The Chinese auto industry is overdue for consolidation and General Motors Co. (GM:US), with local partner SAIC Motor Corp., is interested in acquiring ailing automakers, according to four people familiar with the companies’ thinking.
GM, already the top foreign carmaker in China, aims to increase sales by about 75 percent by 2015 to 5 million, and a deal with another automaker is one possible way its ventures can expand, said the people, who didn’t want to be identified because the plans are private.
China’s government wants to preserve jobs even as it encourages consolidation that echoes the auto industry’s contraction a century ago that made the Detroit-based carmaker the world’s largest for eight decades.
Expanding in China isn’t as simple as going out and buying another plant. Foreign companies face restrictions on the number of partners they can have or how much of a factory they can own. Last year, China said it wouldn’t give incentives for further foreign-owned auto plants. That started raising the value of underused auto plants, of which there are plenty: 10 of China’s 71 automakers didn’t sell a vehicle last year.
“It is much easier to get the government to sign off on their acquisition than to approve new capacity,” said Han Weiqi, an analyst with CSC International Holdings Ltd. in Shanghai. “It is in line with the government’s mandate of consolidating the industry and reducing the number of players.”
Two calls to the media office of the National Development and Reform Commission, China’s top economic planning body, weren’t answered.
China has the world’s most overcapacity. Factories in China are able to produce about 10 million more vehicles than they currently make, according to LMC Automotive. That’s more than the number of autos made in any country other than China or the U.S.
GM and SAIC have plans to open two assembly plants in China in 2014. Even then, their joint ventures may be capable of making only about 4 million cars, sport-utility vehicles and microvans a year. One way to stay on track with the 5 million target set when growth was more exuberant would be by taking over assembly plants that aren’t operating at full production.
GM has built up what it calls a fortress balance sheet with more than $23 billion in cash that gives it flexibility to make acquisitions.
“There are no current plans to increase GM’s manufacturing capacity through acquisition or consolidation,” Dayna Hart, a GM spokeswoman in China, said this week in an e-mail.
SAIC, based in Shanghai, declined to comment.
China passed the U.S. in 2009 to become the world’s largest vehicle market and still has room to grow: While 627 in 1,000 in the U.S. own a car and 517 in Germany, according to the World Bank, in China, it’s only 44.
The recovery of residential property prices in China’s major cities has accelerated since early 2012, potentially increasing demand for new passenger vehicles, said Kevin Tynan, Bloomberg Industries automotive analyst. GM sales in China last month soared 26 percent from a year earlier to 310,765, its best month ever. Buick and Chevrolet sales each gained 22 percent.
GM has been the largest foreign automaker in China for the past nine years, with about 14.7 percent of the market in 2012. GM said it earned $1.5 billion in 2011 from its joint ventures in China, or almost a sixth of the company’s $9.19 billion (GM:US) profit that year. Analysts project the automaker, which emerged from a government-financed bankruptcy in 2009, will report its 12th straight quarterly profit (GM:US) on Feb. 14.
While GM has many opportunities among Chinese automakers, which of them is the most probable target is a complex equation that depends on proximity to markets, ease of transportation and incentives offered by local governments in return for the investments, said Han, the Shanghai-based analyst.
Some local governments may resist investment and management from overseas or even from another city in China.
“Consolidation does not come easily in China because the governments, central and local, own 50 percent or more of most of the ventures,” Michael Dunne, head of industry researcher Dunne & Co., said in an e-mail. “It might be a good idea for Chicago to take over management/ownership of Detroit but getting there is not easy, even unthinkable.”
China signaled in late 2011 that it would be less inclined to sign off on new plants when it said foreign automakers would only be eligible for incentives on new factories approved before Jan. 30, 2012.
A struggling domestic manufacturer’s ability to build cars in China “becomes an asset,” said Matthew Stover, an analyst with Guggenheim Securities LLC based in Boston. “You’ve got a license, you may not be making many cars with it and your facilities may need a lot of help. But you have a license, so you then become an acquisition.”
GM needs to remain aggressive in China. It faces increased competition from Volkswagen AG as the German company aims to become the top-selling automaker in the world by 2018. Among non-U.S. foreign automakers, Wolfsburg, Germany-based VW has fared best in China, almost dethroning GM as the best-selling foreign car company in the country last year.
VW, which, unlike GM, includes Hong Kong in its China tallies, said deliveries climbed 24.5 percent to 2.81 million while sales of GM and its Chinese joint venture gained 11 percent to a record 2.84 million.
VW’s sales were helped by the introduction of new versions of its Lavida and Audi A4L in the third quarter and from a territorial dispute that fueled anti-Japan sentiment. In September, Toyota Motor Corp. and Nissan Motor Co. reported the steepest drop in sales in China since at least 2008.
Other foreign automakers have ambitions for China as well. Nissan, for example, moved the headquarters of its Infiniti brand to Hong Kong to try to gain share in Asia. Ford, which has been a laggard in China, says that breaking into that market is a priority. The Dearborn, Michigan automaker, which sold 626,616 vehicles in China last year, a 21 percent gain, is seeing some early success: Its Focus compact rose to the best-selling sedan in China last year from 10th in 2011.
Hyundai Motor Co. and affiliate Kia Motors Corp., both based in Seoul, also see potential in China, with their combined sales rising 14 percent in 2012.
All of this growth comes as auto sales continue to gain, if not at the same pace as in the past. Auto deliveries may increase 7 percent to 20.65 million this year, the China Association of Automobile Manufacturers said in January. A consensus is forming that sales may rise to as many as 30 million vehicles by 2020, said Bob Socia, GM China president.
“You need to stay ahead of the curve,” he told reporters last month in Detroit. “Are we ready to announce another plant? No, but clearly we’re looking at what we’re going to need to handle our expansion.”
He declined to say how GM is looking to expand beyond two new plants planned to be completed 2014.
The idea of GM growing through acquisition harkens back to GM’s origins, when founder Billy Durant used his company’s coffers to gobble up rivals as the nascent U.S. industry was consolidating. Few Americans today remember Winton Motor Carriage Co., the Oakland Motor Car Co. or other automakers, also called original equipment manufacturers (OEMS or OEs), of the early 1900s.
China is ripe for a similar reckoning, Wilbur Ross, the billionaire owner of parts supplier International Automotive Components Group, said in Detroit last month during a presentation at the Automotive News World Congress.
“The U.S. once had 125 domestic OEs, but has devolved down to a small handful,” Ross said. “At present, China has about 100 OEs, many of which are marginal and lack manufacturing and distribution scale and have limited market shares.”
China, with more than 110 auto brands, has about 36 percent of its car-making capacity unused, the equivalent of 10 million vehicles worth of over-capacity, according to LMC Automotive.
Of the 71 automakers tracked by the China Association of Automobile Manufacturers, 36 companies sold fewer than 10,000 vehicles in 2012.
Jilin Tongtian Automobile Co., Jiangxi Huaxiang Fuqi Motor Co. and Liaoning Huanghai Commercial Vehicle Manufacturing Co. are among the 10 that didn’t sell any vehicles last year, according to association data. Han, the CSC analyst, said those aren’t ideal acquisition targets.
Local China automakers don’t spend as much to develop new vehicles as global automakers do, Ross said. As a result, the 41 percent of the market they divvied up last year is shrinking, he said.
While there may be agreement from industrialists such as Ross to China’s Communist Party that automakers need to consolidate, how such a thing would happen is wide open to speculation, debate and innovation.
One notion is that foreign automakers would need to grow through their local partners, which might be better able to negotiate a fair market value for state-owned assets, said Bill Russo, president auto industry consultancy Synergistics Inc.
“A more likely scenario will be partnerships among local automakers to allow assets to be shared or transferred,” he said in an e-mail. “In such a scenario, foreign OEMs might work with their local partner to absorb under-performing assets into their existing Chinese JV.”
Alternatively, foreign automakers may not want some local capacity in its current form, Jeff Schuster, an industry analyst with LMC Automotive. An acquiring company may be able to win approval to replace outdated factories to create jobs.
“More likely they will continue to come in and build new capacity and much of the old will be shuttered if consolidation takes place,” he said in an e-mail.
The GM-SAIC partnership has acquired money-losing factories in China in the past, including assets related to Daewoo Motor Co. after GM bought a controlling stake in the bankrupt South Korean automaker.
GM and SAIC are partnered on Wuling and its Baojun car brand as part of a strategy to sell vehicles to an emerging working class outside of the major cities, such as Shanghai.
Last year, GM added 700 new stores in China and expects to open another 400 this year to have a total of 4,200 locations, Socia, the division president, said.
GM’s five-year China plan announced in April 2011 called on doubling its sales to about 5 million in the country from 2.35 million in 2010 and introducing 60 new or refreshed vehicles in there within the same time period.
The announcement followed years in which GM’s China sales increased 68 percent in 2009 and 29 percent in 2010, before the country’s rapid economic growth slowed.
With its Chinese partners, GM has eight production centers in China with the capacity of building 3.35 million vehicles this year, according to researcher IHS Automotive.
GM, which strives to build vehicles where they’re sold, will have straight-time capacity to build as many 4 million units in 2015 in China, according to IHS estimates. That includes the two new factories in Wuhan and Chongqing coming online in 2014, said the Northville, Michigan-based research firm.
The automaker aims to outpace the market again in 2013, Socia told reporters in Detroit.
“You have lots of people that the government wants to move into the middle class,” he said. “You’ve got 150 cities that are over a million in population. It’s pretty ripe for further expansion.”
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