A more cautious expansion route for China: Wei Gu

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

By Wei Gu

HONG KONG (Reuters) - While Chinese car makers are scouring the West to snap up troubled car brands, China's largest heavy truck maker Sinotruk (3808.HK) is taking a more cautious route toward expansion.

Sinotruk is selling a 25 percent stake to MAN SE (MANG.DE) of Germany, which is supplying it with technology to build trucks aimed at emerging markets. The upside of such an arrangement may be more limited than outright ownership of a Western brand. After all, Sinotruk can only sell the truck in certain markets. But it looks less risky and a great deal easier to implement than buying abroad.

MAN is paying a premium for its stake, which will comprise shares in Sinotruk it is purchasing from its parent company and also a mandatory convertible bond. Its minority stake only gives MAN a certain degree of control -- it can appoint four of the 17 directors, including one executive director overseeing the cooperation project.

That Europe's third-largest truck maker is willing to transfer technology in return for a minority stake reflects the fact that it has been searching for a Chinese partner for almost ten years in China. The German group believes China might one day take over from Germany to be the main truck production base for the world. It also needs a low-cost structure in China so it can compete better in markets such as Brazil and India where prices are lower.

Awash with the money it raised from its 2007 initial public offering, Sinotruk could in theory have gone shopping abroad for the technology and Western brand it needs. It even earmarked some of the IPO proceeds for that purpose, but has only used a fraction of that amount.

The group has decided that it is not realistic to bid for the likes of Daimler and Volvo, since Chinese manufacturers simply do not have the expertise to manage global companies. Anyway, the deal offers Sinotruk certainty and speed to market with its MAN-based product. It plans to launch new trucks utilizing German technology in the next two to three years.

The deal should clear Chinese regulatory hurdles, according to Sinotruk's banker, JPMorgan (JPM.N). The Communist party chief of Shandong Province, where Sinotruk is based, came to the signing ceremony. More importantly, the tie-up fits China's strategy book of moving up the global manufacturing value chain, and will help it export more.

It's true that the deal limits Sinotruk's ability to sell in developed markets such as Germany or America, but it will be a long way before its trucks can meet emission standards in those markets anyway. While it is laudable to aim high and have global ambitions, maybe this type of tie-up represents a more sensible model for Chinese auto companies to get ahold of Western technology.

-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. --

(Editing by Martin Langfield)