SHANGHAI -- Thanks to a strong push from the central government, consolidation among state-owned automakers has picked up speed this year.
This is no bad thing. Consolidation can boost the competitiveness of these companies.
But only up to a point. The long term solution is privatization.
Last week, Changan Automobile Group Corp. acquired auto subsidiaries of aircraft maker Aviation Industry Corp. of China, including Hafei Motor Co. and Jiangxi Changhe Automobile Co.
Changan Auto Group is the parent company of Chongqing Changan Automobile Co. which runs a joint venture with Ford Motor Co.
This is the second merger and acquisition in the state-owned auto sector this year. In May, Guangzhou Automobile Group Co. acquired domestic SUV maker Changfeng Motor Co.
More are in the pipeline.
Southeast (Fujian) Motor Corp., which builds several Mitsubishi and Chrysler models under license, is widely expected to be merged into Beijing Automotive Industry Holding Corp. or Guangzhou Auto.
On top of this, a merger is likely between two state-owned automakers in east China's Anhui province -- Chery Automobile Co. and Jianghuai Automobile Co.
China's auto sector is highly fragmented. And most homegrown automakers today are state-owned: 17 out of the 19 companies the China Association of Automobile Manufacturers lists as "key" domestic auto manufacturers, to be precise.
True, consolidation among state-owned automakers can weed out weak players and give those remaining a better chance to achieve economies of scale.
But mergers alone cannot solve the fundamental problem these companies are facing. That is, the conflict between serving the interests of the state and achieving success in the market.
Serving multiple masters
State-owned automakers have to listen to the government. They cannot shed historical burdens such as excess overheads and underperforming plants inherited from the times before China started economic reform.
Neither can they choose whom they want to acquire or merge with, because target companies are assigned to them by the government. That is why Shanghai Automotive Industry Corp.'s acquisition of Nanjing Automobile Group Corp. in late 2007 looks more like a government-ordered bailout than a sensible business transaction.
State-owned auto companies can easily get loans from government-controlled banks. This has blunted their ability to control costs and practice lean production. In other ways, state-ownership has eventually done them more harm than good.
Because as well as being its largest, China's auto market is also one of the world's most competitive and fast moving. If they want to survive, automakers have to react swiftly to changing conditions. Because they are controlled by risk-averse bureaucrats, for whom the surest route to promotion is to make as few real decisions as possible, state-owned companies cannot do this.
This explains why none of them has developed an independently sustainable business. The only reason state-owned automakers are still around is they are propped up; either by easy profits from joint ventures with global players, or by government-backed bank loans.
Private automakers progress
Without these two means of support, meanwhile, private automakers are forging ahead.
Zhejiang Geely Holding Group and BYD Auto Co., to give two examples, have not only reaped hefty profits by phasing out cheap models. They have also attracted top-tier foreign investors such as Warren Buffet and Goldman Sachs. A third private Chinese automaker Great Wall Motor has succeeded in certifying its models for the European market.
Has the government heeded the examples of these three companies? No.
Under a plan drawn up with the aim of revamping the domestic auto industry earlier this year, the sector is to be consolidated into eight companies; all state-owned.
It is time for the government to reconsider. Privatization, and not just consolidation, is the best way forward for China's state-owned carmakers.