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| China bid to rival Toyota, VW may stumble on local politics |
| Bloomberg / Shanghai May 28, 2009, 00:44 IST |
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China’s provincial authorities may slow the central government’s attempts to consolidate the auto industry and create a giant automaker to rival Toyota Motor Corp. and Volkswagen AG in the world’s fastest growing car market.
The central government intends to combine the nation’s 14 largest automakers into 10 by 2011 as part of plans to curb competition and create larger players able to invest in developing more sophisticated vehicles. Consolidation will only be possible if local authorities are prepared to endanger jobs and taxes by surrendering control of carmakers set up under Communist reforms dating back to the 1950s.
“The provincial governments are a tremendous obstacle for industry consolidation,” said Michael Dunne, managing director of JD Power & Associates China, an automotive consultant. “Beijing has some leverage, but not enough to make the call.”
The central government wants to pare the country’s more than 100 automakers as provincial support for unprofitable companies has squeezed margins industrywide. Overall profit at the country’s 19 biggest automakers fell 48 per cent in the first quarter, even as national vehicle sales rose 3.9 per cent. In contrast, Europe has seven major automakers and the US has three.
“China’s automakers are too fragmented to compete with overseas companies,” said Ricon Xia, a Daiwa Institute of Research (HK) Ltd analyst in Shanghai. “Persuading some provinces to allow mergers is vital for the overall industry.”
Fragmented Market: SAIC Motor Corp, China’s biggest carmaker, had a 19 per cent market share last year and built 1.79 million vehicles. Of these, at least 80 per cent were through ventures with Volkswagen and General Motors Corp By contrast, Toyota City, Japan-based Toyota, the world’s biggest automaker, made 9.24 million vehicles. It had a 46 per cent share of its domestic market, excluding minicars. Volkswagen, Europe’s biggest automaker, built 6.23 million vehicles last year.
Some consolidation has begun. Shanghai-controlled SAIC Motor bought Nanjing Automobile Group Corp last year in the biggest takeover to have taken place in China’s auto industry. Nanjing City and Jiangsu province only agreed to sell after demand plunged, according to media reports at the time. Its vehicle sales fell 38 per cent in 2007.
“It was very complicated because they didn’t like each other,” said Ashvin Chotai, managing director of Intelligence Automotive Asia Ltd, an automotive consulting company in London. The deal “took a long time.”
Integration costs following the 2.1 billion yuan ($308 million) takeover also contributed to a 49 per cent decline in SAIC Motor’s first-quarter profit. “Short-term problems are normal,” said SAIC spokeswoman Zhu Xiangjun. “The merger with Nanjing has gone very smoothly.” She didn’t say if further deals were planned.
SAIC Motor climbed 3.3 per cent to 14.60 yuan at the close of trading in Shanghai. The stock has more than doubled this year.
Chinese automakers may agree deals that fill holes in their product line-ups, said Daiwa’s Xia. Guangdong province’s Guangzhou Automobile Group Co, for instance, last week agreed to buy 29 per cent of Hunan Changfeng Motors Co, controlled by Hunan province, to add sport-utility vehicles to its range.
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