Another new partnership for ambitious Guangzhou Auto

China Daily - In the latest move to ambitiously expand its business territory, Guangzhou Automobile Group Co, the nation's six-largest automaker in annual sales, recently joined with two domestic partners to tap the market potential of central China.

According to a notice posted on its website, GAC signed an agreement with China Auto Parts & Accessories Corp and Zhongxing Auto on Dec 18 to jointly develop the automotive industry in Yichang, Hubei province and build the central city a new, big auto production base.

The companies plan to cooperate in a wide range of areas including R&D on parts and automobiles, energy-saving and new-energy vehicles, international business and logistics, it said.

Domestic media cited sources with knowledge of the deal saying that the agreement doesn't involve exchange of equity, but GAC does have plans to later buy part or all of Zhongxing and use the smaller automaker's plant in Yichang to build its own-brand vehicles.

GAC has no production in Hubei province, so the partnership could help it expand geographically and make inroads to central China, the sources said.

Based in the northern province of Hebei, Zhongxing Auto builds pickup trucks and SUVs and has been an active exporter.

With existing production facilities in Baoding with annual production capacity of 100,000 vehicles, two years ago it started to build a 200,000-unit car plant in Yichang that is scheduled to be ready in 2014.

But the company's sales have stagnated in 2012. Last year Zhongxing sold more than 50,000 vehicles, about 16,000 of them exports. In the first 11 months of this year, its sales were nearly 50,000 units and full-year deliveries are expected to be almost the same as in 2011.

A complementary product portfolio could also be part of the attraction bringing GAC and Zhongxing together, analyst said.

GAC is not an expert on pickups, so buying Zhongxing is a faster way than developing the products itself, said Zhong Shi, an independent auto analyst based in Beijing.

Cao He, auto analyst with Minzu Securities, said that Zhongxing has long wanted to make passenger cars, and the company will probably trade part of its equity to GAC for funding, technology or even a product platform, but there is little likelihood of a 100 percent sale.

GAC's interest in cooperation with Zhongxing is partly due to its need for a larger scale to be competitive, analysts noted.

Bigger rivals

Though the sixth-ranking domestic carmaker, GAC's sales of about 740,000 vehicles last year were only half the number sold by the fifth-largest automaker, Beijing Automotive Group.

With an ambitious target to raise annual production capacity to 3 million vehicles by 2015, the company has been expanding rapidly, mostly through acquisitions, as the government calls for more consolidation in the nation's fragmented auto industry.

Three years ago it bought a 29 percent stake in Shanghai-listed SUV producer Changfeng Motor Co Ltd for 1 billion yuan and became the largest single shareholder in the company, which has facilities in Changsha, Hunan province.

In 2010 GAC bought Zhejiang Gonow Auto Co, a minivan manufacturer in East China, and formed a new company, Guangqi Gonow, in which GAC holds a 51 percent stake and Gonow received a 49 percent share by offering its auto assets.

The company also formed a joint venture with Fiat in 2010 and built a new plant in Changsha, Hunan province. Its first product hit the market in June.

Most recently, GAC established a new venture with Mitsubishi to produce SUVs.

Amid such ambitious expansion, it could be challenging for the automaker to manage another consolidation, said analysts.

In the first 11 months this year, GAC's sales totaled some 639,000 units, a decrease of 1.7 percent from a year earlier, mainly dragged down by the decline of its joint ventures with Toyota and Honda.

The company reported a 29 percent fall in net profit for the first three quarters of 2012.