Faced with a continuous erosion of sales, the SAIC and GAC brands have announced a strategic partnership which binds them for five years.

Now is the time for consolidation in the Chinese automobile industry. The brands SAIC (Shanghai Automotive Industry Corporation), the country’s leading producer, and GAC (Guangzhou Automobile Group), from Canton, which is in the national top 10, have thus announced a strategic partnership with a view to their future development.

Signed for five years, it concerns finance, logistics and research and development (R&D), in particular with regard to shared mobility and new energy vehicles, without equity investments. In a gloomy context, experts expect deep consolidation, as the sector is fragmented and supported by local government subsidies.

For the second year in a row, car sales are expected to drop 8% to 9% in 2020, the China Association of Automobile Manufacturers estimates. All in a saturated market with more than 80 Chinese players, from small local producers to giants like SAIC and GAC, according to PwC. However, after years of growth of around 10%, manufacturers have thought big: today, the country has a production capacity of 35 million units, while less than 26 million vehicles were sold in 2019.

The most affected, such as the French PSA and the American Ford, had to close or sell part of their factories. But the Chinese are not doing any better, because sales are declining especially in the entry-level range, after the end of subsidies and tax allowances in 2017. Only the luxury models are still progressing, making German brands happy.

Achieve economies of scale

SAIC and GAC are not spared the crisis: the Shanghai company experienced a 13% drop in sales in the first eleven months of 2019. Last year, SAIC had sold 7.1 million vehicles, counting joint ventures with General Motors and Volkswagen, representing a quarter of the Chinese market. Over the same period, GAC sold 4% less than in 2018 (2.1 million vehicles, joint ventures with Toyota and Honda included). Without these lucrative joint ventures, Chinese automakers are selling much less: 2.2 million cars for SAIC brands, and 351,000 for GAC. However, in the medium term, the Chinese could lose the windfall of joint ventures, which will no longer be compulsory for foreign manufacturers from 2022.

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“SAIC and GAC are among the most powerful state-owned automakers in China. Even they realize that they will not be able to survive alone in the face of international competition from companies like Toyota and Volkswagen, explains Jochen Siebert, founder of the specialized consultancy firm JSC Automotive. They will find it difficult to be competitive on the powertrain components (engine, transmission, gearbox). “ Long supported by subsidies and tax reductions, Chinese companies must learn to stand on their own, as authorities seek to reduce the debt of state enterprises and local governments.