How China plans to create giant state-owned carmaker

In recent years, Beijing has forced the consolidation of state-owned industries such as steelmaking, railway equipment and coal mining. The idea was to force these inefficient companies to cut costs, develop new products and turn a profit.

Now it's the auto industry's turn.

This month, three state-owned automakers announced plans to share technology, powertrains, platforms and purchasing. Their ultimate goal: to create a global auto giant.

On Dec. 1, China FAW Group, Dongfeng Motor and Chongqing Changan Automobile signed a partnership agreement in the central China city of Wuhan, where Dongfeng is based.

The agreement laid out a roadmap for joint activities.

First, the three companies will establish an r&d center to develop technology for electric vehicles, connectivity and lightweight materials. Next, they will develop platforms, coordinate purchasing and share production.

The companies also will coordinate overseas vehicle production, distribution and foreign partnerships. And they will jointly offer a range of services such as consumer loans and car-sharing.

If you add up all the initiatives, it sure sounds as if FAW, Changan and Dongfeng are negotiating a merger.

Indeed, all three companies dispatched top executives to ink the deal. Yet, the word "merger" was not in any of their speeches, and their joint statement didn't use the word either.

But there are strong reasons to believe that a merger is the ultimate goal.

First, the partnership will cover nearly all significant aspects of the automakers' operations. Second, a merger is implied — though not clearly expressed — in the joint statement released by FAW, Dongfeng and Changan.

In October, the Communist Party's national congress called for state-owned enterprises to accelerate efforts to "create top-tier enterprises" in manufacturing.

The Wuhan initiative appears to be the auto industry's response. The joint statement described the partnership as "a new exploration" to carry out the government's long-term plan — drafted in April — to consolidate China's auto industry.

Under that plan, the government called for "a number of" domestic companies to join the ranks of the world's top 10 automakers.

One may wonder whether Beijing can pull off this merger. That's a legitimate question.

A few years ago, for example, BAIC Motor Group failed to acquire Fujian Motor Industry Group even though the two companies had signed an agreement.

That merger fell apart because of a bureaucratic turf war. The city of Beijing controls BAIC, while the Fujian provincial government owns Fujian.

After lengthy negotiations with BAIC, Fujian's government refused to give up control of Fujian, which was deemed to be a pillar of the province's economy.

But there is no such problem with FAW, Dongfeng and Changan, which are all directly controlled by the central government.

If the government wants this merger to happen, it will happen.

Beijing already has demonstrated its ability to consolidate other state-owned enterprises. The steel industry offers a good example.

Baosteel Group was China's largest steelmaker, while Wuhan Iron and Steel ranked second. After two years' preparation, those two companies merged in 2016.

To be sure, knitting FAW, Dongfeng and Changan into one entity will not be easy. Each company has overlapping products and hundreds of thousands of employees.

But the three companies appear to have a sense of urgency. They don't have competitive products, they've struggled to expand overseas, and they've been slow to jump into China's fast-growing EV market.

It will be intriguing to observe how this merger will unfold. Each of the three companies has joint ventures with foreign automakers.

FAW has partnerships with Toyota Motor, Volkswagen Group and Mazda Motor. Dongfeng is aligned with PSA Group, Honda Motor, Nissan Motor, Renault and Kia Motors. Changan has joint ventures with Ford Motor, PSA, Mazda and Suzuki Motor.

Since these lucrative ventures generated steady revenues, FAW, Changan and Dongfeng felt little urgency to shake up their own hidebound operations.

But those days are over. Toyota, VW and the other foreign automakers would be well-advised to watch this alliance closely.