China Hunts Down ’Zombies’ to Fix Failed Auto Policies

Four years ago, a small Chinese automaker had such big ambitions it broke ground on a $1 billion plant to make more cars than Ford Motor Co. Then reality set in and Jilin Tongtian Automobile Co.’s factory site is now a pile of rubble.

Tongtian has stopped producing cars after struggling to compete. Near the site, in a province bordering North Korea, dust-covered metal cabinets are among the few traces the company ever existed. It kept its auto-maker license though, which are limited and therefore valuable in the world’s biggest vehicle market.

With the Beijing auto show set to begin next week, China’s facing a reality check: Six decades after setting out to create its own industry, the policies have failed to spawn a single brand able to compete globally. Instead, it’s been plagued by overcapacity, easy money and dominance by foreign carmakers. Now the government is working to revise that approach, including reclaiming licenses from weak players like Tongtian.

“A lot of what the local automakers make is rubbish,” said Jochen Siebert, managing director of Shanghai-based JSC Automotive Consulting, who has tracked the auto industry for more than a decade. “They are more or less zombies and there’s no way for them to compete with the big boys.”

Economic Pillar

China, which last year became the first country to see annual motor-vehicle sales of more than 20 million units, is betting that fewer automakers will translate to better cars and stronger companies, just as the U.S. auto industry experienced at the turn of the 20th century, when hundreds of manufacturers sprouted and then collapsed until General Motors Co., Ford Motor Co. and Chrysler Group LLC emerged as the dominant trio.

The number of Chinese automakers has ballooned through the years as the government promoted the industry as a pillar of the economy that would bring in investments and create skilled jobs. Municipal governments compete with each other to attract automakers by dangling tax holidays, land and financing.

The result: there are about 70 major automakers in China producing passenger vehicles, buses and trucks, according to the China Association of Automobile Manufacturers. And that number doesn’t even include manufacturers of low-speed vehicles used mainly in the country’s rural areas.

Such numbers haven’t translated to market share. Local auto brands have seen their combined share of total sales shrink for seven months to 39.3 percent of sales in March, down from 50.6 percent in February 2010, according to CAAM.

Hand Combat

“The slump exposes the weak competitiveness of local brands,” Dong Yang, secretary-general of the association, which represents Chinese carmakers, said at a briefing in Beijing this month. “The time for hand-to-hand combat to the death between local and foreign brands has really started.”

While the central government has voiced the need for consolidation in China’s auto industry for years, the drumbeat of official pronouncements has gotten louder more recently as Chinese automakers continue to lose market share.

In 2009, the State Council, China’s cabinet, set a goal for the top 10 automakers to account for more than 90 percent of the market and to form two to three automakers that sell more than 2 million vehicles a year.

The Ministry of Industry and Information Technology followed up last October with a list of 48 automakers that made few, if any vehicles. Twelve government ministries and agencies then issued a joint directive in January placing the auto industry at the top of a list of nine that deserve “major focus” for consolidation.

New Ideas

The automakers on the MIIT list have until October next year to meet minimum production levels -- at least 1,000 passenger vehicles or 50 medium to heavy trucks, depending on category -- or have their permits canceled.

“China’s automakers should digest imported technologies and come up with new ideas, and not merely rely on foreign technology and brands to prop up the market,” Su Bo, a vice industry minister, said in April 2013. “Chinese automakers should actively build their own brands, constantly enhance international competitiveness in order to turn a big auto industry into a strong one.”

Many of these “zombies” would rather limp along than shut down because their manufacturing permits could be sold for hundreds of millions of dollars, according to Miao Wei, the MIIT minister. Since 2009, automakers could only acquire companies holding licenses should they expand production outside their home base.

Local Resistance

Still, the central government directives for industry consolidation will probably face resistance from local authorities because they depend on automakers and potential investors to create jobs and generate tax revenue, according to Li Jingsheng, CAAM deputy secretary general.

“The current efforts by MIIT are to cut them off,” Li said. “Local authorities may find it hard to accept.”

Even with fewer automakers, China may struggle to produce a world-beater as even its largest automakers -- almost all of them state-owned -- make the bulk of their profits by producing cars for foreign brands rather than developing their own marques, according to Siebert at JSC Automotive.

That’s led a former minister in 2012 to call the Sino-foreign joint venture model as addictive like opium, according to a Xinhua News Agency report.

The most successful local Chinese brands instead belong to privately owned automakers such as Great Wall Motor Co., BYD Co. and Zhejiang Geely Holding Group Co., which also rank among the country’s biggest exporters to countries including parts of Europe and Australia.

Too Small

The majority are smaller automakers rarely known outside of China’s borders as they lack the scale to move overseas. Some, like Tongtian’s cars, are hard to find even at home. The company doesn’t have a website and the number listed in the phone directory has been disconnected.

On a visit last month to Jilin, officials at the development zone where Tongtian had planned its auto plant directed inquiries to the local Communist Party department, which didn’t answer calls. Zhejiang Xinhu Group, the last-reported owner of Tongtian, declined to make officials available to comment on the automaker.

Tongtian was established in 2002 and its investors at the time included a unit of a military supplier. The automaker produced a subcompact model called “Glow” that it showed at the 2003 Chengdu auto show, according to a report by The model has since been discontinued.

“It’s not worth your money,” said Zhou Jie, a salesperson at a used-car dealership in Hongwei, said of the vehicles that the automaker last made several years ago. “Why not buy a Volkswagen Polo if you want a small car?”

— With assistance by Ying Tian

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