State Owned Manufacturers Are The Problem

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This article by Auto News China’s Yang Jian brings quite the argument to the privatization of China’s biggest state owned manufacturers, he correctly asserts that the companies biggest weakness is the fact that they are state owned either at the local or provincial level which makes them more keen to listen to government policy rather than market requirements, also factor in company leaders are usually grandfathered in from elsewhere in the government apparatus and are largely not automotive people.

What’s wrong with Chinese automakers?

Chinese brands are losing market share in the world’s largest auto market.

In the first 11 months of 2011, Chinese brands’ light-vehicle sales dropped 3% year on year, even though industry sales rose 5%.

Their performance contrasts with double-digit sales growth in China by European, American and Korean brands.

“What is more worrisome is this situation (for the domestic brands) will most likely get worse, not better, over the next few years,” lamented Dong Yang, secretary general of the China Association of Automobile Manufacturers, last week in an open letter.

Mr. Dong and others blame the domestic brands’ weak sales on poor brand images. But the underlying problem is state ownership.

China’s government considers auto manufacturing a pillar industry — too important to privatize. So when China joined the World Trade Organization in 2001, Beijing retained its state-owned automakers.

The government also required foreign automakers to form joint ventures with state-owned Chinese companies if they want to produce in China. By doing so, the government hoped state-owned companies would learn from the global brands.

But these protective policies have done more harm than good to domestic automakers.

Now that nearly all global automakers do business here, China’s auto industry has become highly competitive. To prosper in such a market, a company must be responsive to customer needs and nimble in operations. But state-owned automakers have three deep-rooted weaknesses.

 

1. They are more willing to listen to the government than to customers.

 

1. Supported by government-backed loans and lacking rigorous accountability, they have an incurable desire for reckless expansion.

 

1. The largest state-owned automakers rely heavily on the profits and sales of their joint ventures in China with foreign automakers. Without that crutch, they would be lost.

Few state-owned automakers have developed respectable domestic brands. As a result, their profits plunged last year after the government ended sales subsidies for small cars. Now, they must clean up their mistakes. For example, Chery Automobile Co. is losing money because it introduced too many models too quickly.

How should those state-owned players be revived?

The government is urging foreign automakers to create new brands for their joint ventures, supposedly giving the state-owned Chinese partners opportunities to learn.

Will this plan work? I don’t think so because of the weaknesses noted above. To reform state-owned automakers, the government should look to private domestic automakers for inspiration.

Take Great Wall Motor Co. and Zhejiang Geely Holding Group Co. The two private Chinese automakers did not start making cars until the late 1990s. These latecomers started with inexpensive products, then began to move upscale. In the first 11 months of 2011, Great Wall’s sales surged 31%, according to LMC Automotive. Meanwhile, Geely’s sales rose 7%, not bad for such a difficult year. Now these companies are competing overseas.

Private Chinese automakers also make mistakes. Consider the plight of BYD Co. Sales crashed last year after the company over-expanded its dealership network.

But BYD is quicker to learn from its mistakes than a state-owned automaker such as Chery. BYD has cut back on its distribution network and is now focusing on launching upscale models. By contrast, Chery kept rolling out too many models since it began building vehicles in 1999 and is now stuck in a financial quagmire.

From the examples of Great Wall, Geely and BYD, Beijing should learn that the best way to revitalize state-owned automakers is through privatization.

As the global brands expand into China’s inland markets, the domestic automakers will be forced to compete. If the government really cares about the domestic automakers’ welfare, it should privatize them — and do it soon.