Being careful of latest news people will find out a string of mergers and acquisitions happened recently in China's auto sector.
In the middle of last year,
GuangZhou Automobile Industry Group purchased
Qingyuan Bende Automobile Group, the only mini van producer in the province, further enriching its production lines by breaking into the area of mini van manufacture; in November 2004, Chang'an Automobile Group and Jiangling Motor Group jointly set up Jiangling Motors Corporation, another example of association between strong enterprises; in January this year, Shanghai-listed
Harbin Dong'an Auto Engine Co., Ltd acquired a 100 percent stake of
Harbin Aviation Industry Co., Ltd (Hafei), one of China's biggest mini van makers...
Actually, mergers and acquisitions in the auto sector went much further than they appeared, and less known are local medium-and-small-sized enterprises attaching themselves to bigger companies. Although a practice forced by industrial policies, their current cooperative relations may carry a foreshadowing for future capital cooperation.
Excessive production leads to restructuring
According to international standards, an auto producer can make ends meet only when its annual production reaches 200,000 vehicles, be competitive when the figure reaches 300,000 and be safe from mergers upon 2.5 million. However, most Chinese automakers have not yet reached the scope of 300,000, which, therefore, will inevitably result in higher cost and weaker competitiveness.
The 2004 statistics from China Association of Automobile Manufacturers showed that among the nation's 15 large-scale automakers, only nine reported sales growth over the previous year, and only five achieved profit growth, indicating that two thirds of them declined in profits, including three fallen into red.
Despite a profit decline of 11.74 percent for China's car manufacturing in 2004, the nation's largest auto makers have still been holding on with profits ten times the world average, protecting hundreds of smaller companies under their wing. The current sluggish auto markets provide a right opportunity for winnowing out the weak and regrouping the sector.
The year 2004 reported a total stock of more than 500,000 sets of vehicles even if some mainstream makers stopped production voluntarily. "The excessive production will intensify competition and regrouping within the sector", an expert from China Automobile Technologies Research Center said. Ma Jun, Vice-president of Chang'an Automobile Group, was more assertive: "production of quite a number of companies is very low presently, even zero. Future competition will mainly unfold among the top ten enterprises."
Dashing towards the policy bottom line of 15 percent market shares
It is estimated that by 2007 the market structure of China's auto sector will preliminarily catch up with developed countries, with the top four groups having nearly 80 percent of the total market shares. Considering the regional gaps as well as varied and sophisticated domestic needs, producers of specific models will continue to enjoy certain room for development.
In the new auto industry policy issued on June 1, 2004, the state urged auto alliances to forge economic entities linked up by assets. Enterprises with over 15 percent domestic market shares, the policy said, would be allowed to enter into cooperation with other companies and their alliance plan, after being approved by the National Development and Reform Commission, can be implemented by enterprise themselves. That is to say, enterprises with a market share over 15 percent will have in their own hands the rights of setting up joint ventures and plan new products.
To benefit from the policy, major auto producers all expressed their wish to dash towards the 15 percent bottom line and, at the same time, step up seeking for partners to establish reliable, effective and relatively stable alliances through varied means including stock acquisition and replacement.
Through competition, a research report by China Automotive Technology & Research pointed out, some auto enterprises small in scale, weak in technology and high in cost will be elbowed out of market or acquired by stronger companies. A few large corporation groups boasting big production scale, strong R&D capability, systematized models and rational coordination will be formed in China's auto sector, finally forming a situation with a few corporation groups sharing most auto markets throughout the country.
