Sunday, March 15, 2009

The First Auto Merger of 2009? Hafei and Changhe

This one is kind of like kissing your sister, but it qualifies as a merger nonetheless.

Hafei Auto and Changhe Auto are both owned by AVIC (Aviation Industry Corp. of China), which is, in turn, owned by Central SASAC. AVIC, which also owns Harbin Dongan Auto Engine Company, has recently announced the creation of a new umbrella entity which will combine all three of these automobile-related companies. According to the 21st Century Business Herald, the new company, China Aviation Industry Automobile Corporation (中国航空工业汽车有限公司) officially began operation last Thursday (March 12) in Beijing.

I know I need to update this chart with 2008 numbers, and I will at some point, but even with 2007 numbers it still helps to illustrate the current market share landscape of China's auto industry.

Recall if you will that China's State Council designated a "Big 4" and "Small 4" among China's top auto producers. The Big 4, SAIC, FAW, Dongfeng and Changan will be allowed to pursue nationwide acquisitions. The Small 4, Beijing, Guangzhou, Chery and China HDT will be allowed to pursue regional acquisitions.

Among the remaining firms on this list are private automakers Geely, Great Wall and BYD, and state-owned automakers Brilliance, Hafei, Jianghuai and Changhe.

The private automakers will presumably be left to fend for themselves since, theoretically, the government has no say in their existence. That remains to be seen, of course, and is an interesting topic that I shall set aside for a future post.

Among the remaining state-owned firms, Jianghuai has already been mentioned as a possible partner for Chery since both reside in Anhui Province. (And since this previous post, I have also discovered that, though Jianghuai is owned by the provincial government and Chery is owned by a city government, both were started by Anhui's provincial government.)

This leaves only Brilliance without as yet any rumor of a potential suitor.

So what is AVIC hoping to accomplish by combining its auto entities into a single company?

AVIC is pushing these companies closer together to improve efficiency and profitability. The plans are to "coordinate on R&D, purchasing and sales platforms". They want to avoid competing in the same segments, and they also want to move toward using many of the same parts. There is also the requisite vow to "take the lead in development of low-emission and alternative energy vehicles" that no Chinese auto company can afford to leave out of any press release nowadays.

Given its priorities in aviation (such as building airliners to compete with those of Boeing and Airbus) does AVIC really want to remain in the automobile business? This is hard to answer, and at the moment AVIC has given no public indication that it wishes to exit the auto business. However, even if AVIC were keen on keeping its auto businesses, the point has recently been rendered moot by the government's "Big 4, Small 4" paradigm.

If I were to hazard a guess (and I do so haphazardly) it is that AVIC is grooming its auto businesses for a sale to one of the larger players. Perhaps AVIC believes that, by creating a much larger, and presumably more profitable, automobile company, it is less likely to come under pressure to sell its smaller Hafei or Changhe companies to smaller players for smaller money.

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