China To Restructure Automotive Industry.(Brief Article)

In an effort to streamline its auto industry, The Chinese government introduced a new plan to consolidate or eliminate many small, unprofitable automotive firms. The government said it would give new support to the country's three biggest car and truck manufacturers. In addition, the government said it will consolidate the hundreds of aftermarket firms into five to 10 producers.

The plan, published on the Web site of the State Economic and Trade Commission, highlights how China is trying to prepare its most important industries for greater competition after it enters the World Trade Organization -- a move that will bring auto import tariffs down sharply in the next five years.

The strategy marks the first time the government has laid out a blueprint for industry consolidation and has broad implications for foreign auto firms in China, including many that have formed joint ventures with smaller Chinese auto companies in order to gain entry to the potentially huge market.

China now has more than 100 companies engaged in car manufacturing and assembly. Many of these firms, though, are unprofitable, churning out only several thousand cars per year. The fragmented market exists largely due to long-standing industry protectionism, whereby local governments use investment and trade barriers to keep prices artificially high and prevent competition.

The new plan marks an effort to change that and create an industry that will become a major driver of future economic growth. Eventually, the government also hopes industry restructuring will allow its biggest companies to compete with major auto firms like General Motors Corp. and Ford Motor Co., both of which operate joint ventures in China.

Under the government's plan, dozens of China's smallest auto firms will be shuttered or merged into larger rivals. At the same time, China's three largest auto firms -- First Automobile Industry Corp., Shanghai Automotive Industry Corp. and Dongfeng Automotive Group -- will receive new government support, including easy access to capital and priority approval in forming new foreign joint ventures and building technical research centers, the report said. These companies also will be given greater leeway to roll out new products and set prices for their cars -- decisions that until recently have been made by the government.

The report said the changes are expected to double total auto sales over the next five years to nearly 1.2 million units per year. Much of the growth, the report said, will come from the introduction of cheap compact autos purchased by China's small but growing middle class.

The three biggest firms are expected to capture the bulk of the new sales, the report said. While positive for future industry growth, the restructuring could create problems for foreign auto firms in China. Ford, for instance, has two joint ventures in China, but neither of the companies it has lined up are among the three firms targeted for special assistance. GM operates two main joint ventures in China, one with Shanghai Automotive and another with a former unit First Automobile.

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