Guangzhou Auto: China’s GM? 广州汽车集团:中国的通用?

Less than 2 months after signing a major R&D tie-up with rival Chery, leading south China automaker Guangzhou Automobile (HKEx: 2238) is back in the headlines with news of a similar tie-up with 2 other smaller rivals. This latest move makes Guangzhou Auto look increasingly like a potential consolidator for the many smaller and mid-sized automakers in nearby provinces, potentially molding the company into a future General Motors (NYSE: GM) of China. Auto historians will note that GM has no formal brands carrying its own name, but rather was formed through the consolidation of many smaller brands during a similar consolidation of the US auto industry many decades ago.

But like GM, Guangzhou Auto will need to be prudent if it really does emerge as a consolidator by carefully managing its stable of brands to focus on the most successful ones. Otherwise it could end up like today’s GM, which was overtaken by Japanese rivals in the 1980s and ’90s and ultimately underwent a painful bankruptcy that saw it eliminate many of its older, less popular brands.

Let’s have a look at the latest news reports, which say Guangzhou Auto has formed a partnership with 2 central Chinese companies, China Auto Parts & Accessories Corp and Zhongxing Auto, to develop the market in nearby Hubei province. (English article) Details of the tie-up are relatively vague, with the companies planning to work together to develop a number of areas including the production of car parts, cars and new energy vehicle technology.

The tie-up looks mostly like a joint venture right now, but the reports add that Guangzhou Auto plans to eventually buy some or all of Zhongxing, a maker of SUVs and pickup trucks, and would use the company to introduce its own brand to the central China market. Analysts noted that Guangzhou Auto currently has little or no expertise in trucks, so the new tie-up would help it in that area.

Guangzhou Auto is also trying to develop its own brands to lessen the company’s dependence on its joint ventures with Japanese automakers Nissan (Tokyo: 7201) and Toyota (Tokyo: 7203), which now account for a large part of its sales. That dependence caused Guangzhou Auto’s sales — and its share price — to plunge last fall after Chinese consumers boycotted Japanese-brand cars during the flare-up of a territorial dispute between China and Japan. Guangzhou Auto and other major China automakers also want to develop their own brands to lessen their dependence in general on their foreign joint venture partners, which often supply them with most of their technology and car designs.

Guangzhou Auto’s 2 new tie-ups come less than 2 months after it announced another major partnership that saw it pool its research and development operations with those of Chery, a former high-flying maker of cheap cars that has lately has fallen on hard times due to stiff competition and a slowing home domestic market. (previous post) Chery, which also recently formed a joint venture with luxury car maker Jaguar Landrover, is currently losing lots of money and being supported by its local government, which would surely not mind seeing the company taken over by healthier and better managed Guangzhou Auto.

If the current trends continue, look for Guangzhou Auto to keep signing new tie-ups with car makers in nearby provinces and potentially acquire the partners it works well with, as Beijing encourages industry consolidation. If that happens, the company could easily emerge as one of China’s top 3 automakers in the next decade, providing both opportunities but also challenges as it becomes the GM of China.

Bottom line: Two new tie-ups are making Guangzhou Auto look increasingly like a consolidator for China’s auto industry, potentially creating a homegrown Chinese General Motors.

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