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China to ride out credit storm?

2008-10-15 12:07

Shanghai - A squealing of brakes in China's car market, the world's second largest, should be sending its more than 100 automakers scrambling for the safety of mergers and alliances, but vested interests are thwarting consolidation.

The army of Chinese manufacturers, many of them regional players propped up or partly owned by local governments, is leaving a legacy of wasteful investments in excess capacity, while frustrating Beijing's plans to build up a few national champions that could compete globally.

But analysts expect the foot-dragging on consolidation to continue at least in the near term, with profits still sufficient to allow most companies to survive ... and hope for a rebound in growth next year.

"However inefficient it may be to have so many players out there, versus three or fewer in mature markets, there's little incentive at the local government level to hand over jobs and tax revenue to outsiders," said Chen Qiaoning, an industry analyst with ABN AMRO TEDA Fund Management.

Recent months have brought a handful of rare media reports on acquisition talks in China's automotive sector.

Second-tier firms Guangzhou Automobile Group, which makes cars with Toyota Motor Corp and Honda Motor, and Beijing Automotive Industry, a Daimler AG partner, have separately sought a stake in sport utility vehicle maker Hunan Changfeng Motor Co, sources familiar with the situation have said.

FAW Group, one of China's three largest automakers and another Toyota partner, was in talks to take over the own-brand car business of Brilliance Auto, BMW's China partner, according to media reports.
Brilliance denied any such talks.


Such combinations could ease the fragmentation that has built up heavy overcapacity in China's auto sector.

Changjiang Securities estimates China's 47 major automakers had a combined annual capacity of 9.59 million units in 2007, far exceeding sales of 6.06 million vehicles.

Consolidation would also parallel moves toward deals in a global industry that is struggling with high oil prices, a slowing economy and a severe credit crisis.

General Motors Corp has had talks about a possible merger with both its US rivals, Ford Motor Co and Chrysler LLC, according to sources familiar with the situation, while Chrysler's majority owner Cerberus Capital Management has held talks with several automakers.

But, despite the increased talk of deals in China, few have actually been completed.

One deal still up in the air is an effort by Nissan Motor's partner Dongfeng Motor to take control of minivan manufacturer Harbin Hafei Automobile Industry Group from its parent, state aircraft maker AVIC II. That deal was put on hold after AVIC II's government-backed merger with peer AVIC I.

"You never know what can happen during merger talks. Sometimes you think you have nearly reached the finish line, but things can happen at the last minute and you're back at square one," said a senior Dongfeng Motor executive.

Analysts also doubted the recent slowdown in China's car market would provide much impetus for mergers and acquisitions.

Car sales fell 1.4 percent in September, a second month of decline, as economic growth eases. Before August, there had only been two previous monthly sales declines in five years.

Profit squeeze

The slowdown is taking its toll on profits.

FAW Car Co 000800.SZ estimated its net profit fell about 5 percent in the third quarter, after profit more than tripled in the first half.

Full-year car sales growth in China is expected to slow to 5-6 percent this year, according to Rao Da, secretary-general of the China Passenger Car Association, a leading industry group, from above 20 percent in each of the past three years.

But China is still a relative bright spot in the global industry, especially compared with the United States, where auto sales have fallen to 15-year lows and the big three carmakers have posted heavy losses.

"Chinese automakers lag some of their Asian rivals, especially the Japanese, in terms of profitability, but the bottom line of big auto groups is pretty solid after years of fast growth," said Wang Mingcun, an industry analyst with Tianxiang Consulting.

Rao and other analysts also forecast China could return to sales growth rates of 10-15 percent next year, retaining its position as the world's fastest growing major car market.

"Unless the market goes really bad and many small players are up to their necks in losses, few would throw themselves into the arms of bigger rivals," said Jane Ye, analyst at Cazenove Asia.

Foreign role

Foreign automakers have at times taken a role in spurring consolidation in China, but may play less of a role in the years ahead as they struggle with the global downturn.

Ford, which holds 30 percent of light commercial vehicle maker Jiangling Motors Corp and runs a car venture with Chongqing Changan Automobile Co, instigated an equity alliance between the parents of its partners that was unveiled in 2004.

Failed British vintage car maker MG Rover was the unintentional match-maker in a 2.1 billion yuan marriage in late 2007 between top Chinese car maker SAIC Motor and much smaller Nanjing Automobile Group. Both had previously bought bits and pieces of the British car marquee in separate deals.

"I'm not saying that foreign automakers are driving China's industry consolidation, but they deserve some credit in all the country's three big merger cases so far," said Zhang Xin, a senior industry analyst at Guotai Junan Securities.

But financially strapped global firms now appear more keen on unloading than on building up holdings in foreign automakers.

In the latest development, Ford may sell most or all of its controlling stake in Japan's Mazda Motor Co, according to a source familiar with the matter.

"Foreign automakers will continue to play a role in China's industry shakeup in the future, but at the moment a lot of them have their hands full with their own problems," said ABN AMRO TEDA's Chen.
($1=6.834 Yuan)



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