Domestic Car Makers Eye More M&As

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Despite major steps for Chinese automakers in overseas expansion during the past year, companies are now expected to be more cautious in overseas acquisitions while accelerating their pace in domestic mergers.

Based on a survey of 50 executives from China's auto manufacturers and suppliers, a report issued by the consulting firm, AlixPartners, forecasts that China's auto sales will continue to grow by 20 percent in the next five years. In order to achieve sustainable growth, Chinese auto companies will focus on technology upgrades, after-sale services and internal management in domestic market.

According to the report, China's automobile industry has remained the most dispersed in the world. The top five manufacturers in China comprise only 50 percent of market share, compared to 87 percent in Japan and 65 percent in the United States.

At the same time, China's domestic auto manufacturers only account for 32 percent of market share, much less than their counterparts in Japan and South Korea, which occupy 94 percent and 73 percent in their domestic market. Figures for domestic manufacturers in Germany, France and the U.S. also exceed 50 percent.

The privately-owned, Wuhan-based Chery Automobile now holds the largest market share among China's indigenous automakers at 5.5 percent. Another major domestic brand BYD accounted for 5.1 percent in the market in 2009, an increase from 1.4 percent in 2006. At present, global automakers play a major role in China's auto market. For instance, the two joint ventures of Volkswagen account for 16 percent of China's auto market, while Hyundai holds 10 percent and GM, 9 percent.

Auto executives believe that foreign auto companies will remain a major part of the market, according to the survey. They predict that the market share for domestic auto makers will slowly move up to 37 percent by 2015.

Ivo Naumann, managing director of AlixPartners' Shanghai Office, said that last year's survey showed that many executives placed a high priority for overseas acquisitions as part of their development strategy. This year, the appetite for mergers and acquisitions in the domestic market is expected to grow, after the government set policies in place to encourage industry consolidation. The current plan is to reduce major market players to less than 10 from the previous 14 by 2012.

Compared to domestic auto manufacturers squeezed by fierce competition, China's auto part suppliers are enjoying rapid growth due to rising global demand and relatively low costs. According to Naumann, Chinese auto part suppliers are actively seeking acquisition opportunities in Europe and the U.S. under the encouragement of the government. "ough 2009 was thought to be a hard year, growth has exceeded expectations and now they are quite optimistic," said Naumann.

After the slow growth in 2008, China's sedan sales increased by 55 percent in 2009. The growth in the first quarter this year reached 77 percent, backed by the government's stimulus polices.

In 2010, the government instituted a mild reduction in the preferential auto purchase tax, while subsidies for rural auto purchases remained the same and trade-in activities increased. The government is also expected to offer subsidies for the use of new energy vehicles in five cities.