SHANGHAI -- Of the two Chinese companies chasing foreign auto brands, Sichuan Tengzhong Heavy Industrial Machinery Co. has already given up its pursuit of Hummer. How much chance does the second -- Zhejiang Geely Holding Group Co. -- now have of acquiring Volvo?
Well, I believe Geely has a good chance of success. It has something that Tengzhong never had -- the nod from the Chinese government.
In fact, gaining government approval is now, and will continue to be the foremost task of any Chinese company, state-owned or private, when it seeks to acquire foreign auto assets.
So why is government approval so vital?
Well, if the company is state-owned, the necessity of government approval goes without saying. When Beijing Automotive Industry Holding Co. undertook the major venture of buying Saab assets, its owner of course had to agree.
Privately owned companies often buy foreign brands because they want to acquire technology, transfer it back to China and then produce at low cost to sell into the domestic market. This, indeed, was the plan of both Tengzhong and Geely. To build any new manufacturing facilities in China, they needed permission from the government.
If no production in China were planned, a Chinese company might think it could go ahead and acquire a foreign manufacturer by means of an offshore vehicle. This, indeed, was the plan of Tengzhong, which owns a company in the British Virgin Islands.
But this approach only works so far.
China didn't start privatizing its economy until the late 1970s. Due to their short history, private Chinese companies are relatively small. They don't have enough capital to make acquisitions overseas on their own.
To get the money they need they have to borrow from a bank. And the banks in China are nearly all state-owned or controlled.
So let's look again at Tengzhong. After the government's refusal, there was no way it was going to build Hummers in China. And if it had gone ahead regardless and tried to buy the brand through its offshore vehicle, it would have found it nearly impossible to raise the money needed.
Given these two obstacles, Tengzhong was forced to call it quits.
Geely, however, has been luckier. The company's total assets amount to only 20 billion yuan ($2.9 billion). So it obviously doesn't have enough money to swallow Volvo unassisted. As recently as 2005, Ford paid $6.4 billion for Volvo.
According to the company Web site, Geely's president Li Shufu was given the opportunity to talk to Chinese President Hu Jintao last week on the sidelines of a national meeting in Beijing.
Li updated Hu on Geely's strategies on how to expand abroad. The president then nodded his approval and said all sides concerned should support Geely's efforts to go global.
This bodes well, both for Geely's fundraising and its plans to produce Volvo cars in China.
In short, the most important thing needed for any Chinese automaker to buy foreign assets is government approval. Without it, all efforts will almost always be in vain.