Chinese car companies risk major mistakes

With the Zhejian Geely Holding Group completing its $1.8 billion acquisition of Ford Motor's Volvo division, all the signs seem to point to an expansion overseas by Chinese automakers. But it's domestic mergers and acquisitions that can help mainland China auto companies build the scale they need at this stage.

Consider first the global aspirations of China's major car companies. In addition to the Geely-Volvo deal, Beijing Automotive Industry Holding Corp. (BAIC) recently acquired Saab technology from GM, and Sichuan Tengzhong put in a bid for GM's Hummer.

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Even though the Hummer deal did not go through, the message is clear: China's leading automakers intend to become major competitors in U.S. and European markets. And they have the cash to acquire global technology, brands and distribution reach. They can access loans from government banks as well as raise private equity capital from local funders, such as Bohai Industrial Investment Fund Management Co. and CDH Investments, or from global investors like Goldman Sachs and Berkshire Hathaway.

The catch is that cross-border acquisitions are harder to pull off. Merging two business cultures always comes with challenges, which tend to be magnified when the acquired company is located in a different country than the acquirer. Sometimes, the obstacles arise from the complex interplay between China's state-owned enterprises and its government regulators. Sichuan Tengzhong withdrew its bid for Hummer after months of delay because it failed to win Beijing's approval for the deal.

Read the full article on Forbes.com