Manufacturing News

Beijing must put teeth into its plan to merge state-owned automakers

The strike by Jiangxi Changhe Automobile Co.'s workers lasted only four days in January. The workers are back on the assembly line and Changhe production has returned to normal.

But don't let that peaceful outcome fool you. The walkout was a major blow to the central government's campaign to consolidate China's inefficient state-owned automakers.

Chongqing Changan Automobile Co.'s attempt to integrate Changhe into its own operations was stopped in its tracks. In a stare-down with angry municipal officials who backed the strikers, China's central planners blinked first.

How did Beijing bungle its efforts to restructure China's auto industry? Well, it is a long story.

China has more than 100 automakers, most of which are state-owned. For years, the Chinese government has pushed for mergers and acquisitions to improve competitiveness.

And they've had a few successes. In 2008, Shanghai Automotive Industry Corp. acquired Nanjing Automobile Group Co.

Taking heart from this deal, China's central economic agency -- the National Development and Reform Commission -- drafted an ambitious plan in 2009 to consolidate China's domestic auto industry down to eight major state-owned players.

The lucky eight were Changan, SAIC, China FAW Group Corp., Dongfeng Motor Corp., Beijing Automotive Industry Holding Corp., Guangzhou Automobile Group Co., Chery Automobile Co. and China National Heavy Duty Truck Group Corp.

At first, the plan looked good. In 2009, Changan agreed to take over a state-owned aircraft maker's two automotive subsidiaries: Hafei Motor Co. and Jiangxi Changhe Automobile Co.

But no mergers or acquisitions have happened since.

To make matters worse, Changan's acquisition of Changhe backfired in January when the company's workers went on strike. They were upset about Changan's plan to reduce Changhe's product lineup to microvans, a plan that seemed certain to result in job cuts.

Fearful of labor unrest, the NDRC quickly ordered Changan to halt consolidation efforts.

The NDRC also has allowed Changhe to remain largely independent from Changan, leaving the company to be temporarily managed by the municipal government of Jingdezhen, where the company is based.

Why did China's central economic agency back down? In China, local governments are skillful protectionists. Local officials want to preserve the jobs and revenue that local state-owned businesses provide.

So it's no surprise that Jingdezhen's municipal officials and Jiangxi's provincial government both sided with the strikers.

After the strike began, these officials quickly appealed to the NDRC to allow Changhe to retain its auto manufacturing business.

Needless to say, these officials were not especially concerned about the inefficiencies of China's fragmented domestic auto industry.

With no effective financial controls, state-owned automakers often make too many of the same products. And when one automaker acquires another, local governments resist efforts to eliminate redundant products.

Take Changan and Changhe. Both companies make small cars and microvans. After the acquisition, it made good business sense to pare down Changhe's product line. But the workers had other priorities.

It's time for the NDRC to put some teeth into its consolidation plan.

Until then, those of us who favored the consolidation of China's inefficient state-owned automakers are bound to feel disappointed.

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