Ford's bid for Daewoo a desperate defensive move

Ford's bid for Daewoo a desperate defensive move
REUTERS

TOKYO, JULY 6: The elevation of US Ford Motor Co's to pole position in the race for South Korea's Daewoo Motor has not only surprised auto industry watchers, but divided them sharply into two camps.

There are those who see long-term strategic sense behind such a deal. But others see a flustered defensive move and warn: be careful of what you bid for, you might just get it.

"Ford's Asian strategy is coming across as confused. It already has a strategic partner in Mazda and it seems to be doing stuff it doesn't need to do," says Ryuichiro Inoue, Asia auto analyst at the Mitsubishi Research Institute in Tokyo.

Ford offered $6.9 billion -- considered high -- for the debt-burdened automaker, beating arch rival and favorite General Motors Corp, which had put in a joint bid with Fiat SpA GM is believed to have offered $4-5 billion.

DaimlerChrysler AG with Hyundai Motor was reported not to be interested in a full takeover.

The bid is non-binding. Ford has six weeks to go through Daewoo's books before submitting a final proposal and is expected to cut its offering price. If talks fail, other candidates can submit new bids.

Conventional wisdom had it that GM, with long ties to Daewoo, was the obvious partner and that Ford was only in the race to drive up the price.

Some even say that Ford, not expecting to be named sole bidder so early on, miscalculated and now may face the embarrassing problem of how to exit from the auction gracefully.

But the size of bid and the latest moves by rival automakers have convinced most analysts that the world's second largest automaker has a genuine interest.

"They are serious about it," says US Goldman Sachs analyst Gary Lapidus. "If your growth markets are emerging markets like Eastern Europe and Asia, if your paradigm is I gotta play ball in those markets, Ford needed it more than all of its primary competitors."

Daewoo, in addition to providing access to South Korea, a market hitherto mostly closed to foreign firms, has also been aggressive in Eastern Europe, with a large presence in Poland.

DaimlerChrysler's recent alliance with Hyundai locked the only other potential South Korean partner out of the picture and Fiat, GM's latest partner is also strong in emerging markets.

"Daewoo is a perfect fit for Ford which wants to raise its Asian market share to 10 per cent by 2005," said Richard Pyo, analyst at Credit Suisse First Boston in Seoul.

But other analysts point to Daewoo's many potential problems, including a militant Union representing a workforce that needs cutting back and the possibility of more hidden debt.

They also question the notion that emerging markets will yield much in the way of profit, saying that while ultra cheap cars like Daewoo's will be popular for some time, margins are low and the brand is not that strong.

In the long run, it may be easier and more profitable to go in alone and wait five years for the market to mature.

And a Ford-Daewoo combination does not have Toyota Motor Corp running scared in Asia. "I don't think the combination is that much more of a threat than Daewoo alone. Korean cars are cheap but they don't have the brand strength -- what's more worrying are the tie-ups with Japanese makers, GM and Suzuki, DaimlerChrysler and Mitsubishi," said Toyota executive vice president Tadaaki Jagawa.

Some argue that although Daewoo offers a gateway into South Korea's fiercely nationalist consumer base, the market at around two million vehicles a year is not a must-have. Nationalism should subside over time and exports from Japan would be cheaper.

Another part of the equation that invites a lot of debate is how a Ford-Daewoo relationship affects Mazda Motor Corp. Mazda is a mass volume automaker with excess production capacity. That Subaru-brand make Fuji Heavy Industries but no mass-volume car plant in Asia. And these two partners are already mostly running at full capacity.

Some analysts suggest Ford's interest in Daewoo may have grown due to troubles at Mazda, which expects profits to halve this year and has suffered from a quick turnover in management.

Fears that a Ford-Daewoo alliance could actually harm Mazda's interests have put pressure on its share price, now trading around 280 yen, down seven per cent this week.

They also caution that if Ford was perceived in the future to be favouring Daewoo over Mazda, it could harm both Mazda's and Ford's position in the Japanese market.

Ford's share price has risen slightly since the announcement that it was named sole bidder.