Wednesday, March 11, 2009

Who Wants to Buy an Auto Factory in Chengdu?

First Auto Works has excess capacity. A factory in Chengdu that, according to Gasgoo.com, was to have been its third manufacturing base, is no longer needed. It makes sense that they would want to sell it to someone else who could make better use of it.

Who would be interested in a factory located far inland? Well, as it turns out, it doesn't really matter who is interested. While FAW wants to sell its factory, it has also placed strict conditions on who the purchaser can be. The purchaser must be a domestic auto firm with registered capital of at least seven billion RMB and annual revenue of 80 billion RMB. That limits the possibilities to only five: Changan of Chongqing, Bejing Auto, Dongfeng of Wuhan, Shanghai Auto or Guangzhou Auto.

However, if China's recent "big 4, small 4" designation is taken seriously, Beijing and Guangzhou would be dropped from the list as they will only be allowed to expand regionally, not nationally. So now we are down to only three possible purchasers: Changan, Shanghai and Dongfeng.

FAW, is one of only two centrally-owned automakers (three four if you count Hafei and Changhe which is are owned by AVIC, the aviation monopoly), so unlike locally-owned SOEs or private automakers, there is little chance that we will see FAW dragging its feet in implementing policy. The conditions on the sale of FAW's factory, we can be fairly certain, were placed, not by FAW, but by the Central Government. My money is on the NDRC (National Development and Reform Commission), which still thinks of itself as the state planner with the power to pull levers as if China were still a command economy -- but that is mere speculation on my part.

In a real market economy, FAW would decide it has too much capacity, put its factory up for sale, and accept the highest bid, regardless of who the bidder was. And such bidders might have included, not only Chinese auto firms, but also foreign auto firms or even a real estate firm.

The point here should not be surprising. It is that the Central Government intends to remain very much involved in the development of this industry. They understand very well that China's design capabilities are still in their infancy, and that foreign auto makers are viewing China as one of the few places in the world in which they can sell a significant number of cars.

Until recently, Chinese automakers have largely been content to learn manufacturing from their foreign JV partners, but the real key to growing an auto industry is not in manufacturing; it's in design. The Central Government is in the process of separating the sheep from the goats because they will want to see more concentrated efforts on R&D and less on just cranking out cars, half of the profits of which flow back out of the country.

FAW's factory will probably go to whichever among Changan, Shanghai or Guangzhou can demonstrate the ability to produce a high-quality, independently-designed sedan with national appeal, and quickly ramp up production.