Monday, May 25, 2009

A Couple of Recent Auto Mergers: So What?

The past week has seen a couple of merger announcements in the Chinese auto space. These are significant, first of all, because they are more than mere rumors: the partners have shaken hands; these mergers will actually happen. Even more significantly, these may portend further movement in China's auto sector.

The first one was announced last week. Guangzhou Auto is buying a 29 percent stake in Hunan Changfeng Motors. A Guangdong SOE is buying a controlling stake in a Hunan SOE, which is significant because until now, many observers, myself included, have thought the greatest barrier to consolidation in the auto industry to be local recalcitrance. That is, despite the Central Government's calls for consolidation for years, it has not happened because local governments have been reluctant to give up control of their prized auto companies.

This particular merger will supposedly give Guangzhou Auto a stronger offering in terms of a domestically branded SUV. In terms of design, however, I'm not sure whether Changfeng will have much to offer. The Changfeng people I talked to were very proud of this atrocious pickup on display at April's Shanghai Auto Show.

The other interesting story is yesterday's announcement of a three-way merger in the parts industry. I won't bore you with their names, which you can see if you follow this link.

Though this is not a cross-provincial merger (all three parties are headquartered in Shandong) this may be an indication that the Shandong government expects consolidation down the road, and that by bulking up the size of their parts company, they may be more likely to come out on top if mergers become mandatory at some point.

There has been a question as to whether the Central Government actually has the power to force mergers, or whether power has become too decentralized. Some insiders I have spoken with believe that, since the Central Government has not forced mergers so far, this means they lack the power. Others believe that the Central Government still has the power, but sees no need to upset the applecart at this point. As long as everyone is making money, the Central Government is happy to "let a hundred flowers bloom".

If that is the case, let us hope the aftermath of this "hundred flowers" campaign isn't quite as destructive as that of its predecessor.

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