TREND #1: Policy-driven Consolidation of Chinese Vehicle Manufacturers

July 30, 2009

by Bill Russo

In my last post, I introduced the Eight Overarching China Automotive Trends That Are Revolutionizing the Auto Industry. I will describe in this and subsequent postings how each trend is manifested, and how they cumulatively result in a transformational force which is fundamentally changing the business model and competitive landscape of the global auto industry.

I had previously introduced the first trend in detail in the article The Coming Structural Realignment of China's Automotive Sector (posted on this blog on April 28, 2009). Since that time, there have been a flurry of announcements regarding potential mergers and alliances among the China domestic vehicle manufacturers, including Beijing Automotive Industry Corp (BAIC) and Fujian Daimler, Guangzhou Automobile Group Co. (GAC) and Zhejiang Gonow Auto, Chery Automotive and Jianghuai Automobile Co. (JAC), Dongfeng Motors investment in Yulon's LuxGen (Hangzhou) Motor Co., and First Auto Works (FAW) and Brilliance Auto.

The rationale for this major restructuring is clear: the current structure of the automotive industry reflects an industry in its nascent stage of development. There are more than 150 registered vehicle manufacturers in China. In 2008, only 10 of these manufacturers accounted for 83% of the vehicles sold. This highly fragmented structure cannot provide for a stable development of the current domestic players.

As a result, the Chinese government has pulled-ahead its plan to consolidate the vehicle manufacturer landscape in order to achieve economies of scale. Prompted by the economic crisis, the China government in January, 2009 published stimulus plans for 10 key industries including automotive. The most sweeping proposal in this plan is the intention to consolidate the industry into a “top 10” group organized into 2 distinct “tiers”: the Tier 1 group consisting of companies with an annual capacity of 2 million units that are encouraged to acquire smaller automotive companies throughout China, whereas Tier 2 consists of companies with an annual capacity of 1 million units that are encouraged to drive regional consolidation. The plan even names 4 tier 1 companies as well a 4 tier 2 companies:

TIER 1:

· Shanghai Automotive Industrial Corp (SAIC)

· First Auto Works (FAW) Group

· Dongfeng Automobile

· Chang’An Automotive

TIER 2

· Beijing Automotive Industrial Corp (BAIC)

· Guangzhou Automotive Industrial Group (GAIG)

· Chery Automobile

· China Heavy Duty Truck Corp (CNHTC)

It is noteworthy that this is not a final list of surviving companies as it represents only 8 of the “top 10”, and by calling it “top” 10 there is obviously room for others below the “top”. One can anticipate that OEM consolidation and rationalization will surely be accompanied by a major restructuring of the Chinese auto supply base. It is also noteworthy that companies such as BYD, Geely and Great Wall are not included on the list. In spite of this, there is a clear indication of the rationale and urgency around the issue of consolidation, and why the time to act is now.

But, how does a restructuring of the domestic structure in a single auto market revolutionize the global auto industry? Taken as a stand-alone trend, it certainly is not sufficient enough to unleash a global transformational force. However, one must consider the fact that we are talking about the largest and still rapidly expanding China auto market. By seizing on the financial crisis as a triggering event to drive forward the necessary consolidation, the China government is ensuring that it can more efficiently develop the industry around the fewer, and stronger auto groups that remain. This is a necessary foundation-building step from which fewer, yet stronger China auto companies can emerge. While providing a base, it is the cumulative impact of this trend along with the remaining seven yet to be described that will revolutionize the business model of the global automotive industry.

In the next posting, I will describe the trend of "Global Redistribution of Assets to Capture China Market Growth".

Click here to view article published in GLG News

Click here to view article published in GlobalAutoIndustry.com

Click here to view article published in Gasgoo.com China Automotive News

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TREND #2: Global Redistribution of Assets by Non-Chinese Companies to Capture China Market Growth