Two major Chinese state-owned carmakers are weighing a resource consolidation amid Beijing’s push to rein in overcapacity.
Guangzhou Automobile (GAC) Group said Monday that it had reached a stake acquisition agreement with First Automotive Works (FAW) Group, paving the way for the latter to become its second largest shareholder with “strategic influence”.
The deal is designed to “optimize” and “integrate” the industrial resources of the two state-owned automakers, GAC Group said in a filing with the Shanghai Stock Exchange.
Under the signed agreement of intent, GAC Group will acquire part of the equity interest in an automobile manufacturing joint venture held by FAW Group and raise supporting funds through the issuance of A shares.
The transaction will also involve an overseas-listed company and a related-party transaction, the announcement said without elaborating.
Shares of GAC Group were suspended from trading in Hong Kong and Shanghai earlier in the day. Following the announcement, its Shanghai-listed A shares will remain suspended for no more than ten trading days.
Established in 1953, Changchun-based FAW Group is controlled by the State-Owned Assets Supervision and Administration Commission. Its luxury brand Hongqi has been used as the official car of successive Chinese leaders, including President Xi Jinping.
A stake transfer between the two leading Chinese automakers could herald a new season of consolidation in the country’s hypercompetitive car industry.
China’s state-owned carmakers—which in the gasoline car era relied on their ventures with foreign legacy marques as cash cows—are now bleeding heavily amid a subsidy-driven electric vehicle boom.
Compared with the nimbleness of local EV upstarts and their breakneck pace of innovation, the state-owned automakers’ slow transition to EVs has dragged their financial results into the red. GAC Group’s first-half net loss widened 76% year-on-year to RMB 4.5 billion (USD 669.4 million). The Guangzhou city government controls about two-thirds of the automaker via several investment companies.
BAIC Motor, a Chinese joint-venture partner of Mercedes-Benz owned by the Beijing city government, reported a net loss of RMB 1.59 billion (USD 236.5 million) for the six months, compared with a profit of RMB 360 million (USD 53.5 million) a year earlier.
Full financial disclosure at FAW Group is unavailable as the group has listed only part of its assets, while its truck arm recorded a 1,459% increase in profit in the first half of the year. The group acquired a 5% stake in homegrown EV startup Leapmotor for RMB 3.74 billion (USD 556.3 million) in December. Both companies sealed a deal last month to explore “in-depth” collaboration in areas like capital cooperation, assisted and intelligent driving, and finance.
In China, GAC Group and FAW Group are partners of Japan’s Toyota. First-half sales declined 6.3% year-on-year at GAC-Toyota and 27.4% at FAW-Toyota. FAW Group also operates joint ventures with Volkswagen in China.
Overcapacity and a prolonged price war have some analysts anticipating a consolidation that could reshape China’s competitive landscape.
“We believe the divergent performance trend should… eventually lead to market consolidation, with top-tier automakers gaining market share faster,” Citi analysts wrote in a research note, singling out BAIC Motor and GAC Group among six loss-making Chinese carmakers during the second quarter.
The market share commanded by the top five Chinese EV brands rose by 1.4 percentage points to 53.5% in July from the previous month, according to Citi.
Earlier this month, China’s top economic planning agency signaled support for mergers among major automotive groups to “effectively” consolidate production resources and avoid “homogeneous” competition, an official of the National Development and Reform Commission said at a briefing.
However, some earlier attempts faced strong resistance. Last year, a proposed merger between state-owned carmakers Dongfeng Motor and Changan Automobile fell apart due to government concerns about the potential impact on local employment, according to people familiar with the matter.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.
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