May 100 Automakers Flourish! Just Not In China

Saab, the plucky Swedish automaker, is officially in big trouble. A deal for a big Chinese operator of car dealerships to buy a stake in the troubled brand from current owner Spyker has potentially run afoul of China's master plan to reduce, not expand, its roster of car companies. Weirdly, the way the Chinese auto industry is now set up is extremely appealing to entrepreneurial-techie types.

You often hear China's automotive landscape described in terms of what the U.S. auto industry looked like 100 years ago. The analogy doesn't truly hold, but there's some substance to it. China has big carmakers, and many of them are engaged in joint ventures with foreign manufacturers, such as General Motors (GM) and Volkswagen.

Welcome to the wild, wild East
But much of the rest of the Chinese auto industry is highly distributed. Here's a snapshot from a few years back, originally from the Wall Street Journal:

Like the U.S. in the early 1900s, China has dozens of small but spirited car makers that grew out of the country's burgeoning sales growth last decade. They were welcomed as local engines of economic growth....Their difficulties mean short-term pain for China's economy but consolidation could result in a more streamlined industry that is better positioned to take on bigger, foreign rivals....
The weeding out of [underperforming] companies like Shuanghuan could in the short term benefit big foreign auto makers such as Toyota Motor Corp. and Volkswagen AG by reducing competition in the world's second-largest car market after the U.S. Upstart auto makers have put enormous downward pressure on retail prices for cars in China, hurting foreign players' profitability.

This "weeding out" is what China is trying to achieve at the level of industrial policy. This is also why it may not want Pang Da, the aforementioned Chinese company, to acquire a chunk of Saab (which would also require that Saab partner with a large Chinese firm that actually makes cars). This is from Motor Trend's Wide Open Throttle blog:

[T]he Chinese government wants to reduce the number of car companies within its borders by 90 percent, which means it is unlikely the NDRC would approve the proposed deal between the Swedish and Chinese companies. "There is almost no chance for the government to approve Pang Da's purchase of Spyker's stake," [an analyst] told Automotive News.

Yes, you read that right
Ninety percent? Evidently, this is the game plan for the Chinese economy's overseers. It's a big question whether this will happen naturally, through closure or consolidation, or via command-and-control. There are perfectly good reasons to get rid of nine out of ten Chinese car companies. But what about the inherent appeal the existing model has?

Americans are accustomed to having only very large companies to buy their vehicles from. With the exception of Tesla Motors (TSLA), there hasn't been a successful startup carmaker in decades. This has induced a craving for a livelier automotive ecosystem -- less heavy metal mid-20th century, more garage band 21st.

You see the spirit of this in "open source" car companies like Local Motors, but it's also being played out to a degree in the electric car space. Of course, what's...at least stimulating for a mature market like the U.S. is potentially toxic for the growing Chinese market.

Focus, focus, focus
For an ancient culture, China is in an industrial hurry. It doesn't have time to let the market choose its automotive winners. By then, it's domestic industry may have become too entwined with outside automakers, who will gobble up market share. A smaller number of players means that this problem can be managed (because the Chinese want that Western auto technology).

Still, you can't help but feel China is losing something by interfering with market evolution. Pretty soon, this may be a country where no one would want to start building cars. Sound familiar?

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Photo: Wikimedia Commons

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