No shotgun weddings for China autos amid slowdown

SHANGHAI (Reuters) - A squealing of brakes in China's car market, the world's second largest, should be sending its more than 100 automakers scrambling for the safety of mergers and alliances, but vested interests are thwarting consolidation.

The army of Chinese manufacturers, many of them regional players propped up or partly owned by local governments, is leaving a legacy of wasteful investments in excess capacity, while frustrating Beijing's plans to build up a few national champions that could compete globally.

But analysts expect the foot-dragging on consolidation to continue at least in the near term, with profits still sufficient to allow most companies to survive ... and hope for a rebound in growth next year.

"However inefficient it may be to have so many players out there, versus three or fewer in mature markets, there's little incentive at the local government level to hand over jobs and tax revenue to outsiders," said Chen Qiaoning, an industry analyst with ABN AMRO TEDA Fund Management.

Recent months have brought a handful of rare media reports on acquisition talks in China's automotive sector.

Second-tier firms Guangzhou Automobile Group, which makes cars with Toyota Motor Corp and Honda Motor, and Beijing Automotive Industry, a Daimler AG partner, have separately sought a stake in sport utility vehicle maker Hunan Changfeng Motor Co, sources familiar with the situation have said.

FAW Group, one of China's three largest automakers and another Toyota partner, was in talks to take over the own-brand car business of Brilliance Auto, BMW's China partner, according to media reports. Brilliance denied any such talks.

Such combinations could ease the fragmentation that has built up heavy overcapacity in China's auto sector.

Changjiang Securities estimates China's 47 major automakers had a combined annual capacity of 9.59 million units in 2007, far exceeding sales of 6.06 million vehicles.

Consolidation would also parallel moves toward deals in a global industry that is struggling with high oil prices, a slowing economy and a severe credit crisis.

General Motors Corp has had talks about a possible merger with both its U.S. rivals, Ford Motor Co and Chrysler LLC, according to sources familiar with the situation, while Chrysler's majority owner Cerberus Capital Management LP CBS.UL has held talks with several automakers.

But, despite the increased talk of deals in China, few have actually been completed.

One deal still up in the air is an effort by Nissan Motor's partner Dongfeng Motor to take control of minivan manufacturer Harbin Hafei Automobile Industry Group from its parent, state aircraft maker AVIC II. That deal was put on hold after AVIC II's government-backed merger with peer AVIC I.

"You never know what can happen during merger talks. Sometimes you think you have nearly reached the finish line, but things can happen at the last minute and you're back at square one," said a senior Dongfeng Motor executive.

Analysts also doubted the recent slowdown in China's car market would provide much impetus for mergers and acquisitions.

Car sales fell 1.4 percent in September, a second month of decline, as economic growth eases. Before August, there had only been two previous monthly sales declines in five years.