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BAIC to acquire Fujian Motor and Changfeng Motor

Beijing Automotive Industry (Holding) Corp. (BAIC) is set to merge with Fujian Motor Industry Group Corp. (Fujian Motor) and Changfeng Motor Group, two carmakers located in South China, according to a report in 21st Century Business Herald.

The restructuring plan is ready and is only waiting for regulatory approval from the Beijing municipal government according to BAIC insiders quoted by the newspaper.

BAIC, China’s fifth largest automaker last year, is the parent company of commercial vehicle manufacturer Beiqi-Foton and the Chinese partner of Hyundai Motor and Daimler AG.

BAIC chairman Xu Heyi told reporters in early February that the company aimed to become a Chinese auto giant like FAW, SAIC and Dongfeng, with annual sales revenue exceeding ¥100 billion ($14.5 billion). To realize this goal, BAIC has no other choice than to link with other domestic auto groups.

Xu revealed in an interview last September that BAIC was talking with two State-owned companies about potential mergers but he declined to name the companies.

Analysts believe the acquisition would also help the Chinese partnerships of Daimler, Chrysler and Mitsubishi to unite and focus on BAIC, as Fujian Motor is now partner of all these three foreign automakers and Changfeng Motor is linked with Mitsubishi.

Three qualifications for potential partners

Since the announcement of merger negotiations, Xu has always emphasized it should be a “strong-strong” alliance. “First, the company should be located in South China and have a wide network. Second, its lineup would be a supplement to that of BAIC. Third, it would be better if we had connections in personnel or history,” Xu told CBU/CAR in an interview last November.

All these qualifications apply to Fujian Motor. Southeast Motors, a partnership between Fujian Motor, Taiwa’s Yulong Motors and Mitsubishi of Japan, now produces the Chrysler Grand Voyager under license from Chrysler. In addition, Fujian Daimler, which was founded by Fujian Motor, Daimler AG, and Taiwa’s China Motor Corp. in 2007, produces Daimler commercial vehicles such as Mercedes-Benz Vito and Viano.

Beijing Benz-DaimlerChrysler (BBDC), a BAIC subsidiary, assembles Chrysler and Mercedes-Benz cars. And as DaimlerChrysler held a controlling share in Mitsubishi, the Beijing-based joint venture also produced Mitsubishi brand vehicles.

As two separate companies assembling the same three brands, this obviously demonstrates the “connections in personnel or history” proposed by Xu.

Fujian Motor is apparently struggling in a development bottleneck, and the automaker is willing to be restructured by a capable company. This intention is also supported by the Fujian provincial government, an important element in mergers and acquisitions between Chinese State-owned companies.

BAIC also expects to build China’s biggest SUV-manufacturing base by acquiring Changfeng Motor, banking on the latter’s strengths in the SUV market and its joint venture with Mitsubishi Motors. Last September, BAIC started building a new plant in the city of Zhuzhou in Hunan Province, close to Changfeng Motor, to produce BAIC’s own brand of passenger vehicles and commercial vehicles from 2010.

If the merger goes forward, the foreign partners would be able to focus on one Chinese company and integrate their businesses. This was a guiding principle when FAW acquired Tianjin Auto and Chang’an Motor acquired Jiangling Motor.

The Chinese automotive market is highly fragmented. There are approximately 130 auto companies and the top 10 accounted for 83 percent of all sales in 2008. There were 10 auto companies that made no cars at all last year according to media reports.

While the central government has been pushing consolidation in the auto sector for years, such mergers among major players have been rare until now. The most recent merger was between Shanghai Automotive Industry (Group) Corp. (SAIC) and Nanjing Automotive Industry Group at the end of 2007. A ¥10-billion auto giant

Automobile production accounted for 8 percent of all Beijing industry in 2008, double the percentage from seven years before. The automotive industry has become one of the pillars supporting economic development in the capital.

As an enterprise owned by the city government of Beijing, BAIC has won great support from the municipal government in M&A projects.

Last December, the Beijing municipal government set out to build a company with annual revenue exceeding ¥100 billion. After Shougang Group moved to the Hebei Province, BAIC was selected as the company to achieve the task.

BAIC sold 780,000 vehicles and achieved ¥75 billion in sales revenue last year. Sales will need to grow by at least 34.3 percent this year if BAIC expects to reach ¥100 billion. In the backdrop of an economic crisis, this target seems more difficult to achieve, and acquisition of domestic automakers has become inevitable. This is echoed in Xu Heyi’s statement that “economic crisis provides opportunity of consolidation” in the interview with CBU/CAR.

Fujian Motor’s sales revenues exceeded ¥10 billion in 2008, which seems enough to supplement that of BAIC. But Changfeng Auto only achieved revenues of ¥5 billion last year, not satisfying BAIC’s needs.

Restructuring more than one company would be a tough task for BAIC now, say analysts, so only buying Fujian Motor could be the best choice.

Future of foreign partners

If BAIC acquires Fujian Motor, the two companies would have to adjust their partnerships with foreign partners to save resources.

Currently Fujian Motor has a few subsidiaries including Southeast Motor and New Forta Automotive Industry Co., Ltd. Analysts said Southeast Motor would be the most important business in the future merger, as other subsidiaries are still small in output.

In passenger vehicles, Fujian Motor now focuses on the Southeast and Mitsubishi brands. Its partnership projects with Chrysler and Daimler could be integrated with those of BAIC in the future.

Chrysler lost its voice in the three-way JV BBDC after the divorce with Daimler. Consequently the U.S. automaker began to let Southeast Motor produce Chrysler brand MPVs and hoped to build a separate sales channel. However, a merger would pull Chrysler back to BAIC and might affect its plan of developing independently in China.

Daimler will get more advantages from the merger than Chrysler. Fujian Daimler now produces the Vito and Viano, Mercedes-Benz’s light commercial vehicles, and plans to launch Sprinter in 2010. That may build a synergy with the new JV between Foton Motor and Daimler in commercial vehicles.

As for Mitsubishi, analysts have predicted the Japanese automaker would definitely build more ties with BAIC and may assemble Mitsubishi brand cars again in BBDC.

 

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