HONG KONG: China has long called for consolidation to rein in production overcapacity in the world’s biggest auto market, only for those efforts to fizzle.
But a deal involving two state-owned companies is a sign that it may finally have found a way of tackling the problem of making too many cars.
Guangzhou Automobile Group Co (GAC) announced late Monday plans to buy a stake from FAW Group Co in an unspecified car-manufacturing venture by issuing GAC shares to FAW in return.
Since both companies make Toyota models in China, analysts said the move likely indicates the two government-owned firms are planning to combine those operations.
Rather than trying to force a shotgun marriage between competing carmakers backed by rival local governments – a strategy that’s failed before – China appears to be targeting foreign-brand joint ventures for consolidation, which makes any production cuts more palatable to domestic stakeholders.
This way, both state-owned enterprises (SOE) remain independent while trimming capacity.
“This transaction is a precedent for SOE integration in China’s auto sector and could be a critical test case for deeper SOE integration,” Claire Yuan, a Hong Kong-based credit analyst at S&P Global Ratings, said in a research note.
“The FAW-GAC transaction shows cross-region SOE integration is feasible.”
Merging SOEs has historically been difficult because of issues including employment concerns and regional protectionism, the credit rating company said.
Closely held FAW, which is based in the northeastern Chinese city of Changchun, would become the second-largest shareholder of GAC, which is based in southern China’s Guangdong province, according to a securities filing on the Hong Kong Exchange.
GAC, FAW and Toyota Motor Corp either declined to comment beyond the statement or didn’t respond to queries.
Despite the lack of details, investors cheered the move and sent shares of GAC up as much as 16% in Hong Kong trading the day after the announcement, with the stock ending 2.6% higher on Tuesday.
China’s auto industry has been ripe for consolidation for years, as dozens of new entrants sought to capitalise on the nation’s push to transition to electric cars by building factories.
China now has enough production capacity to manufacture well over 55 million vehicles a year, according to the latest data compiled by Shanghai-based Gasgoo Automotive Research Institute.
But domestic sales were fewer than half that amount last year, according to the China Passenger Car Association, resulting in too many cars chasing too few buyers.
Some of that excess is finding its way into overseas markets, with the China Association of Automobile Manufacturers data showing exports jumped 21% to more than seven million cars.
That’s exacerbating trade tensions.
The surplus production of cars is also taking a toll on industry profitability at home, as Chinese carmakers seek to undercut one another by slashing prices.
Industry profits fell 20% in the first half of the year, according to government data.
Furthermore, even domestic market leaders such as BYD Co have struggled to make money in China, pushing them to ramp up exports.
Meanwhile, foreign brands like Toyota have been under mounting pressure in China as they struggle to keep up with the onslaught of new models being churned out by local brands.
Despite being the world’s largest carmaker, the Japanese company saw its sales in China – the world’s biggest car market – tumble 24% in July, the sixth consecutive month of declines.
Past attempts to simply merge state-owned automakers haven’t worked out, as was the case last year with Dongfeng Motor Corp and Chongqing Changan Automobile Co.
Despite talks, the two remained independent of each other.
But the GAC deal may provide a novel blueprint to tackle an old problem, especially if it spreads to include other joint ventures.
Many of those tie-ups date from an era when non-Chinese carmakers had to partner with local companies to build plants.
But in 2019, China began to allow full ownership of auto manufacturing facilities by foreign companies.
Foreign brands may not be thrilled to bear the brunt of the industry’s production cuts, but sacrificing volume may help stabilise their tattered profit margins.
“It could mark the beginning of a broader wave of restructuring across China’s auto industry,” wrote Eunice Lee, an analyst at Bernstein. — Bloomberg
