China may have found a way to tackle car glut
China has long sought consolidation to address production overcapacity in its largest automotive market, but previous efforts have not succeeded. However, a new deal between two state-owned companies, Guangzhou Automobile Group (GAC) and FAW Group, suggests progress in tackling the issue of producing too many cars. GAC announced it plans to acquire a stake in FAW by issuing its shares to FAW in a joint venture.
Since both firms produce Toyota models in China, analysts believe this indicates the two companies may consolidate their operations.
Instead of forcing a merger of competing automakers backed by different local governments— an approach that has failed in the past—China appears to be focusing on foreign-brand joint ventures for consolidation. This strategy aims to make production cuts more acceptable to domestic stakeholders, as both companies would remain independent during the process. Claire Yuan, a Hong Kong-based credit analyst at S&P Global Ratings, believes this SOE integration could set a precedent for deeper integration in China's auto sector.
The FAW-GAC transaction highlights the feasibility of cross-region SOE integration, as historically, merging state-owned enterprises has been challenging due to issues like employment concerns and regional protectionism. FAW, based in Changchun, would become the second-largest shareholder of GAC, located in southern China's Guangdong province, according to a Hong Kong Exchange filing.
GAC, FAW, and Toyota Motor Corp. did not comment on the matter, but GAC's shares rose 16% in Hong Kong trading following the announcement, with the stock closing 2.6% higher on Tuesday.
China's automotive sector has long been ripe for consolidation due to the nation's push towards electric cars, which has led to the establishment of numerous factories. With production capacity to manufacture over 55 million vehicles annually, domestic sales are far below the production capacity, resulting in a surplus of cars. According to the China Passenger Car Association, domestic sales make up less than half of the production last year, leaving excess vehicles to be sold overseas.
Exports have surged by 21% to over 7 million cars, intensifying trade tensions and contributing to industry profitability challenges at home.
Written by urgent.news from The Economic Times's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
