General Motors Co., which has sold more vehicles than any other automaker so far this year, may be poised for market share gains in China as a host of smaller, local players struggle to survive.
With auto sales in China rising at the slowest pace in 13 years, pressure is building for smaller Chinese producers to exit the industry, presenting an opportunity for foreign carmakers such as GM (GM) and Toyota Motor Corp. (7203) to extend gains in China, according to Guotai Junan Securities Co.
“If the smaller Chinese carmakers get squeezed out because of over-competition, it will be a plus for GM and other foreign automakers because they’ll be able to swoop in and take over those markets with cheaper models,” said Zhang Xin, an auto analyst with Guotai Junan in Beijing.
GM, the biggest foreign automaker in China, illustrates the widening gap between the large, established automakers and their smaller, local rivals. The company this week reported November sales in the country rose 20 percent, the fastest increase in 10 months, as lower prices drove up demand of its Wuling light trucks. By comparison, Chery Automobile Co.’s car deliveries in China tumbled 30 percent to 37,446 last month, according to the nation’s Passenger Car Association.
Of 70 automakers tracked by the China Association of Automobile Manufacturers, the 15 largest producers accounted for 89 percent of total deliveries this year, with GM leading the pack. It sold more than 7,000 automobiles a day in the country. That’s left the remaining companies selling fewer than 10,000 units monthly, including 10 with zero sales all year, according to the government-backed group.
China vs. U.S.
The rift may be accelerating because of a slowing market. CAAM forecasts the number of vehicles delivered to Chinese dealerships will rise between 3 percent to 5 percent this year, after surging 32 percent in 2010. That would mark the first time the Chinese market would expand at a slower pace than U.S. light-vehicle retail sales, based on CAAM figures stretching back to 1998.
For analysts such as Zhang at Guotai Junan, China’s slowing market ripens it for acquisitions.
“Opportunities are popping up for consolidation as overall growth slows and companies are being squeezed out by competition,” Zhang said. “But a lot of factors need to be in place for this to happen, including whether the degree of complementary manufacturing capacity available and the willingness to allow this on the local-government level.”
Case for Consolidation
The Chinese central government, which aims to have two to three national automakers with annual sales of over 2 million units and 4-to-5 companies with full-year deliveries of more than 1 million vehicles by the start of 2012, is encouraging domestic producers to merge.
The industry ministry identified the auto market as one of the eight key sectors that need to be consolidated by 2015, according to a meeting chaired by Minister Miao Wei in July. Politics, though, may get in the way of such plans, according to some analysts.
“Local governments are reluctant to let go of any automakers given that car companies are engines for GDP growth,” said Lin Huaibin, an analyst with IHS Global Insight in Shanghai.
Room to Grow
Still, auto industry consolidation is not unheard of in China. BYD Co. (1211), a battery maker, began making cars in 2003 after taking over Qinchuan Automobile Co. Zhejiang Geely Holdings Group founder Li Shufu, who began his career making refrigerators, bought his way into the car industry in 1997 by investing in an automaker owned by a jail in Deyang, Sichuan province.
China, whose automobile market has surged almost eightfold in the past decade to more than 18 million units a year, still has room to grow. Rural towns with few cars have kept the country’s average vehicle ownership at about 60 vehicles per 1,000 people, less than half the world average, according to CAAM. Annual vehicle sales could reach 30 million by 2020, according to Xu Changming, research director at the State Information Center.
Such untapped demand is driving investment. Volkswagen AG (VOW) plans to open a 2-billion yuan ($315 million) plant in 2013 in Xinjiang, a move the provincial government planning agency said “filled a hole” in the region’s passenger-vehicle industry. Nissan Motor Co. (7201), Japan’s second-largest carmaker, is targeting consumers in inland China for future growth, Kimiyasu Nakamura, head of the company’s Dongfeng Motor Co. venture, said in September.
For the domestic automakers, the intensifying competition has led them to stepped up marketing. Geely sponsored the Zhejiang Symphony Orchestra’s performances in September, while Guangzhou Auto sent a fleet of 30 Trumpchi cars to be featured in the movie “Racer Legend.”
“There’s been a lot of pressure on us on the pricing side,” said Wu Song, general manager at China’s Guangzhou Automobile Group Motor Co. “We want to beef up awareness of our Trumpchi cars by sponsoring the movie to let people know more about us.”
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