Tuesday, March 10, 2009

Why a Chery-Jianghuai Merger would be a Tough Sale

There has been a lot of speculation in recent weeks of the possibility of a merger between Chery Auto and Jianghuai Auto, and I must admit that I have also taken part in the speculation. Still, this potential combination makes sense for a number of reasons.

  • Chery and Jianghuai are both headquartered in Anhui Province, so a merger would make sense from both a logistical and managerial standpoint.
  • They are both manufacturers of independent brands (自主品牌), so a combination would help to ease the R&D expense burden.
  • The Central Government really wants to see consolidation in this sector, and has increased recently increased the volume of its demands. A merger entered into by Chery and Jianghuai under their own terms would probably be preferable to one engineered from above.
  • Finally, Chery has been waiting for years to list itself on the stock market, and a merger with Shanghai-listed Jianghuai would give Chery instant access to equity markets.

However, despite all the good reasons for a merger to happen between these two, politics will likely intervene -- if not to stop a merger altogether, at least to ensure that it doesn't happen quickly or easily.

Chery, one of China's top-ten automakers, was recently designated by the Central Government as one among the "4 small" automakers that would be encouraged to expand regionally. Jianghuai, also among the top-ten, was overlooked in the listings, meaning that it will most likely be aquired by one of the others.

The difficulty with this possible arrangement is that Jianghuai's ultimate controlling shareholder is the Anhui Provincial Government while Chery's controlling shareholder is merely the City of Wuhu.

In an ideal world, this should not matter, if a combination makes business sense, then it should happen. But in reality -- and in China -- hierarchy is pretty important. There are a lot of egos at stake.

The Central Government, by designating Chery as one of the intended survivors of consolidation, may have unwittingly increased the difficulty of what should have been a naturally good fit.