Friday, March 6, 2009

Auto Industry Consolidation: Who Calls the Shots?

I am happy to see that my interest in consolidation in China's auto industry is shared by others. Part of the interest stems from my overall research agenda which is to understand the nature of business-government relations in general.

The auto industry presents a great opportunity to observe in detail how these relationships affect outcomes. It also gives us an interesting case to compare to the U.S. experience of about 80 to 90 years ago when, like China today, there were over 100 auto assemblers in the U.S.

My assumption today is that the U.S. government remained largely aloof from the consolidation process, but frankly, that's only an assumption. Perhaps the U.S. government had a bigger role than we realize. (That's not the topic of this particular post, but I'm just throwing that out there.)

A couple of interesting posts on other China-focused blogs have recently covered the issue of consolidation in China's auto industry to varying degrees.

First is an interview with Bill Russo, former Chrysler guy in China (still in China, but no longer with Chrysler) on Aimee Barnes' blog. (h/t ChinaLawBlog). I'm specifically drawn to the following passage in part 2 of the interview:
In China, there are over 100 licensed automotive OEMs. That can’t continue- this is a market that just isn’t big enough to sustain that many licensed manufacturers. So, what will happen is the weaker OEMs will merge with the stronger OEMs. The government will also act a lot faster to correct the supply and demand imbalance - this is a top down system. The government will act in a way that constrains the capital inflow and guides consolidation towards a particular and preferred outcome.
The other is a post specifically about China auto reform by David Wolf on his Silicon Hutong blog. Wolf offers several reasons why consolidation, while definitely in the cards, will not happen anytime soon:
  1. Geographical concerns. Forcing one auto maker to be acquired by another would require the Central Government to make hard political choices favoring one region over another. Wolf also notes that, while local governments have the power to derail possible mergers (an argument I have made before as well), the Central Government ultimately has the power to overcome local resistance.
  2. Hastily closing down excess capacity in China could hand market share over to the foreign joint ventures. Slowing the process would allow makers of independent Chinese brands to gradually gain a stronger local market position.
  3. It is too early to tell which Chinese automakers will come out on top, so the government is wise not to pick the winners too early.
Wolf concludes:
The nation's auto industry will be reformed in stages rather than with the single stroke of a pen, and the speed of those reforms will depend not only on market growth and global finance, but on the demonstrated ability of China's automakers to withstand the successive waves of change they will face in the coming years.
Based on my reading of the above, Russo appears to believe that the Central Government will act to bring about consolidation when it wants; whereas Wolf sees the process as more of a negotiated outcome that will take place over a longer period of time. I will throw out a few additional points that I think have an effect on consolidation and close with a series of questions.
  1. While the Central Government has been harping (justifiably, I believe) on the need to reduce overcapacity in the auto sector, now is not the time (from the perspective of China's leaders) to risk the additional unemployment that could result from forced acquisitions. Unemployment ≠ Harmonious Society.
  2. Despite its continual calls for consolidation, the Central Government appears to be more interested in the development of independent Chinese brands, and is willing to continue tolerating inefficiency in order for that to happen. For example, rather than allowing the Export-Import Bank to give Chery a 10 billion RMB loan for expansion, the Central Government could have made funding contingent on a merger with another automaker. Why didn't the Central Government take this opportunity? My guess is that Chery's position as maker of the best-selling independent Chinese brand had something to do with the decision. (This argument is related to Wolf's point 2 above.)
  3. Granted, the Central Government has the ultimate power to force consolidation. However, I am going to assume that the leaders in Beijing are intelligent enough to know that the cost of getting their way may not be worth the benefit.
In all fairness, because Russo's point was taken from a much larger interview whose focus was not consolidation, perhaps I have read too much into his belief in the Central Government's power to force consolidation. If that is the case, then I shall stand corrected. Nevertheless, I think the juxtaposition of these two points-of-view -- regardless of who holds them -- raises very interesting questions about business-government relations in China:

  • Which level government will have the greatest influence on the ultimate outcome?
  • Can the Central Government design its preferred outcome and gradually exert influence to ensure that it happens?
  • Or do the local governments have enough power to affect the ultimate outcome -- one that could be different from the Central Government's preference?
  • If local governments do have power to affect the outcome, do some local governments have more power than others? For example, could the richer or more well-connected provinces have a bigger say in the outcome?
  • Finally, does the market have any role at all in what will happen to this industry?
I realize these aren't open-ended questions, so please feel free to elaborate.

Thanks for reading!
UPDATE: As a former business person, I'm a bit embarrassed to admit that I left out one very important constituency in this process: the auto firms. Here are some more questions:
  • How do the automakers fit into this equation? How much influence do they have in the process?
  • What factors affect the influence of auto firms: size, market share, ownership (SOE vs private, Central SOE vs Local SOE, listed vs unlisted, etc.), company leadership, brands (local vs foreign)...
  • Okay, that's enough. Feel free to talk amongst yourselves...


  1. Insightful post on two compelling analyses. While I won't attempt to make any clarification for Bill, I certainly agree that China's automotive sector is managed within a top down system. Central Government will continue to make the majority of all major decisions and, if necessary, overcome any local resistance that results. David Wolf rightly points out that Central Government will be forced to favor one region over another; it will be extremely difficult to avoid dissent in the process.
    Will Central Government radically transform China's automotive sector with one stroke of the pen? Very unlikely. An industry's survival depends on continuous reform. It is pretty easy to argue that the global automotive industry has found itself in this incredible mess because the companies collectively failed to evolve with the times. So, I don't think any revelation has been made in Wolf's conclusion; rather, it's a well-stated observation based on the fundamental rules of survival in big industry.
    Local goverment= small voice. But, it's still a voice. Central Government will definitely take their wishes into consideration and I'm sure that carefully executed deals will influence how many of those wishes come true.
    I would not assume that high-level conversations regarding consolidation have been entirely insular or that they've been confined to China's borders... To do so would be to deny what China has shown the global business community over the past ten years.
    Again, great analysis. I look forward to reading more from you!

  2. Thank you for the posting as well as the commentary. You are correct in noting that my comment was made in the larger context of the overall development of automotive industry, however that does not discount my belief that this is no uncertain terms a top-down system. The larger context in which my comment was made was related to the fact that there is a capacity that far exceeds demand in China - and that combined with a global recession will force consolidation on an accelerated timetable to address the imbalance.

    China's State Council in fact takes a direct role in shaping the development of the Automotive Industry. They publish guidelines regularly regarding the plan for the development of 10 specific industries which they believe are critical to China's economic development. The most recent guideline was published in January of this year. It is the opinion of the State council that the consolidation of the automotive OEMs should occur on an accelerated time table and they envision 8 larger "groups" to emerge from this consolidation, grouped into 2 "tiers". Tier 1 includes First Auto Works (FAW), Shanghai Automotive Industrial Corp (SAIC), Dongfeng Automotive (DFA), and Chang'An. There is also a Tier 2 which I believe includes Beijing Automotive Industrial Corp (BAIC), Guangzhou Automotive, Chery Automotive and one other.

    While there may be room for "negotiation" - regarding who survives and can access capital (and some organizations may be able to negotiate who they may eventually be affiliated with) there is a clearly mandated design for where this is headed.

    The top-down guidelines are administered at the central government level by the Ministry of Industry and Information as well as the National Development and Reform Commission (NDRC). These ministries maintain strict control of policies including "Product Registration", which grants the manufacturers the rights to produce cars for sale in China. The Ministry of Commerce regulates the importation of materials either sold of used in production in China. Each of these very powerful ministries defines and enforces policies consistent with the industrial development guidelines.

    While it is true that central government allows and encourages some level of competition among the provinces, and while these provinces have representation at the central government level, that does not mean that the process for industrial development will be redesigned based on a bottoms-up consensus. In short, I stand by the comments in the interview with Ms. Barnes: the China government knows where its wants to go in the Automotive sector, and it will be interesting to see how they "negotiate" their pathway towards that outcome.

  3. Please have a look at the following reprint of the interview in's CHINAtalk. This eJournal Includes a number of very good articles on developments in the China auto sector. highly recommended!

    Bill Russo


Note: Only a member of this blog may post a comment.