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China's large carmakers woo small rivals

(Agencies)
Updated: 2009-03-09 16:06

China's auto makers, often touted as possible buyers of assets from desperate foreign giants, are instead heeding calls from the government to look to their fragmented and over-crowded home turf for deals.

China has more than 100 automakers who have been dragging their feet for years on combining to forge large, globally competitive groups, due largely to resistance from regional governments that are keen to protect local jobs and tax income.

But, with a push from the central government, they have developed a new sense of urgency as China's once-booming auto market slows sharply and losses pile up at many smaller firms.

"The problem with China is we have too many players fighting each other at the lower end but none has the clout to compete globally," said Guotai Jun'an Securities analyst Zhang Xin.

"There has been a lot of talk - or rather expectations - about Chinese snapping up US auto assets, but the automakers first need to make sure they have the ability to turn those assets around."

Sichuan Auto Industry Group Co, a tiny automaker tucked away in southwest China, denied a media report it was in talks to buy General Motors' Hummer brand for up to $500 million.

"I don't know where this is coming from," an executive at the company, which has barely $150 million in assets, said.

But he acknowledged that Sichuan Auto was recently approached itself by some big State-run domestic firms earmarked to lead a restructuring of the local industry.

Limited success

China's big auto groups, including Shanghai Automotive Industry Corp (SAIC) and FAW Group, are mostly low-price manufacturers for brands of foreign partners such as General Motors and Volkswagen AG, while smaller players have succeeded mainly in local niche markets.

Many Chinese companies harbor grand ambitions, hoping to emulate the global success of Asian giants such as Toyota Motor Corp, and some have expressed initial interest in brands such as Saab and Volvo, according to sources familiar with the situation.

But Chen Bing, an official at China's top economic planner which would have substantial influence over any overseas deals, recently tempered expectations by saying Chinese automakers were not yet strong enough to face such challenges.

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The central government, for its part, is expected to issue a detailed plan as early as this month encouraging big players to take over smaller domestic firms, state media reported.

The government wants to cut the number of major Chinese auto groups to 10 or fewer from 14, and wants two or three mega-producers with annual output of more than 2 million vehicles each, the reports said. SAIC Motor's production was 1.7 million vehicles in 2008, compared with 8.2 million at Toyota.

To consolidate, however, they must overcome zealous local governments that have jealously protected regional firms and, in the process, fueled duplicative and wasteful investments, auto executives and analysts said.

Some auto executives have been talking down the prospects for acquisitions after SAIC's investment in Ssangyong Motor Co turn sour when the South Korean SUV maker filed for protection from creditors.

"Now we are not interested in acquisitions and we don't have any plans (for acquisitions)," Chen Hong, president of SAIC's listed unit SAIC Motor, said over the weekend.

Strength in fewer numbers

But the case for domestic buys has grown more compelling.

"Now that the economy is slowing and the pace of consolidation is picking up in other industries such as steel and cement, I don't see why autos would be much different," said Chen Qiaoning, industry analyst with ABN AMRO TEDA Fund Management.

Car sales growth in China slowed to a single-digit rate in 2008 for the first time in at least a decade.

Beijing has indicated that it wants Changan, a Ford Motor China partner, and three other big State-controlled automotive groups - Shanghai Auto, FAW and Dongfeng Motor Corp - to lead the nationwide industry realignment.

Signs are already emerging of fresh moves to consolidate.

Hunan Changfeng Motor Co is holding separate talks with Guangzhou Automobile Group and Beijing Automotive Industry Holding Co and could reach a deal in a matter of weeks, a source with direct knowledge of the matter said.

Chery Automobile and Anhui Jianghuai Automobile group may also join hands, executives and analysts said.

However, some mid-sized private-sector players that are well-established in specific segments, such as Great Wall Motor Co, could be tough customers.

"Demand for our vehicles is pretty solid so far this year and we have set a target for about 70 percent sales growth for the full year," said a spokesman at Great Wall, a leading domestic manufacturer of pickup trucks and SUVs.

"We are also profitable and well-managed. Why should we throw ourselves into the arms of someone else who may be bigger but not necessarily stronger than we are?" he asked.