FAW, Dongfeng Automobile Co., Shanghai Automotive Industry Corp. and Chongqing Changan Automobile Co. have been directed by Beijing to start acquiring smaller rivals in a race to transform themselves into the “Big Two” or “Big Three” in China’s auto industry.

 

The State Council, China's cabinet, hopes to create homegrown equivalents of Toyota and Honda in order for Chinese automakers to gain a greater share of sales in the international marketplace. The government's consolidation strategy for the auto sector involves concentrating power in the hands of two or three mega-auto groups, with annual sales of more than 2 million units each, as well as four to five regional leaders with more than 1million vehicle sales a year. Besides encouraging FAW Car, Dongfeng Automobile, SAIC and Chongqing Changan to make acquisitions nationwide, officials are pushing Beijing Auto, Guangzhou Automobile Industry Group, Chery Automobile and China National Heavy Duty Truck Group Co. to expand regionally, according to a detailed plan unveiled by the State Council on Friday night.

 

China also is aiming to reach 10 million units in both vehicle production and sales this year and is shooting for an average 10% annual growth for the country’s car production and sales over the next three years. According to the plan, released on China’s official government Web site, passenger cars with an engine displacement of less than 1.5 liters will take 40% of the market by 2011, and those with engine displacement of below 1 liter will have a 15% share.

 

Citigroup said the stimulus plan would be positive for the auto industry in the short term through support for sales expansion and in the long term as well through the encouragement of reorganization and the development of related service industries such as auto financing and used car sales. “However, we believe it also introduces medium-term uncertainty through consolidation for both potential consolidators and targets in terms of potential combination and financial impact,” the bank said in a research note released Monday. Citigroup analysts fingered Dongfeng Automobile and Weichai Power Co., a leading auto parts maker, as potential consolidators under the new plan.

 

First Automotive Group Corp., commonly known as FAW, has been producing the Hongqi ("Red Flag"), a luxury limousine, since 1958. The company currently operates a joint venture with Toyota to produce the Prius hybrid and has formed partnership with Volkswagen to produce the Bora, Jetta and the Audi A4 and A6. Shares of its listed subsidiary, FAW Car Co., rose by 0.73 yuan (11 cents), or 6.15%, to 12.60 yuan ($1.84), Monday in the wake of the stimulus plan. Those of light truck and diesel motor manufacturer Dongfeng Automobile Co. rolled up by 0.20 yuan (3 cents), or 4.9%, to 4.30 yuan (63 cents).

 

Shanghai Automotive Industry Corp. partnered with General Motors to form Shanghai GM Corp., and joined hands with Volkswagen in setting up Shanghai Volkswagen Automotive. Shares in the listed SAIC Motor Corp. soared by 0.51 yuan (7 cents), or 5.35%, to 10.05 yuan ($1.47). Chongqing Changan Automobile Co., which produces trucks for Suzuki and the Focus, Fiesta, and Mondeo for Ford Motor, spiked by 0.69 yuan (10 cents), or 10.0%, to 7.59 yuan ($1.11).

 

The stimulus plan for the auto sector was first announced by the State Council in mid-January and was among the government’s initiatives to support and reform 10 industries, also including shipbuilding, logistics, textiles and nonferrous metals.