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Chery and JAC may enter a cooperative merge

A possible merger between Chery Automobile Co., Ltd. (Chery) and Jianghuai Automobile Co., Ltd. (JAC) is again a speculative topic among industry analysts, as consolidation is one of the goals stated in China’s Automotive Industry Readjustment and Revitalization Plan.

The two companies, both owned by the Anhui provincial government, intend to form a tie-up, but the detailed plan has not been released, according to senior JAC executives. This is the first time that company sources confirm speculations about a possible tie-up between the two automakers in the same province.

According to the Automotive Industry Readjustment and Revitalization Plan published recently, Chery is among the four minor automotive group companies listed by the central government to make regional mergers and acquisitions. The Anhui provincial government has been keen in nurturing the cooperation between JAC and Chery so as to strengthen its automobile industry.

“There are many speculations about Chery and JAC,” said Jin Yibo, vice president and company spokesman. “But Chery has not made any decision yet in light of the Revitalization Program,” Jin told the media in late February.

The provincial government reportedly had a merger plan for Chery and JAC three years ago, in which JAC would concede shares to Chery in exchange for using the latter’s license to produce sedans. The plan ended with JAC getting its own license in early 2007.

 

Province of independent brands

Chery started from scratch when in 1997, Zhan Xialai, Wuhu City Party boss, recruited Yin Tongyue, then at FAW-Volkswagen to start a new assembly plant in the city. After a difficult beginning, Chery had to be affiliated with the Shanghai Auto Industry Corp. in order to get its production license.

After only 10 years, Chery has reached an annual capacity of 650,000 cars, 650,000 engines and 300,000 transmissions. It has been a sales champion among independent car manufacturers for 10 consecutive years and ranked No. 5 in the industry last year.

In July 2008, Zhan was appointed secretary-general of Anhui provincial government. At the end of that month, Zhan formed the Anhui Province Auto Industry Leading Group, which was a clear sign that he wanted to consolidate and strengthen the province’s auto industry.

A source revealed that Chery and JAC will announce a tie-up soon as a result of both the Revitalization Plan and the encouragement by the provincial government.

What is more important, the two companies have complementary product lines and therefore a cooperative tie-up may be mutually beneficial.

Chery has a considerable share in the passenger car market, while JAC is a leading manufacturer in commercial vehicle chassis, light trucks, medium trucks, heavy-duty vehicles and MPVs. The tie-up will help build synergies in both passenger vehicle and commercial vehicle production and sales.

Chery’s plan for a public listing has been postponed several times. Its rapid growth has been funded by its own revenue plus government and bank loans and funds. JAC as a public listed company has much experience in financing, which may help Chery open up the capital market

Possible merger methods

“Chery wants capacity expansion, while JAC has adequate capacity right now,” said an insider close to JAC management last year. “Our thought is to share capacity.”

“The provincial government has always hoped that the two would join hands and cooperate,” said the insider. “Both of them are leading homegrown auto manufacturers. If Chery and JAC could merge, Auhui’s auto industry will be raised to a much higher level in terms of competition in the market.”

Mutual shareholding might be a potential method of a merger, in which case neither Chery nor JAC would acquire the other. The provincial government as owner of the two companies would be able to coordinate a mutually beneficial deal.

As a major manufacturer of commercial vehicles and MPVs, JAC has a record of compound growth rate exceeding 50 percent for 15 consecutive years. Growth of its margin once ranked No. 1 among 14 major national auto groups.

The legend ended after JAC forayed into the passenger car sector. According to available statistics, the public listed JAC had sales revenue of ¥14.7 billion ($2.13 billion) in 2008, up 3.16 percent year-on-year. However, its profit was only ¥22.7 million, down 94.58 percent from the previous year.

Anhui provincial government as the largest shareholder of JAC is no doubt concerned. And there is every reason for the government to consolidate the two independent automakers during difficult times. Preferential fiscal and tax policies are being considered by Anhui to help with such consolidation.

Zuo Ya’an, chairman of JAC, told the media during his attendance of the annual National People’s Congress that for automobile enterprises, the concept of merger is “too sensitive.” “It is better that we talk about cooperative mergers, because more often than not, people would tend to compare the relationship between two enterprises to be merged like that between a father and son, or that one takes over the other,” Zuo said.

To him, the best way of cooperation between JAC and Chery would be in utilizing each other”s assembly facilities and integrating their supply chains rather than a direct merger via assets acquisition.

 

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