Wednesday, July 04, 2007

Private Equity Follies: Everything Old is New Again

by Tom Bozzo

1. The randomly-assembled diversified conglomerate!

Blackstone buys Hilton, for a 40 percent premium over Hilton's price-at-the-time. Is it the rebirth of ITT? Or maybe Engulf & Devour? What do they know that The Market doesn't?

2. The Yugo!

This short news item appeared at the bottom of the NYT story on the weak June sales figures for the Domestic Three:

The Chrysler Group, which is being bought by Cerberus Capital Management, has agreed to develop small and subcompact cars with Chery Automobile of China for sale in North America, Europe and other markets as soon as next year.

The companies will modify existing Chery vehicles to be sold under Chrysler brands and co-develop future models... [emphasis added]
Perhaps Chinese cars will be the South Korean cars of the 2020s, whatever the automobile market might look like by then. That schedule is aggressive, though, especially when you consider that the car appearing in this much-autoblogged video is what's considered "world class" (or at least marketable in Europe) for the Chinese industry:

That, folks, is a one-star performance on a EuroNCAP-style front-offset crash test (the U.S. Insurance Institute for Highway Safety conducts similar tests to supplement the official NHTSA testing).

For comparison, here's a five-star result, for the Lexus IS:

Some people did actually buy Yugos for a while — some people will go for cheap, for a while. Whether Chrysler brands can withstand the subsequent crater formation event is a good question.

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Something about this moves smells like a disaster for Chrysler. CNN had a poll, "Would you buy a Chinese made auto?" 82% responded "NO".

I don't know, something in my gut just doesn't see Chinese cars being accepted by consumers in North America. In 2020, I still can't see them selling at a THIRD the volume that S. Korean cars sell at now.
It will be interesting to see how their marketers try to overcome quality and safety concerns. The experience of the early Hyundais does suggest that the Chinese state-of-the-art has a good prospect for destroying their brands.

This is in part to show that Daimler didn't offer Chrysler much in mass-market car development. With new fuel economy regs looming, I'd have to think that GM and Ford are better positioned by being able to raid their European product lines.
Question: Am I seeing this right? Was the crash dummy decapitated in that video? And it still got one star?
At the Autoblog link, there's a second video that shows a tester describing the outcome (in German) while standing next to the wrecked car with the dummies in it, and it doesn't look like the dummy was decapitated.

As for the star rating, I'm sure the industry would want to limit how bad a really bad result would look -- hence one star as the minimum. But the marketability of cars with less than four stars is seriously impaired.
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