Wednesday, February 25, 2009

New Details and Analysis on Auto Merger Possibilities

Yesterday's post discussed the revelation that the Central Government wanted to see China's top 14 automakers reduced to 10 or fewer in the near future. Subsequent to that news, Bloomberg and the Shanghai Securities Journal (via Gasgoo.com) have revealed more details based on conversations with people who have seen draft documents of the plans.

In short, it appears that, among the top 14, four large firms will be encouraged to expand nationally, and four smaller firms will be encouraged to expand regionally.

The "Big 4" firms are: Shanghai (SAIC), First Auto Works (FAW) of Changchun, Dongfeng of Wuhan and Changan of Chongqing.

The "small" firms are: Beijing Auto, Guangzhou Auto, Chery Auto of Anhui Wuhu, and Sinotruk (China National HDT).

Once again, here is yesterday's list of the top 15 (as of year-end 2007):



Notice that the "Big 4" also correspond with the top four on this list. The next three on the list, Beijing, Guangzhou and Chery are among the small four, as is China HDT, a truck company bringing up the rear. (The other seven are producers of sedans.)

This suddenly brings some clarity to the situation. The remaining SOEs on the list, Brilliance, Hafei, Anhui Jianghuai (a good target for Chery?) and Changhe -- if the recent revelation is to be believed -- can all look forward to becoming part of larger enterprises in the future. Some CEO egos are about to get bruised.

What remains to be clarified is what will be done with the private firms on this list: Geely, Great Wall and BYD. It can be assumed that each of these firms is also considering how to grow through acquisitions in order to survive and compete with the SOE giants. It is also not out of the question that one of the big SOEs could make a tender offer for shares in these private firms.

As for the firms not on this list, they may very well travel the same roads as did the likes of Packard, Nash and Studebaker in the United States. Never heard of them? That's the point.

On an historical note, these plans sound very familiar. Back in 1988, the Central Government implemented a plan called "Big 3, Small 3" (三大,三小). The Big 3 of 1988 are part of today's Big 4: FAW, Dongfeng (known as SAW at the time) and SAIC. The Small 3 of 1988 were Beijing Jeep (now part of Beijing Auto), the defunct Guangzhou-Peugeot and Tianjin Daihatsu (which, if I'm not mistaken, is now part of FAW).