China's Unruly Auto Sector

Beijing is playing a now-familiar record: China's auto industry needs to get leaner. The rest of the country isn't listening.

According to J.D. Power, nearly 80 different manufacturers compete in the light vehicle market alone. The central government has long desired some rationalization of this sprawl, and this week state media reported that China's State Council has placed the auto sector atop a list of industries needing consolidation.

It isn't the first time the authorities have made such a call. Last year, Beijing unveiled a grand plan to develop a core of auto groups to lead the domestic industry. Since then, there's hardly been an avalanche of activity. The last big deal, Changan Auto's purchase of Hafei Auto and Changhe Auto, was announced in late in 2009.

Beijing's logic is clear. A more streamlined sector will enable the larger companies to benefit from economies of scale and increased pricing power, in turn raising their profits available for re-investment. Ultimately, that could help China develop a clutch of world-class car makers.

But it seems this isn't swaying local governments, which house the auto makers. In a growing market where even small car makers are doing well, they provide employment, a measure of economic growth, and a source of tax revenue to local authorities. The type of consolidation Beijing wants could see some plants slimmed down or closed, with provinces in turn losing those benefits.

The resistance is justified, for now, by China's fast-rising auto sales. Year-to-year growth may be slowing, but auto sales were still up 48% in the first half from a year earlier. Few analysts see anything other than continued expansion of car ownership in China in the coming years.

The central planners, then, are in need of a good crisis. A drop in auto sales, which would reveal high levels of industry overcapacity and lead to losses among those too small to operate profitably in a slower growth environment, would bolster its scheme. At the moment that seems far off.

Beijing may hope its car industry develops like the U.S.'s in the 20th century, with a core of leading firms emerging from an initial plethora.

But then, that process did take about a century

The Wall Street Journal   

Write to Andrew Peaple at andrew.peaple@dowjones.com