Tuesday, 27 February 2018

Geely Automotive Becomes Daimler’s Largest Stakeholder: The Latest Demonstration of an ever-tightening Market

We have looked at the Auto Industry on a few occasions here in Financial Regulation Matters, with posts ranging from industry reorganisation with Peugeot’s purchase of Opel-Vauxhall, the increasing securitisation of auto finance packages, to corruption within the industry. Today, we will review the latest demonstration of an ever-tightening marketplace by looking at the news that Geely Automotive, a significant player in the Chinese electric vehicle market, has recently invested $9 billion for a 9.7%, and largest stake in German automotive powerhouse Daimler. There have been some concerns raised as to the potential effects of the deal, so whilst we shall be focusing upon those, we will also look at the sentiment that this news provides for the direction of the automotive industry.

Geely’s purchase of the Daimler shares, making it the largest shareholder, comes on the back of a concerted wave of action by Chinese automotive companies outside of Chinese markets. Geely is the full owner of the Swedish automotive company Volvo, whilst also relatively recently acquiring the London Taxi Company. Great Wall Motor has recently signed an (outline) deal with BMW to have the new electric-powered Mini Cooper cars built in China (as well as in the U.K.), whilst there have also been investments in recent years in companies like Peugeot-Citroen. There are a number of reasons for these collaborations, in both directions, but we shall get to them shortly. If we focus on the current deal for a moment, it will be clear to see why the recent wave of investment benefits all parties (although there are some added complexities to these deals).

In announcing the deal, Geely stated that the emphasis was on accompanying Daimler ‘on its way to becoming the world’s leading electro-mobility provider’, adding that to deter ‘invaders from outside’ firms must cooperate and work together through the forming of partnerships like that created by this current deal. As part of the deal, Geely is said to be looking for greater input into its electric vehicle portfolio, mostly as a result of increased emission-related regulations that come into force next year; the recent partnership between BMW and Great Wall Motor, and also between Ford and Zotye reflect the pressing need to adapt to the forthcoming rules that are designed to reduce the pollution experienced in many Chinese cities. Yet, these deals (particularly the Geely deal) have raised some issues which suggest there is a potential shift on the horizon.

Germany’s Economy Minister recently stated that the German Government would be ‘keeping a watchful eye on developments’, as fears grow that the investment could a. ‘be used as a gateway for other States’ industrial policy interests’, and b. bring about a negative effect in the development of the German automotive industry. Whilst Angela Merkel was quick to suggest that the deal was all above board, this has not been enough to stop an investigation anyway, with Reuters reporting that a German Parliamentary Committee will tomorrow question whether any disclosure rules were broken, and whether securities trading law needs to be reassessed in the country. However, whilst these financial issues (potentially) remain, the larger issue is with regards to the foreign access to Daimler’s lauded technological developments, particularly within the realms of electric vehicles which, of course, represents the future of the industry; Germany itself broke with the E.U. to an extent last year and tightened its takeover rules on the back of Chinese companies gaining access to elevated technologies in a number of sectors (it must be stated, however, that Geely is not Daimler’s only foreign investor). Whilst we wait for developments in this regard, it is worth considering the benefits for the two ‘sides’ in this equation and the potential effects of this increased collaboration.

For the Chinese companies investing in these Western automotive firms, the allure is fairly obvious; they are purchasing the technological know-how they need to fall in line with the new regulations – the first phase of these regulations comes into force in 2019 and requires firms to, essentially, contribute to the phasing out of fossil-fuelled powered cars. There are also issues in relation to the relatively low number of exports on behalf of Chinese automotive manufacturers, with recent endeavours resulting in very little progress; the sentiment is that by potentially incorporating this technological know-how Chinese cars will be seen as much more viable options for car purchasers around the world. For non-Chinese firms, the need to work with Chinese companies is both enforced on one hand, and sensible on the other. Non-Chinese companies must work with a Chinese enterprise to bring their products to the Chinese market by way of Chinese regulations, but the suspected development of the automotive marketplace in China over the next few decades makes for incredible investment opportunities for foreign firms; the world’s largest car market now, is predicted to grow substantially, with the usage of electric vehicles estimated to stand at 176 million cars in China alone by 2040 (equating to 46% of all cars on Chinese roads). Volkswagen’s recent $12 billion investment in electric vehicles within the Chinese market is just the latest demonstration of non-Chinese companies realising the immense potential that the Chinese regulations will bring to the industry. However, what may be the effect of this phase?

Ultimately, but certainly not definitively, there is a potential shift in the midst. The increased investment into the Chinese ‘infrastructure’ in this particular industry carries a gamble for these non-Chinese companies, and that is mostly based upon ‘brand-power’; Chinese endeavours outside of their own market have fallen short mostly because of a perception surrounding the quality of the products being offered, but if the product is enhanced significantly (as this wave of investment will surely do), then competition in this tight-knit marketplace may be about to explode. If that happens, on the basis that the divergence created by ‘brand-power’ will be reduced, then there are likely to be many casualties, with a number of ‘well-known’ automotive brands being enveloped within the larger conglomerates; Geely Chairman Li Shufu’s declaration that he is attempting to build a ‘new Volkswagen’ is a telling one, with the potential for just a very small number of massive conglomerates ruling the industry becoming that much more of a reality.

Keywords – automotive industry, Daimler, Geely, China, Business, Finance, Electric Vehicles, @finregmatters

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