Domestic automakers to apply the law of the jungle

China's auto industry has been hit hard by the global financial crisis. An even stronger industry could emerge, writes Shanghai Securities News

The Chinese automotive industry has entered a period when the law of the jungle prevails.

"The fallout from the global financial crisis has dented China's car market and prompted domestic carmakers to cut production," an Anhui province-based domestic carmaker said. "I reckon that Chinese auto brands will experience a thorough consolidation after which only four to five super players will survive."

Vehicle sales in China edged back 1.4% from a year earlier in September. It was the first time that two straight months had both seen sales declines over the past five years.

Industry experts expect the financial storm billowing out from Wall Street to increase the pace of consolidation in China's car making industry. More than 100 Chinese carmakers have sought mergers and acquisitions or mutual partnerships to ride out fiercer competition in the sector.

In August, Guangzhou Automotive Industry Group and Beijing Automotive Industry Group wanted to bid for a stake in Hunan province-based Changfeng Motors (600991.SH), a sports multipurpose vehicle producer. It was also reported that FAW, one of China's top three automakers, is in talks with Brilliance China Automotive Holding (1114.HK), one of BMW's dealers in China, to acquire its self-branded car division. The report was later squashed by Brilliance China.

"China's auto industry was hectic a few years ago and the outlook was way too optimistic," Zhong Shi, an independent auto industry analyst said. "This resulted in most industry players expanding as quickly as possible because of the then widely accepted notion that only if you are big enough can you survive the rivalry.

"Expansionary activities are supported by immense cashflow which now appears impossible as the banks are in austerity."

Indeed, cashflow and the capital supply chain are the sticking points in the evolution of China's auto industry. Zhong predicted the situation would get tougher next year. "Some smallest carmakers will collapse first, starting a domino chain effect," he said.

A market watcher said the dual problems of China's auto credit lending and overcapacity will strike sequentially in the ongoing bout of consolidation amongst homegrown brands.

Statistics show 89 new models are on track to be launched in 2009, including 35 from joint ventures and 54 from domestic brands. "The sheer large number would lead the industry to the middle of nowhere," the market watcher warned.

However, positive voices are saying that domestic sales will bounce back to 10-15% next year and continue to drive the global auto market.

"Government sourcing should exclusively choose domestic brands," Xu Ming, director of the State Information Center argued. "Government should act in accordance with its words that it will unswervingly back homegrown products."

Tan Jijia, an analyst with Pacific Securities, was even more aggressive. "Domestic giants like FAW, SAIC and Dongfeng could amalgamate to acquire ailing foreign giants like Chrysler,” he said. “General Motor's market cap is just RMB3 billion at the moment. Sometimes a nation has to take risks."

This article originally appeared in Chinese in the Shanghai Securities News on November 6, 2008. The China Perspective takes no responsibility for the accuracy of the original article.