State ownership can slow Chinese automakers

SHANGHAI -- Most of China's largest automakers are state-owned. They answer not to shareholders or to the market, but to a government. That makes privately owned automakers in China such as BYD Auto Co. and Great Wall Motor Co. look promising in the longer term, despite their small size.

Take state-owned Chery Automobile Co. Last year, sales growth at Chery started to slow. So how did Chery react? Like a state-owned company. Suppliers sources say that Chery pressured the Fiat Group to buy engine components from supplier companies owned by Chery. The two companies are planning to build engines together.  If Fiat bought parts from Chery suppliers, that would help the local economy, providing jobs and taxes for government officials.

But Fiat was not satisfied with the quality of some of the components, especially crucial parts such as the engine management system.

The local government is also urging Chery to push foreign suppliers to set up joint ventures in Wuhu, where Chery is based. That is a delicate decision. "If you go there, you will be tagged Chery," one European supplier executive pointed out. "Selling to others will be a problem."

Meanwhile, First Auto Works Group sought to escape some of the burdens of state ownership, such as excessive employees and pension plans, by privatizing its supplier group, Fawer. The preferred buyers were foreign suppliers, FAW said.

But foreign suppliers were reluctant to get involved with FAW's management, which one characterized as "really old China; lot's of favoritism. "A local supplier bought a large part of Fawer some months ago.

Privately-owned BYD, by comparison, has flexibility in forming strategy. It has grown its car business very slowly. The company, whose primary business is still producing batteries for mobile phones and laptop computers, started with just one car model to learn the car business. Then, BYD expanded its car lineup.

Great Wall long ago said that it would be happy to base researchers in another city besides Baoding if that is what it took to attract and keep them. Baoding, about an hour outside of Beijing, lacks many of the amenities associated with life in China's larger cities.

To be sure, China's state-owned companies have advantages that private companies lack such as easy access to financing. But if state-owned government owners don't allow them the flexibility to make market-based decisions, it could come back to haunt them.