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China’s auto retailers waiting in the wings

China's auto retailers and Chinese investors are show-ing increasing interest in acquiring U.S. dealerships, although they have not completed a deal yet, according to several buy-sell experts.

On Nov. 29, more than a dozen Chinese dealers will be in Los Angeles for a symposium to learn more about how to enter the U.S. market, according to Ken Rosenfield, a CPA working with the group. Rosenfield, founder and managing partner of Rosenfield & Co. in Orlando and New York, said he has been working with the group for about a year and a half. The visiting dealers are from across China, and their interests include taking a minority stake in a U.S. operation, partnering with current U.S. dealers,orbuying their own U.S. dealerships. The Chinese want to learn more about how U.S. dealerships operate, including financing and technology, Rosenfield told Automotive News.

"They're very interested in the used-vehicle market," he added.
The Chinese dealers and investors also may be interested in partnering with a U.S. dealer in operating a dealership in China, he said.

Erin Kerrigan, founder and managing director of Kerrigan Advisors in Irvine, Calif., said her sell-side and consulting firm has had several discussions over the past 12 months with Chinese auto retailers who are interested in entering the U.S. market. She declined to provide specifics.

"We're seeing Chinese business- people looking to get their capital, in many cases, out of China," Kerrigan told Automotive News. "And investing in new markets is one way to do that."

James Taylor, managing director of the boutique San Francisco advisory firm Presidio Group, said he also has had serious conversations with six or so Chinese investors or firms in the past two years.

"Either they are extremely large scale, seeking to build very large enterprises, or they are what we would call dipping their toe in the water" with one to two stores, Taylor said.

'Great investments'

Rising Chinese interest in U.S. dealerships comes from the reputation of American stores as "great investments" that typically provide "wonderful cash flow" and are protected by franchise laws, Taylor said.

"We've also had some inquiries about independent used-car businesses from Chinese investors," he said. "And that is principally because they recognize that the market itself is incredibly robust and a little bit more stable than the new-car market has been traditionally."

But China's potential players also face several hurdles in the U.S., buy-sell experts say.

"There's the political hurdle," Kerrigan said. "There's the hurdles of getting capital out of China. There are times when that's allowed, there are times when it's not. There are manufacturer approvals.

"I would say the hurdles are high."

Taylor believes no Chinese deals have occurred yet due to the recent U.S.-Chinese trade friction, coupled with Chinese government restrictions on how funds are expatriated from China.

"We are under the impression that the ability of Chinese investors to come to the United States to buy car dealerships is greatly limited by internal government policies," Taylor said.

Rosenfield said the group of visiting dealers he is working with tried unsuccessfully to attend this year's National Automobile Dealers Association Show in Las Vegas. They had trouble getting travel visas.
He and others are working with the group to solve logistical issues to invest in the U.S. One possibility is to use offshore companies, Rosenfield said.

Money flow

The amount of Chinese foreign investment into the U.S. for the first five months of 2018 declined more than 90 percent to $1.8 billion compared with the same period in 2017, according to Rhodium Group, a company that tracks Chinese investment in the U.S. That's the lowest amount in seven years, the group said.

Trade policy changes under the Trump administration, and a tightening of reviews by the Committee on Foreign Investment in the United States, also could be restraining investment from China, plus "greater scrutiny in Beijing over outbound flows," according to the Rhodium Group.

Despite the obstacles, Kerrigan said, it is possible a Chinese investor or Chinese dealer will enter the U.S. within the next five years. Kerrigan clarified that she is not currently under contract with any interested Chinese investors. Taylor declined to say whether his firm is.

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