Restructuring is no cure-all for auto industry

Shanghai, March 4 (Gasgoo.com) Last week, the Chinese government issued the outlines of its auto industry plans, which include the mergers and restructuring of automakers to boost the market share of Chinese-brand vehicles. But the restructuring process will pose an uphill task and will not be a cure-all for problems of the auto industry.

Through the restructuring program, China aims to form two or three large auto-making groups, such as FAW and SAIC, which will each have an annual capacity of 2 million vehicles and also three to four tier-2 auto groups each making 1 million vehicles a year, such as Beijing Auto and Chery Auto. The number of large Chinese automakers with a combined 90% market share will be reduced to 10 from the current 14.

Indeed, it is quite necessary to restructure the Chinese auto industry to achieve the economy of scale in production. Currently, China has more than 130 auto-making companies, and about 120 of them sell less than 10,000 vehicles a year, including 10 companies that sold no vehicle last year.

This shows the long distance a Chinese auto company has to cover to become a global auto giant that can sell about 10 million vehicles a year. However, the current 6+3 global auto giants are also the survivals of long-time free competitions among tens of thousands of carmakers. This is a natural but harsh process of any industry development.

However, in the build-up to the Chinese auto industry restructuring wave, some concerns are coming to our mind and may serve as a reminder.

First, the restructuring should be voluntary, not compulsory. It should be a market behavior rather than a government-planned action. The auto companies should choose their partners for merger by themselves to avoid the "arranged marriage," and their merger should develop their relative merits and balance off the demerits to achieve maximal synergy.

Second, the large size should generate large profits. If an auto company has become bigger, its production costs will also increase, and the profits must grow accordingly or to a much higher level. If the profits after the mergers and expansion see no much growth, the mergers will be meaningless and even would be counterproductive.

Therefore, the restructuring should aim to reduce the costs and raise the profits by integrating the advantages of each companies in every section of the industry chain, including R&D, sourcing, production, marketing, sales, service, training, management, and incentives.

Third, restructuring will not be a cure-all for China's auto industry. The U.S. Big 3 auto giants are already big enough, but they are also in big trouble now. This suggests that there are many other factors to influence the operations, profits, and growth of an automaker than the sheer size of the company.

Big or small, that is not the only question. The upcoming wave of Chinese auto industry mergers and restructuring urged by the government are hopefully expected to be productive and fruitful. To buck the economic downturn, China may come up with more other measures and policies to support the auto industry.