China signals it may let weaker automakers merge as sales slow

Workers building a car on the Geely Motors assembly line in Cixi, China's Zhejiang province.
Workers building a car on the Geely Motors assembly line in Cixi, China's Zhejiang province. PHOTO: AFP

BEIJING (BLOOMBERG) - Chinese regulators signaled they may refrain from introducing large-scale stimulus measures and instead encourage weaker automakers to merge or be acquired, as a slowdown in the industry exposes problematic overcapacity.

Slowing vehicle sales will "severely undermine" the auto industry's profitability and make companies with operational difficulties targets for takeovers, Qu Guochun, a deputy director at the Ministry of Industry and Information Technology, said Saturday at a forum in Tianjin, China. Lu Weisheng, a deputy director at the National Development and Reform Commission, cited "severe structural problems" within China's auto industry and encouraged local carmakers to step up expansion overseas.

The assessments by China's two main auto industry regulators followed the state-backed China Association of Automobile Manufacturers saying last week that it is lobbying the government to consider stimulus measures to revive demand. Its proposals include halving the 10 per cent purchase tax and raising caps on the number of new vehicles that can be bought.

"To build a strong auto nation, we need the government's help to boost demand," Shi Jianhua, the deputy secretary general of the auto association, said at a briefing last week, without elaborating on how the government has responded to the lobbying. "Vehicle demand has a close correlation with economic growth and infrastructure investment."

The China auto association is predicting sales to grow at the slowest pace in four years as the economy slows. Consumers in China also are putting off purchases as a summer stock-market rout saps discretionary spending. Dealers have responded by extending unprecedented discounts to reduce stockpiling inventory, raising concerns about profitability.

Changan Automobile Group and Dongfeng Motor Corp., two large state-owned carmakers, said at the forum in Tianjin that regulators should allow the market to weed out weaker players and avoid distorting demand by introducing short-term incentives.

"China's overall passenger car sales are still expanding at about 10 per cent in terms of registered new cars," Zhu Huarong, president of Changan Auto, told reporters in Tianjin on Saturday. "Automakers in Europe and the US would laugh their jaws off if they hear the argument about introducing stimulus policies with such growth rates."

Dongfeng's deputy general manager Liu Weidong said one-off stimulus measures have not led to good results in the past.

"We had a lot of examples in the history to live beyond one's means," said Liu. "Under current circumstances, government can step up support in areas such as promotion of new energy vehicles and replacement of old vehicles. Those are very necessary."