Consolidation as Dongfeng deals for Fujian Motor

China Daily - In the biggest consolidation in the nation's fragmented auto industry since 2009, China's second-largest automaker Dongfeng Motor Corp agreed last week to become a shareholder in Fujian Motor Industry Group Co Ltd.

Dongfeng signed a framework agreement with the Fujian provincial government to acquire shares in the local automaker from its owner, the Fujian State-owned Assets Supervision and Administration Commission.

Dongfeng did not disclose in its official statement how many shares it agreed to acquire or the specific investment amount.

But sources with knowledge of the agreement told China Daily the company plans to take a 45 percent stake in Fujian Motor at the beginning and will increase it to a controlling stake "when conditions are ripe".

According to the agreement, Dongfeng and Fujian Motor also plan to set up a new investment company two-thirds owned by Dongfeng.

The investment company will then take half the shares of Soueast Motor.

Soueast is now a three-way venture among Fujian Motor, Japan's Mitsubishi and China Motor Corp from Taiwan. It makes vehicles under the nameplates of Soueast and Mitsubishi.

The new investment company will replace Fujian Motor with a 50 percent stake in Soueast.

The shareholdings of Mitsubishi and China Motor Corp will not be affected by the plan.

Established in 1992, Fujian Motor has multiple business units in addition to the Soueast.

They include the homegrown minivan maker NLM Motor, bus manufacturer Xiamen King Long Motor Group and truck maker Fujian New Forta Automobile Industry Co.

The company also operates a joint venture with Daimler that makes Mercedes-Benz vans.

Last year, Fujian Motor sold about 200,000 vehicles with revenues of just above 10 billion yuan, according to domestic media reports.

Due to a slow development in the past few years, Fujian Motor has been seeking an association with a stronger automaker since 2009.

It has had discussions with Guangzhou Automobile Group and Beijing-based BAIC Group.

But Dongfeng's status as a large enterprise under the management of the State-owned Assets Supervision and Administration Commission of the State Council made it stand out from the competition, said industry observers.

The carmaker based in Central China's Hubei province is the nation's second-largest carmaker only after SAIC Group.

It operates joint ventures with Honda, Nissan, Kia, PSA Peugeot Citroen and Yulon Motor Co from Taiwan. It also makes vehicles under its own brands Fengshen, Fengdu and Fengxing.

Dongfeng sold 3.07 million vehicles last year including about 515,000 own-brand passenger cars.

The company said in a statement that the strategic cooperation with Fujian Motor will help boost sales of its own-brand passenger vehicles.

It has set a target of doubling annual sales of its own-brand passenger vehicles to 1 million units by 2016.

Dongfeng also said that Fujian's location on the country's southeast coast will facilitate exports.

It plans to increase exports to 300,000 vehicles a year by 2016.

Analysts noted that Dongfeng's recent move is also driven by its ambition to expand its business geographically.

Almost every large auto group in China is now expanding across the nation, usually by cooperating with smaller, local manufacturers or taking over existing facilities.

Also in the past week, Guangzhou Automobile Group, a major carmaker in Southern China, agreed with smaller SUV and pickup maker Zhongxing Auto on joint development in Yichang, Hubei province.

The agreement will allow Guangzhou Automobile to restructure Zhongxing's subsidiary in Yichang and make inroads to the central province where it had no production before.

The moves by big auto groups are in line with the central government's call for further consolidation in the sector, said analysts.

The last big merger in China's auto industry was in 2009 when State-owned Chang'an Automobile Group based in Chongqing acquired the two automobile manufacturing subsidiaries of aircraft maker Aviation Industry Corp of China.