Hot wheels jump on M&A bandwagon

Industry consolidation and restructuring are on top of the mind for Chinese automobile firms as the sector prepares itself for what would be a milestone year, which could also see more companies spreading wings abroad and acquiring prestigious international brands.

Before the advent of the financial crisis, the automobile industry in China had almost reached a stagnation point and was not sure of the way forward.

But with the financial crisis grounding global automobile giants, the industry in China found succor in booming domestic sales, aided largely by friendly government measures. It also helped the government to pave the way forward with progressive reforms aimed at making the nation a dominant player globally.

Last year, China sold 9.38 million vehicles, a year-on-year increase of 6.7 percent, the lowest pace of growth in the past decade and for the first time lower than the GDP growth rate.

Due to the financial crisis one-fourth of the 45 major passenger car producers in China failed to achieve even half of their sales targets for 2008, forcing some of them to resort to production and staff cuts. The collapse of the US auto giants also multiplied the problems for many Chinese automobile firms.

The automobile sector accounts for one fourth of the total production value in China's machinery industry and 15 percent of the domestic industrial added value, amounting to nearly 4 trillion yuan annually.

Zhang Guobao, vice-minister, National Development and Reform Commission, said the auto industry-related headcount accounts for one sixth of the total employment in China.

It was against such a backdrop that the government decided to go on an overdrive to restructure the industry to make it leaner, stronger and tougher. The State Council said in a statement in March that China hoped to boost the auto industry by reducing the number of companies in the sector through mergers.

The government has envisaged that by 2011 it wants to reduce the number of major automobile firms to 10 from 14. These firms currently account for over 90 percent of the domestic sales and output.

The roadmap also calls for two or three firms to be the industry dominators with production capacities in excess of 2 million units annually, while the second rung of four or five companies would each produce around 1 million units every year.

The government also said the "four big groups" who have been identified as possible leaders, including FAW Group, Dongfeng Motor Corp, Shanghai Automotive Industry Corp (SAIC) and Chang'an Auto should consider expanding through mergers and acquisitions nationwide.

It will also encourage "four small groups" - Beijing Automotive Industry Holding Co (BAIC), Guangzhou Automobile Industry Group, Chery Automobile Co and China National Heavy Duty Truck Group Corp (Sinotruk) to go in for regional restructuring and mergers.

Over 130 big and small companies dominate the automobile sector in the country. "There are far too many players in the industry, fighting with each other in the lower end of the market. This limits the industry's ability to make a mark in the international markets," said Zhang Xin, automobile analyst, Guotai Junan Securities.

"Before they flock to the international markets, they need to have a strong dominant position in their home turf too," he said.

According to the industry statistics, the top 10 automakers in the country collectively sold 7.8 million vehicles in 2008, accounting for 83 percent of the total domestic sales. The rest of the companies manufactured 1.6 million units in the same period, with average sales per company no more than 13,300 units.

Guangzhou Auto has been the first firm off the block to expand nationally under the government plan. In May, the company acquired a 29 percent stake in Shanghai-listed small SUV (sports-utility vehicle) maker Hunan Changfeng Motor Co for nearly 1.2 billion yuan, making it the largest shareholder.

"The deal makes business sense as it will complement Guangzhou Auto's product mix, which mainly covers medium- and high-end sedans," said Jia Xinguang, chief analyst with the Chinese National Automotive Industry Consulting and Development Corp.

"Changfeng's SUV lineup and its production capacity will be a big boost to Guangzhou Auto's ambition of becoming a leading national player," Jia said. Changfeng, which is 14.59 percent owned by Japan's Mitsubishi Motors Corp, has an annual production capacity of 100,000 units.

The company also signed a preliminary agreement to join hands with smaller firms like Hangzhou-based Gonow for microbuses. The two firms are expected to set up a 50-50 joint venture in Zhejiang province, with an annual production capacity of 250,000 units.

The flurry of moves, including another 50-50 joint venture which Guangzhou Auto signed with Fiat Auto SpA in July to produce the Italian automaker's cars and engines in Changsha, Hunan province, has put the company in contention for the top slot over other peers like SAIC Motor Corp, FAW Corp and Dongfeng Motor Corp.

"The company also wants to geographically expand its presence outside of Guangzhou," said Yale Zhang, director, Greater China Vehicle Forecasts for US auto industry consultancy CSM Worldwide Corp.

While Guangzhou Auto was making its inroads in the north, BAIC, German automaker Daimler AG's China partner based in the capital was busy exploring opportunities in south China.

After failing in its quest to acquire General Motors' Opel brand, BAIC now intends to replace Fujian Motor Industry Group as Daimler's Chinese partner in Fujian Daimler Automotive to produce vans by taking over Fujian Motor's 50 percent stake in the commercial vehicle venture. The company plans to restructure the venture after the deal is inked later this month.

China's battery and car maker BYD Auto, backed by legendary investor Warren Buffett, agreed in July with Foshan Weishang Technology Industry Development Group to purchase the latter's total stake in Hunan Midea Coach, an ailing bus maker from Changsha, for 60 million yuan.

"It's a shortcut, but a positive move for BYD to tap into commercial vehicles segment by taking over Midea Coach. With its advanced technology in batteries and alternative energy, BYD can grab market share in the government's big purchase plan for new energy buses, which has huge profit potential," said Jia.

However, analysts said that these kind of cross-province mergers have to first get past the protective local governments before they can make headway.

Chery Automobile and Anhui Jianghuai Automobile Group, both based in Auhui province are also expected to come together. But the possible cooperation is only "subject to and in accordance with central government and local government's scheme to restructure auto industry regionally," Jin Yibo, Chery spokesman told China Daily.

(China Daily 09/10/2009 page40)