* Deal will not involve equity stakes
* Smaller players resistant to consolidation
* Policy makers continue to push for larger carmakers
* Majority of Chinese companies compete at low end of market
By Fang Yan and Norihiko Shirouzu
BEIJING, Nov 5 China's Guangzhou Automobile
Group Co Ltd and Chery Automobile Co Ltd
are expected to announce as early as Tuesday a broad alliance
involving technology sharing and sales cooperation.
The move is a sign that consolidation of China's highly
fragmented auto industry may be gaining steam as sales growth
slows in the world's biggest auto market.
The alliance, some of the details of which were described to
Reuters by two Chery officials, also highlights Chinese
automakers' efforts to beef up their competitiveness by
combining resources in a market dominated by foreign automakers.
Under the agreement, due to be announced by Guangzhou Auto
and Chery in Beijing early Tuesday, the two companies would
share technology such as engines and vehicle underpinnings,
according to one of the two Chery officials, who declined to be
named because the information was not yet announced.
He said the two automakers are also likely to cooperate in
the sales and marketing of cars marketed under their own brands.
Both Chery officials stressed the alliance would not involve
equity stakes and that it would not involve joint ventures the
two companies have with global automakers.
"It's a broad, wide-ranging cooperation between Chery and
Guangzhou Auto, but we won't be holding stakes in each other,"
said one of the two Chery officials.
A Guangzhou Auto spokesman declined to comment.
PUSH TO CONSOLIDATE
China's industrial policymakers in Beijing have for years
been pushing without much success for the country's fragmented
auto industry to combine resources. They want the large number
of auto companies that operate in the country to merge into a
fewer number of stronger players to better compete with foreign
Provincial and municipal governments, which in some cases
own the smaller automakers, have been reluctant to streamline
those operations because they offer sizable employment
According to the China Association of Automobile
Manufacturers, China has more than 70 registered automakers. A
CAAM spokesman said those registered entities in some cases
operate multiple auto units.
A majority of indigenous Chinese automakers of various sizes
and strength compete at the lower end of the market, leaving the
lucrative upper end to global automakers such as General Motors
and Volkswagen AG.
Consolidation of the market is becoming more important
because Chinese demand for automobiles appears poised to
register single-digit growth rates this year for a second year
in a row, the slowest back-to-back years since the market first
took off in the late 1990s.
Small moves to consolidate have happened over the past few
years, such as Changan Automobile Group's takeover of microvan
maker Harbin Hafei Automobile Industry Group in 2009 and
Guangzhou Auto's own move to take control of small pickup truck
maker Gonow and Changfeng Automobile, which has a 50-50
manufacturing and sales joint venture with Japan's Mitsubishi
"Consolidation is the way to go for China, but it is a
time-consuming process because it involves various stakeholders,
including provincial and municipal governments," said John Zeng,
a Shanghai-based analyst for research firm LMC Automotive.
Guangzhou, China's sixth largest automaker by sales,
reported a 58 percent decline of its third quarter net income
due to slower economic growth and falling demand for Japanese
cars made at its joint ventures with Toyota Motor Corp
and Honda Motor Co amid a diplomatic row between the
Chery's vehicle sales during the first nine months of this
year fell about 11 percent from a year earlier despite its
expanding export business.