Is China Merging Its “First” and “Second” Auto Works Into A Car Kaiju?

Preparing for the storm?

Preparing for the storm?

Consolidation has been the law of the auto industry ever since Ford’s assembly lines unlocked the brutal logic of scale, but fears that the US and Chinese markets may be cooling have automakers even more anxious to grab quick growth by merging. Last week, Fiat Chrysler Automobiles CEO Sergio Marchionne gave voice to the industry’s building anxiety by all but apologizing for his industry’s low rate of return on capital and threatening to explore mergers with Silicon Valley firms if no automaker wanted to acquire it. Marchionne’s position may be more desperate than some of his better-established competitors, but his basic logic is resounding across the auto industry.
When trading in shares of the Chinese automakers First Auto Works and Dongfeng (known until 1992 as “Second Auto Works”) were halted this week, the market’s initial read was that a merger between two of China’s biggest automakers was in the works. Dongfeng issued a swift denial of any merger plans but the Chinese state council shook up leadership at the two state-owned automakers, replacing the chairman at each with a man who had previously served at the other. With its automakers outmatched even in their home market, China appears to be pushing two of its “big four” manufacturers closer in hopes of creating a national champion with the scale to take on the global majors.

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Does Beijing-Shanghai Tension Spell Trouble For GM and VW?

Jiang Zemin and the Communist Youth League, in happier times.

Jiang Zemin and the Communist Youth League, in happier times.

 

Ever since the dramatic 2012 downfall of the colorful Chongqing party leader Bo Xilai, the Western press has been fascinated with China’s “princeling” plutocrats and the Central Government’s efforts to restrain them. No wonder: the battle is China’s basic political division, pitting the bureaucratic and ideological power of the Beijing Central government against the economic power of Southern Chinese entrepreneurs centered around Shanghai. Under former Shanghai mayor Jiang Zemin, China opened rapidly to the foreign investment that spurred decades of florid economic expansion… and sowed the seeds of China’s major political problems, corruption, inequality and environmental ruin. The downfall of Bo Xilai, a protege of Jiang Zemin’s Shanghai clique and member of its successor “Princeling” clique, was taken as a sign that Xi Jinping is serious about continuing Hu Jintao’s campaign against the ill-gotten gains of the Shanghai boom… a signal that is growing louder as the investigations widen.

Why the ten-cent lecture on Chinese politics? Shanghai’s automotive star rose alongside Jiang Zemin’s, and the city with which the he is synonymous has become one of China’s biggest automotive players and partner to the two biggest foreign presences in China, Volkswagen and GM. If Xi Jinping’s reform movement continues to target Shanghai and  its Princelings, and especially if the investigations draw closer to Zemin himself, automakers could find themselves on awkward ground. Caught between the guanxi (connections) culture of the world’s new largest market for cars and the Foreign Corrupt Practices Act of what is still the most profitable market for cars, automakers with Shanghai exposure have reason for concern.

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