How Dongfeng can protect a risky investment in PSA

Yang Jian is managing editor of Automotive News China.Yang Jian is managing editor of Automotive News China.
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SHANGHAI -- Dongfeng Motor Corp. is being very cautious about a proposal to buy a stake in its joint-venture partner, PSA/Peugeot-Citroen -- and rightly so.

The Chinese automaker quite naturally would prefer to earn a profit from its investment in PSA. But the French automaker is losing money, and it will keep bleeding as long as Europe is in recession.

Dongfeng and PSA should study the example of SAIC Motor Corp., which bought a stake in partner General Motors in 2009, when GM teetered into bankruptcy. More on that later.

First, let's take another look at PSA and Dongfeng. Profits aren't the only factor in this deal. By acquiring a sizable stake in PSA, Dongfeng would be allowed to use its partner's technology to improve its own products.

But it's questionable whether Dongfeng can gain access to that technology. PSA would like to have Dongfeng's money, but won't be happy to share technology.

That's because the two companies could easily become carmaking rivals in China, PSA's second largest market.

Armed with PSA's technology, Dongfeng could strengthen its own brand and eventually compete with its partner. That is the last thing PSA wants to see from Dongfeng.

To be sure, PSA's joint venture with Dongfeng is doing well in China. It is in Dongfeng's interest to prevent PSA's financial woes from spilling over into their partnership.

But how can Dongfeng invest in PSA without taking a big financial risk?

Perhaps they could emulate SAIC's deal with GM in 2009, when the U.S. auto giant was in a deep crisis. At that time, GM transferred a 1 percent interest in their joint venture for $85 million (519 million yuan).

That transfer gave SAIC a majority 51 percent share of their joint venture, Shanghai General Motors Corp.

Under the deal, GM was given the option to repurchase that share of the joint venture when it returned to financial health. In 2012, a fully recovered GM bought back that stake for $112 million.

Instead of selling a piece of itself to Dongfeng, PSA could allow its partner to buy a bigger stake in their joint venture. After PSA regains financial health, it could buy back its full stake in the partnership.

It is unlikely that a deal like this will generate all or even most of the 3 billion euro (24.7 billion yuan) bailout that PSA reportedly hopes to receive from Dongfeng and the French government.

But it could allow PSA to get some cash from Dongfeng, and that's what it needs the most.

You can reach Yang Jian at yangjian@autonewschina.com.

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