Wedding Bells in China's Auto Industry

This story in the 21st Century Business Herald spills the beans on a couple of impending mergers in the China auto world. Both mergers involve a common entity: Bejing Auto Industry Holdings (BAIC or Beijing Auto), owned by the City Government of Beijing.

BAIC was China's fifth largest seller of passenger vehicles last year. Their largest selling brand is Beijing Hyundai, and they are also the partner of Daimler-Benz, manufacturing C and E class Mercedes sedans for the China market.

BAIC's targets are Fujian Auto and Changfeng Auto, and all three have had some common partners, so they are not unfamiliar to each other.

Fujian, which has apparently been struggling as of late, has a partnership with Daimler. One of Fujian's subsidiaries, Dongnan Motors, is a partnership between Taiwan's Yulong Motors and Mitsubishi of Japan. Mitsubishi also has a partnership with Changfeng, BAIC's other merger partner.

According to unnamed sources, these mergers, which have yet to be formally announced, are currently being considered by the Beijing government.

While the Central Government has been pushing consolidation in the auto sector for years, until now, such mergers among the major players have been rare. The most recent was between Shanghai Auto and Nanjing Auto at the end of 2007. Also, First Auto Works bought Tianjin Auto in 2002.

Auto factories (at least those that achieve scale) are not only major providers of employment and taxes for local governments, but they are considered to be prestige projects. Every locality wants an auto company, but like the US auto sector in the early- to mid-20th century, China's auto sector is due for consolidation.

There are approximately 130 auto companies in China, the top ten of which account for 83 percent of total sales. And according to Gasgoo.com, there were ten auto companies that made no cars at all in 2008.

The heavy involvement of the state (particularly the local state) in this sector has allowed many of the smaller players to live longer than they should have. If the structure of China's auto sector were completely determined by the market, consolidation would probably have progressed much further.

However, despite the reluctance of local governments to allow their small car companies to be swallowed by bigger fish, I think consolidation is inevitable. China's wish to develop "national champions" with enough scale to reach global markets will eventually overcome local reluctance.

Perhaps the Central Government is temporarily allowing a hundred flowers to bloom in order to judge which enterprises are most capable of learning from foreign partners and developing independent brands.

An interesting question that this raises is: If it is local reluctance that prevents more mergers, to what factors can we attribute the few mergers that do occur?