Cars: new tie-ups in web, R&D

A couple of interesting news bits are coming from the auto space, where a top foreign website operator is buying into the China car story, and where two major domestic manufacturers are set to announce a new tie-up. The former news is seeing US-based AutoTrader purchase a stake in Chinese peer BitAuto (Nasdaq: BITA), reflecting the arrival of a new generation of auto-related foreign firms to the fast-growing Chinese auto market; meantime, the second news is seeing a new R&D tie-up between Chery Automobile and Guangzhou Auto (2238.HK), reflecting the industry's overheated state and perhaps signaling the resumption of a stalled but much-needed consolidation.

Let's look at the web news first, which has AutoTrader, a US provider of car-related information and services, purchasing 21.8 per cent of BitAuto for US$58.5 million. BitAuto shares jumped 17 per cent after the news came out, giving the Chinese company a healthy but still relatively modest market capitalization of about US$240 million.

Even after the price jump, the price paid by AutoTrader still implies a market value of US$268 million, meaning the US company paid a premium of around 30 per cent for its stake. AutoTrader's decision to take a minority stake in BitAuto is an interesting one, as many foreign companies have tried this route before, only to discover their Chinese counterpart has no interest in becoming a true strategic partner.

Still, outright acquisitions of Chinese web firms by foreign companies have fared even worse in most cases, often ending in outright failure. The purchase of a minority stake offers the foreign buyer the advantage of having a chance to become acquainted with a potential Chinese partner before deciding whether to make a bid for the entire company; Walmart (NYSE: WMT) and US travel services provider Expedia (Nasdaq: EXPE) have both used this strategy with some success. Look for this new online partnership to follow a similar road, with AutoTrader perhaps making a bid for all of BitAuto in the next two years if the tie-up goes smoothly.

Meantime, Chinese media are reporting that Chery and Guangzhou Auto will announce a landmark deal to pool their R&D resources later this week. This deal looks quite interesting because Chery has been struggling for more than a year now, due in large part to its failure to develop popular new models amid stiff competition from well-funded foreign rivals.

Guangzhou Auto has also fallen on hard times in the last few months due to its reliance on joint ventures with Honda (Tokyo: 7267) and Toyota (Tokyo: 7203) for most of its business. All of the Japanese brands have reported plunging sales in the last two months due to the territorial dispute between Japan and China over a small island chain, and that weakness looks set to continue into next year.

Guangzhou Auto's brand name is largely unknown to most Chinese consumers, and the company would like to build up its own product line to provide it with a more stable business. This new R&D partnership would thus benefit both partners, and is probably the best kind of tie-up that China's auto sector can hope for right now since outright mergers are much more difficult due to local government interference.

Look for lots of smiles and fanfare to accompany the announcement of this new tie-up later this week, though I would give it only a 50 per cent chance of success. But if it does succeed, the deal could also potentially pave the way for closer collaboration between Chery and Guangzhou Auto and perhaps even a real merger in the next 5-10 years.

Bottom line: AutoTrader's purchase of a stake in BitAuto could be a prelude to a future buy-out bid, while Chery's R&D tie-up with Guangzhou Auto could also result in closer collaboration.