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Friday, May 8, 2009

By Keith Fitz-Gerald
Investment Director Money Morning/The Money Map Report

As deep as the U.S. auto industry's financial crisis seems to be, there may actually be a fairly simple solution. Sell out to China. Nearly a decade ago, I warned that Detroit's Big Three, General Motors Corp. (NYSE: GM), Ford Motor Co. (NYSE: F) and Chrysler LLC had better learn to speak Chinese if they wanted to survive. I've repeated that warning many times since. Now, it appears that the idea is finally entering mainstream thought. China may well be Detroit's lifeline. From some ñ chiefly those who don't understand that Detroit has largely failed to make a passing grade in an increasingly global economy ñ my warnings have attracted a lot of criticism. That's unfortunate, because by adopting such a defensive posture, these critics have missed the real point I was making: Chinese companies would initially have no interest in taking over Detroit, but over time would likely demonstrate a deep interest in acquiring key parts of the U.S. auto sector ìvalue chainî that could support the expansionist efforts of their domestically produced brands. Distribution channels would be very attractive. And so would auto-parts producers, since they are a key element of such post-purchase ìaftercareî initiatives as maintenance and repair. The only real question, I noted at the time, was how big the lag would be between Chinaís acquisition of the U.S. auto-parts companies and the international expansion of its own brands. Absent the current financial crisis, I estimated the lag would have been five to 10 years. Now, however, that lag time has dropped to as little as five years. The reason: The financial crisis has eviscerated the market values of so many Western companies, creating bargain-basement opportunities for cash-rich Chinese companies that are so alluring that they were unfathomable a decade ago. Events are playing out just as I predicted. Enter the (Red) Dragon

Back in November, as GM and Chrysler tottered on the bring of complete collapse ñ and after Japanís Toyota Motor Co. (NYSE ADR: TM) had reportedly considered, and ruled out, the purchase of one, or both, of these carmakers ñ Chinaís SAIC Motor Co. Ltd. and Dongfeng Automobile Co. Ltd. ñ were reportedly working on a play to buy the two embattled U.S. firms, Huliq News and the 21st Century Business Herald both reported. Said one China auto-industry executive (who requested anonymity): ìWe really want to acquire some of our global counterpartsí core technologies now, because prices are so low.î His sentiment was echoed by Xu Liuping, chairman of Chongqing Changan Automobile Co. Ltd., Mainland Chinaís fourth-largest automaker, who recently said that ìthe longer the [global financial] crisis lasts, the bigger the chance of [a] failure or [of] a scale-down of some American and European carmakers.î For the most part, Chinese companies are still learning to do business overseas. They are not yet comfortable leading the charge in overseas markets, which is why so much of their overseas expansion efforts and shopping sprees remain largely confined to natural-resource sectors and, in the auto sector, auto-parts players. Top-tier managers of China-based companies recognize that the acquisition of overseas assets can strengthen their companyís domestic competitiveness. And with a market as big as Mainland China, thatís logical. But what might not occur to Western business leaders is that Chinese executives donít yet view themselves has having global-branding expertise, particularly when it comes to the so-called ìdesign elements.î Sign up below... and we'll send you a new investment report for free: "Credit Crisis Report."

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