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

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.

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Published: 9:32am, 5 Nov 2012Updated: 10:34am, 5 Nov 2012

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.