November 5, 2012 / 10:30 AM / 5 years ago

China's Guangzhou Auto and Chery alliance may signal industry consolidation

* 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 (Reuters) - 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 rivals.

Provincial and municipal governments, which in some cases own the smaller automakers, have been reluctant to streamline those operations because they offer sizable employment opportunities.

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 Motors Corp.

“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 two countries.

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.

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