low for a long time relative to the dollar. If the Chinese central bank did not buy large amounts of US government debt, the dollar would normally become very weak, while China's heavy exports would make its currency stronger. The Chinese strategy so far has been to keep the dollar artificially high and the Chinese currency artificially low so that Chinese goods are artificially cheap in America. As a result, Americans have been buying up Chinese goods and Chinese manufacturing has expanded very rapidly.
If China is revaluing its currency now, after years of truculent refusal, I don't believe it's simply because it's caving in. China is the most isolationist player on the world stage. The Bush administration has consistently overestimated its willingness to do anything about, for example, the despotic maniac developing nuclear weapons next door in North Korea. If China is revaluing its currency now, I do not think it is being diplomatic, but changing its strategy from one of being mere suppliers of low-cost goods to one of acquisition of American firms with readymade brand names and distribution channels. A more valuable yuan will make it easier for Chinese firms to buy American firms, since a billion yuan will buy a lot more dollars. Acquisitions will let Chines firms not only to compete at the factory level but all the way to the storefront.
There's one more piece to the puzzle. Why did I pick out General Motors? Because Chinese auto manufacturer Chery may have already reverse-engineered the design of GM's most popular car in China. The Spark doesn't look like anything GM makes in the USA, but as I understand it, GM's business plan is dependent on reusing undercarriages and other designs across nameplates. The Chery QQ could very well be an attempt to learn how to make GM's vehicles in a Chinese factory before Chery even owns GM. Am I too suspicious? Perhaps. But if you hear of Chery ripping off GM's light truck designs, buy General Motors stock and wait for China to make you an offer.
