Fearing Auto Industry Over-Capacity, China Discourages New Partnerships

Local Car-Makers Now Face Obstacles in Teaming Up with International Partners

By Published on .

Worried by the prospects for over-capacity, China's central government is making it increasingly difficult for private domestic automakers to form new joint ventures with international companies.

The losers are smaller Chinese automakers that hope to compete with their big state-owned rivals. Some foreign automakers that are latecomers to China -- such as Saab -- also may be victimized by this policy.

Before 1978, the Chinese government planned every detail of the economy, literally dictating every company's products and prices.

The government no longer guides the economy as tightly as before. But it still wants to consolidate the domestic auto industry -- which has dozens of players -- and it is favoring state-owned companies over private rivals.

In 2010, Sichuan Tengzhong Heavy Industrial Machinery Co., a private construction equipment maker, failed to win government approval for its plan to buy General Motors' Hummer brand.

And now Saab's would-be saviors -- a trio of Chinese companies -- have run into trouble.

In June, Hawtai Automobile Co., Zhejiang Youngman Lotus Automobile Co. and the private dealer group Pang Da Automobile Trade Co. launched a bid for the Swedish brand.

But China's central economic planning agency, the National Development and Reform Commission, urged them to think twice about the bid.

Hawtai has since bowed out, but Youngman and Pang Da are still keen to invest in Saab and produce its vehicles in China.

How likely are Youngman and Pang Da to get the green light from the government for their proposed deal with Saab? The odds are slim, since the government is moving to limit new entries into the domestic auto sector.

This month, China's Ministry of Industry and Information Technology has proposed new rules for entry into the passenger vehicle sector. Under the proposed rules, only companies that have "reached a certain scale and developed needed production capabilities and conditions" will be allowed to produce vehicles in China.

By contrast, the government will simplify procedures for China's major automakers to expand their own ventures.

What does this mean to the auto industry? Well, it means big state-owned auto groups including Changan, SAIC Motor Corp. and China FAW Group Corp. will be allowed to pursue fast expansion.

But small private automakers such as Hawtai and Youngman will face an uphill battle. And for companies like Pang Da -- which do not have auto-production experience -- the door to the domestic auto sector appears to be closed.

The new rules also will affect foreign automakers such as Renault, Subaru and Jaguar Land Rover, which have yet to set up production in China. Most likely, they will have to pair up with the big state-owned Chinese companies to achieve local production.

But they'd better not waste time doing so. The door to China's lucrative auto sector is starting to swing shut.

Automotive News China

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