By on January 29, 2010

Chinese automakers may not get government approval to expand their capacities, unless they first agree to take over another Chinese carmaker, says the Shanghai Securities News via Reuters.

China may have the largest auto market in the world, with 13.6m units sold in 2009, but China also has a big problem: Way too many automakers. There are more than 100 automakers in China. The exact number is unknown. China’s top 10 automakers accounted  for 87 percent of total sales, or 11.9m in 2009. The more than 100 small guys built some 1.7m units – together. That’s 17000 units each.

As reported before, China’s central government wants to cut the number of major Chinese auto groups to 10 or fewer from 14 now, and ultimately wants two or three mega-producers with an annual output of more than 2 million vehicles each. You need to have size and sales to amortize R&D costs, especially if you want to be a world player.  Beijing has been prodding its mostly state-owned large automakers to buy smaller ones, but so far, that fell largely on deaf ears. The carmakers are largely a provincial affair, and Beijing is far away.

If the report is correct, then the central government is pulling out a big stick. With the new rules in place before the end of March, the government will in principle prohibit new vehicle projects and capacity expansion unless automakers first take control of a domestic peer, the Shanghai Securities News said, citing unnamed sources.

No stick without a carrot: The happy couples that merged will be showered with tax, credit and other incentives, said the paper.

We’ll see what happens in March.

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15 Comments on “China’s Orders Its Car Industry To Buy Smaller Players – Or Else...”

  • avatar

    Well it would eventually happen anyway, with or without government intervention and I agree with the thinking. You need to have volume and major capacity to compete on a world market…I personally would not mind driving around in a Chinese car as long as price, quality and safety are good. Just think about how we all thought of Hyundai 10-15 years ago…oh how things change.

  • avatar

    (About the photo) Doesn’t China have government-sponsored day care?.

    I guess China is on their way to their version of the “Big 3” – too big to fail, as long as the gov’t is there to bail them out. Hmmm.

  • avatar

    This is the problem, Chinese automakers shouldn’t need to take over smaller players.

    I can’t imagine those smaller Chinese automakers have technology, brand-recognition, or any merit that the bigger ones don’t already have. Its perplexing to think how the big automakers would benefit.

    The most efficient way would be to just allow the market to allow natural attrition of non-competitive smaller companies.

    The Chinese government is tying capacity increases with corporate take-over, instead of the traditional way (upgrading factories, or building new ones).

    There has to be more to this, its bad-business no matter what way you look at it. Populist agenda? Provincial infighting?

    • 0 avatar

      This whole “big is best” merging mania in China baffles me. Even disregarding for a moment the excellent counter-examples evident in GM and Chrysler, surely the erstwhile British Leyland illustrated clearly how simply bundling lots of car companies together for no reason other than “to be big” can have disastrous consequences

    • 0 avatar

      Completely off topic, but love your car splateagle! Had an opportunity to buy one exactly like that in 2000, but chose instead to buy a more practical Ranger. Sigh!

    • 0 avatar

      I think it’s less about capacity and more about R&D. You need to spent shitloads on R&D to create a world-class car. With scattered R&D you waste a lot of time and money on duplicated efforts, that’s why most indigenous Chinese cars are crap. When you consolidate the efforts you can streamline the process.

  • avatar

    Chinese Auto Show Booth Babe, meet future Chinese Auto Show Booth Babe. I can’t tell what kind of car she’s sitting on but her dress looks like it might be worth more than the auto. Or maybe it’s just the way she wears it. :)

  • avatar

    USA: tax payers are forced to buy out failing auto companies.
    China: healthy auto companies are forced to buy out failing auto companies first.

    Seems that the Chinese version is a tiny little bit better.

  • avatar

    Combination of the child on the picture and comparing Hyundai/Kia of 10-15 years ago to now brought some memories.

    In late ’98 or ’99 I took my son first time to an autoshow. He quickly got tired of busy pavilions and whined to go home. I offered him to find a car he would really like. He stumbled upon the Kia display. I think we were the only ones there. At least we were significantly outnumbered by the visibly bored booth babes in black business suites. They let him sit in a compact (Sephia?) and in the Sportage and gave him a ton of trinkets – key chains, pens, colorful broshures. It was the brightest part of his first autoshow. He said that he would definitely buy a Kia when he grows up.

    Now Kia/Hyundai pavilion is much much busier.

    I wonder if Chinese cars would warrant serious considereation 15 years from now.

  • avatar

    Isn’t this what Japan did in the 1960’s? They had nowhere near as many producers as China does today, but they did require their larger car companies to absorb the smaller ones.

    The other alternative is what happened in the U.S. We used to have many car makers, but over the years the weaker ones died out because they were not competetive. Like the majority of the modern Chinese car companies, many of these small American independents were never significant players.

  • avatar
    Mr Carpenter

    Joe, the smaller car companies which lasted through WWI, the post-war recession, the Great Depression, then World War II which were non-Big Three were called “independents”. 1950 car marques (60 years ago) included:

    International (trucks, only)
    Kaiser (built partially on the bones of Graham-Paige via….)
    Crosley (the radio tycoon – yes he built cars pre-war)
    Nash (Nash’s Rambler was a “model series” in 1950 not a make)
    Willys (yes, they did build cars post war 1951-1955 and pre-war too, not just jeeps post-war)

    I count that as ten auto companies. In 1950, Studebaker was #8 in the auto market ahead of Mercury, Chrysler, DeSoto, Cadillac and Lincoln (of the big-3 builders) with 320,884 cars sold.

    Dodge at #7 sold 341,797 cars. Top seller was Chevrolet at just under 1.5 million, Ford next at just over 1.2 million, plymouth with half that was #3.

    My point is this: until the “sales wars” between Ford and GM of 1953-1954, the independents were competitive enough to have survived all that they had previously gone through and would have had some chance of continuing on had it not been for the usual problem that mankind seems to continually have. Sheer greed.

    Ford executives, having seen sales go past Chrysler after their new 1949 cars came out, decided they wanted to recapture #1 over GM, and GM fought back.

    Long story short, it’s impossible for any other car companies to compete with two giants willing to temporarily give up any and all profits (including their captive dealer’s profits) in a fight that nobody really could win – except that the “independent” car companies ended up having to have forced marriages to survive.

    Nash and Hudson merged into American Motors in 1954 and this company lasted until 1987 when it was absorbed by Chrysler

    Willys and Kaiser-Frazer merged in 1953 and this company lasted until 1970 when American Motors absorbed it.

    Studebaker was foolishly purchased by Packard in 1954 and bled dry, and the company quit building cars in 1966.

    Checker and International each lasted independently until 1982 and 1980 respectively, killed by the recession/depression.

    Crosley threw in the automotive towel in 1953 just before the Volkswagen started to get popular a few years later.

    Having little or no choices on the marketplace (an effective monopoly) allows the remaining players to treat their customers like trash, allows them to stifle innovation, charge what they want… all undesirable things.

    The independent auto companies were where virtually all of the innovations came from.

    Reo (which still built trucks until 1972) quit cars in 1936, but they had the world’s first self-shifting transmission in 1931 and sold them right up through 1935. We call it an automatic transmission. (GM later claimed theirs was first – it is a lie).

    Packard built the first air conditioned cars in 1940.

    Studebaker introduced front disc brakes to the US market in 1963.

    The 1949 Packard developed automatic had a lock-up torque convertor almost 30 years before this became normal practice by Detroit Inc.

    For that matter, how would you like to try to drive a modern car with a tiller? Packard introduced the steering wheel early last century.

    Nash developed the first modern automotive heating/defrosting/ventilation system in the 1930’s which is worldwide standard now.

    Amerian Motors’ Rambler introduced dual circuit brakes in cars along with Lincoln (which was a considerably more expensive car) in the early 1960’s.

    Nash introduced the unit construction method in 1939, for modern cars. Probably 95% of cars built worldwide now use unit construction.

    AMC’s Rambler introduced the E-coat electro-dip process to help prevent rust on new cars in the 1950’s. Almost all cars now use this when constructed at factories worldwide now.

    AMC developed the first uniside large body pressing for precise door alignment in 1963 for their Rambler Classic and Ambassador cars. Again, virtually all cars are built with larger pressings now for better construction precision.

    AMC even had the first ever “real” car warranty worth more than the paper it was written on, starting in 1972, the Buyer Protection Plan, actually a one page plain English document and one which dealers actually adhered to.

    What a novel frickin’ idea, eh?

    So, I say that smaller players are healthy in any industry down to and including the auto industry. History proves it.

    • 0 avatar

      “Long story short” – too late.

      But I do love the independents because at least you don’t pull up next to an exact copy of what you’re driving every other stoplight.

    • 0 avatar

      I am very familiar with the history of these Independent auto makers. My first car was a 1962 Studebaker GT Hawk and I have always had a soft spot for these little guys.

      You are correct that the Ford-GM price war was the death blow for the Independents as they did not have the volume to compete with the Big Three on price alone. Had this price war not happened I do not believe the Independents would have survived past the 1970’s. They did not have the resources to follow the Big Three in diversifying their line-ups during the 1960’s. They would have been hard pressed to meet all of the safety, emissions and CAFE regulations which were enacted in the 1960’s and 1970’s. And they would not have had the resources to downsize and make the switch to front drive which occured during the 1970’s and 1980’s. The Independents were just too small to adapt to all of the costly changes which occured during this time frame.

  • avatar
    Mr Carpenter

    Now I’m a little bit green, Joe. I’ve always had a very soft spot for the Hawks, but haven’t ever been lucky enough to have one.

    Looking at how International Harvester did through the 1970’s would give you some clue as to how truly independent automakers would have fared. Or American Motors, for that matter. Increasingly uncompetative and unable to do more than react to the increasing federalization of cars after the mid-1970’s, and essentially uncompetative by 1980. So you’re probably right.

    International had their fans and these guys stuck by the cornbinders even after the big pickups were discontinued after 1975 or so, and Scout based pickups replaced them.

    Much like Chrysler right now, some Chrysler fans won’t give up but the general public pretty much avoid Chrysler like the plague.

    But given that Mr. Mason (of Nash fame) was determined to make a big four automaker out of Packard, Nash, Hudson and possibly even Studebaker (though I suspect he was smart enough he’d have shied away from them or demanded the closure of South Bend production had a full merger gone through), I suspect that had Mason lived, American Motors might – just might – have survived to this day.

    Packard, Clipper (1956 to about perhaps 1961 or 1962), Hudson (to 1957), Nash (to 1957), Rambler (later replaced by AMC) and later absorbing Jeep.

    So today, the 4th big-ish player would be Packard, AMC, Jeep.

    Jeep is Jeep. But looking at two major brands, including a luxury brand with a lot of history and a mass market brand (which by now would have had 35 years of history) are pretty much what most major car companies are doing.

    Plus the AMC and Jeep folks were always looking to non-US markets, and could have been as much of a player worldwide as say, Volvo are now.

    But it wasn’t to be.

    As for Studebaker making it alone without Packard? The company wouldn’t have survived through the mid-1950’s without Packard money. Studebaker bled their “partner” dry and threw away the corpse.

    The other thing to consider is that without the influx of the excellent engineering and management talent that American Motors and Jeep had in 1987, would Chrysler have even survived to become bankrupt under The Occupant in the White House last fall? I doubt it!

    That says quite a lot about the potential of AMC had they been able to lay hands on sufficient money to keep afloat. Having Packard money from the git-go may have just made all the difference 55 years later.

    A good foundation and all that…

  • avatar

    Central planners always know best. Chinese or American lefties. Its all the same.

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