Monday 9 March 2009
Carmakers brace for industry revamp in economic uncertainty
Whether the latest policy directive to consolidate the car industry is old wine in a new bottle, the central government could not have chosen a better moment to remind the domestic industry that the tough economic times offer potential takeover opportunities.
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Carmakers brace for industry revamp in economic uncertainty
Kandy Wong
9 March 2009
Whether the latest policy directive to consolidate the car industry is old wine in a new bottle, the central government could not have chosen a better moment to remind the domestic industry that the tough economic times offer potential takeover opportunities.
As cash-starved international carmakers like Ford Motor and General Motors Corp scout for buyers - with Chinese carmakers the most sought after - to acquire their brands, power-train or financing arms, Beijing has emphasised that the country’s carmakers are “not ready” for overseas deals.
The implications are obvious: Fixing business at home is top priority and domestic consolidation should be considered by large carmakers.
A Shanghai Securities News report in February spelt out a government plan that picked Shanghai’s SAIC Motor Corp, Jilin-based First Auto Work Group, Hubei’s Dongfeng Motor and Chongqing-based Changan Group to spearhead national consolidation that would result in companies each capable of generating 2 million units in annual vehicle sales. Beijing has already issued guidelines to provincial governments.
At the regional level, the government has also selected four smaller companies for mergers - Beijing Automotive Industry, Guangzhou Automotive Industry Corp, Anhui-based Chery Automobile and Shandong-based China National Heavy Duty Truck.
Among the four carmakers, Beijing Automotive said it aimed to generate revenue of 100 billion yuan (HK$113.39 billion), with about 10 billion yuan to come from acquired target producers.
Beijing’s ultimate goal is for the number of car companies to be reduced to 10 from 14. Of those selected for national consolidation, smaller scale Chongqing Changan Group has caught the attention of market watchers.
By market share and sales, analysts said Changan Group had the scale to be a leader for a consolidation at the national level. Most importantly, its military background would help it take over small-scale counterparts with a similar background, such as Hunan’s Changfeng Motor.
Changan Group, ranked number four on the mainland, sold 861,377 vehicles last year with a 9.2 per cent domestic market share.
The chosen companies have yet to announce their merger and acquisition plans but industry analyst Wang Zhihui at China International Capital Corporation said consolidation could be the sector’s “new investment theme”.
Mr. Wang projected that Hafei and Changhe Automobile under aircraft maker AviChina, Brilliance China Group, parent of Hong Kong-listed Brilliance China, Chongqing-based Qingling Motor, Fujian Motors and Anhui-based Jianghuai Group, were very likely to be acquired.
China - the world’s second largest car market - sold 9.38 million vehicles last year, up 6.6 per cent from 2007. Sales even topped the United States for the first time in January with 735,500 units, surpassing 656,693 vehicles in the US.
But market watchers were not optimistic the mainland will meet its 10 million unit target this year as sales conditions are expected to remain sluggish in the first half.
“The government previously raised the issue of consolidation 10 years ago when the domestic industry was booming. But who wants to be merged when sales are growing at 20 per cent per year?” said Yale Zhang, director for greater China vehicle forecasts at CSM Worldwide. “The slower sales this time will show which carmakers are not competitive enough, and those players should be consolidated.”
The selection of carmakers for consolidation is, to an extent, dictated by geography. SAIC, the country’s largest carmaker, is located on the relatively well-off eastern coast where consumers have a higher purchasing power. The company, directed by the National Development and Reform Commission and State-owned Assets and Supervision and Administration Commission, took the lead in buying the assets of loss-making Nanjing Automobile Group in 2007 for about 2.1 billion yuan.
Some analysts said the SAIC-Nanjing Auto combination provided the synergy to develop the MG Rover brand, which Nanjing Auto bought before it was taken over. But others doubted the extent of the benefits from the merger.
SAIC, which once competed with Nanjing Auto to take over the defunct British MG Rover brand, bought MG Rover’s design rights for the Rover 75 and 25 models for US$20.76 million in 2006.
In order to give Nanjing Auto a last opportunity to prove itself viable, the central government supported the carmaker to acquire the assets and brand of the British carmaker in 2005 for €67 million (HK$658.9 million).
FAW, located in Jilin, is the first carmaker in the country to produce a domestic brand vehicle, Red Flag, the early official vehicle for the government. The carmaker’s long history of development, plus its strong joint venture partners Volkswagen and Toyota, provide it with a solid foundation in the industry.
Dongfeng Motor, formerly Second Automobile Group, leads the industry in central China.
The government had urged Dongfeng Motor to acquire Hafei Automobile and Changhe, under aircraft maker AviChina. However, the talks were eventually suspended because the parties were unable to reach a compromise on shareholding structure.
Changan Group, which is aggressively climbing towards the mainland’s number three spot, is located in the central government’s directly-managed city of Chongqing.
“Changan Group has fairly advanced technological skills for building alternative fuel vehicles,” said Mr. Zhang, referring to the central government’s policy for the coming decade to build a “green” car industry.
In the mid-1980s, global giants such as General Motors and Ford Motor bought up smaller rivals including Sweden’s Saab and Volvo, as well as Britain’s premium brand Jaguar, which later went to India’s Tata Motor.
“Undoubtedly China is moving towards the development pattern of big car-producing countries such as the US, where a few car giants lead the industry,” said Mr. Zhang. “But as domestic players often have 50-50 joint ventures with global carmakers, it’s impossible for the country to have only two or three car giants.”
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