Chinese Auto Makers Join Forces To Fight Foreign Competitors

SHANGHAI, June 14 Reuters reported that China's biggest auto group, FAW, will merge with the country's fourth largest car producer to fend off piercing foreign competition in the maturing Chinese auto market, company officials said on Friday.

Analysts said a tie-up between First Automotive Works (FAW) and compact car maker Tianjin Automotive Industry Corp would represent a milestone in China's drive to consolidate its fragmented car industry which now has more than 100 producers.

"We will sign an agreement with FAW this afternoon in Beijing to mark our marriage," an official at Tianjin Auto told Reuters from the northern city of Tianjin. He declined to put a value on the deal or give more details.

Based in the northeastern city of Changchun, FAW is one of three auto titans earmarked by the Chinese government to help consolidate its pillar auto industry after WTO membership ushered in heightened competition from imported cars.

FAW has a venture with Volkswagen and its listed unit FAW Car makes the Red Flag sedan, once the limousine of choice for Chinese Communist leaders before it was discarded for foreign models.

FAW vehicles sell for 115,000-500,000 yuan ($14,000-$60,000) and target the middle to high-end auto market. Tianjin Auto would add a much-desired product to FAW's line -- small and cheap compacts to lure tight-fisted individual buyers, analysts said.

The family car segment is swelling alongside booming economic growth and is one of the mostly hotly contested sectors in China.

TOYOTA LINK

Tianjin Auto's listed unit, Tianjin Automotive Xiali Co, was a leading producer in the segment until new models products from rivals and brutal price wars forced it to post an 87.05 million yuan loss in 2001.

Xiali's tiny cars use Toyota technology and cost 50,000-100,000 yuan.

Analysts said Tianjin Auto could ride on FAW's financial strength and wide sales network, while FAW could carve inroads into the small car market where the Xiali brand is well known.

Xiali also planned to launch a mid-range passenger car with Toyota in October and the Japanese firm was another beneficiary from the merger, they said.

"Toyota has said China will be a key market in Asia for the next couple of years and they are turning more aggressive here," said ABN Amro analyst Mario Zhu in Shanghai.

"To tie up with the First Auto group after this kind of merger will benefit it quite significantly."

Industry sources said FAW was also keen to tap Toyota's expertise to branch out into making vans and mini-buses.

China's car market is one of the fastest growing in the world but competition in the already overcrowded industry has heated up since the country joined the World Trade Organisation in December and cut import tariffs by more than a third to 40-50 percent.

Domestic firms slashed prices to defend market share and those without economies of scale suffered.

"As car prices fall further, you need volume to survive," said Amy Lin, analyst at Capital International Holdings.

"Foreign companies have global sourcing capabilities so their components are relatively cheap. Domestic companies have to merge so that they can expand both sourcing and sales markets."

SIZE MATTERS

China said last year it wanted to create two or three globally competitive car producers to strengthen a divided industry which churns out 2.3 million vehicles a year. Only about 10 firms have annual capacity of more than 100,000 units.

The FAW-Tianjin tie-up would be the biggest merger so far.

"They've talked about this kind of consolidation for years so this would be a real breakthrough," said an analyst at a European investment house in Shanghai.

Last year, China's third largest auto firm, SAIC, took over mini-van maker Wuling and compact car producer Chery.

Medium-sized Yuejin Motor said in April it was in talks with SAIC, while state media have linked China's second biggest producer Dongfeng Motor with Beijing Automotive.

The FAW-Tianjin group could present fierce competition eventually for other Chinese producers like Denway Motor and Brilliance China, and the joint ventures of foreign firms such as General Motors, analysts said.

The analyst at the European house also noted FAW-Volkswagen's Jetta sedan competed in a very similar segment to top Xiali cars.

"Going forward, what is really important is how First Auto, Tianjin Auto, Volkswagen and Toyota position themselves," said the analyst, who declined to be identified.