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Government consolidation target difficult to achieve

No doubt China’s Automotive Industry Readjustment and Revitalization Plan released recently will have a direct and positive impact on the country’s automobile market, ensuring a 10 percent growth rate on average in the next three years.

The government’s decision to implement a national strategy in support of independent innovation and brands, new energy vehicles and automobile export is likely to affect OEM and supplier behaviors in the market. The many concrete policy, fiscal, financial and tax measures included in the Plan constitute a practical action program than a mere policy statement and they are expected to contribute effectively to the revitalization and stable growth of the market in 2009 and beyond.

However, the goal of “structural readjustment,” or industry consolidation through mergers and acquisitions, remains to be little more than the wishes of decision makers who are still accustomed to thinking and acting like central planners.

The Plan has set a target in the next three years to form “2-3 large automotive enterprise groups with annual output and sales exceeding 2 million units; 4-5 automotive enterprise groups with output and sales exceeding 1 million units; and reduce the total number of automotive enterprise groups that control 90 percent of the market shares from the current 14 to less than 10.”

Specifically, the Plan identifies four leading automobile groups, First Auto Group (FAW), Dongfeng Motor Corp. (Dongfeng), Shanghai Auto Industry Corp. (SAIC) and Chang’an Automobile Group (Chang’an), to engage in mergers and acquisitions on a national scale, and four smaller automobile groups, Beijing Auto Industry Group Corp. (BAIC), Guangzhou Auto Industry Group (GAIG), Chery Automobile (Chery) and China National Heavy-Duty Truck Corp. (CNHTC), to engage in regional mergers and acquisitions.

As owner of all these eight automobile group corporations as well as some others, the government is entitled to facilitate their consolidation. But the purpose of consolidation should not be simply to create large automakers in terms of the number of automobile sales. An automaker in China with 1 or 2 million annual sales may be big, but it may still be a weak enterprise in terms of R&D, independent innovation and independent brands, such as the case with China’s “Big Three,” FAW, SAIC and Dongfeng, whose bulk of passenger vehicle sales are foreign brands.

Senior automotive executives have therefore questioned the specific reference of eight automakers as the mainstay of future mergers and acquisitions. “The consolidation of large enterprise groups mentioned in the Plan reflects a one-sided mentality under a centrally planned economy,” said Zuo Ya’an, chairman of Jianghuai Automobile Corp. and member of the National People’s Congress. “In a market situation, we cannot predetermine who would be acquiring whom. Real mergers and acquisitions can happen only through market competition.”

In other words, while consolidation is inevitable in China, nobody can foresee who would remain to be the country’s top 10 automakers in the future. Real consolidation will come only when China’s automobile market is fully open to competition.

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