Cars

GAC expands with minibus buyout

By Han Tianyang (China Daily)
Updated: 2010-05-10 10:28

Beijing: The first-ever purchase of a private carmaker by a State-owned auto group last month saw Guangzhou Automobile Group Co (GAC), China's sixth-largest auto producer by sales, acquire a small minibus manufacturer in Zhejiang province, the latest consolidation move in the country's fragmented auto industry.

According to the agreement signed on April 26, GAC and Zhejiang Gonow Auto Co will set up a joint venture - Guangqi Gonow - in which GAC holds a 51 percent stake and Gonow took a 49 percent share by offering its auto assets.

Other financial details of the deal were not released.

Established in 2003 with a designed annual production capacity of 300,000 vehicles, Gonow makes minibuses, pickups and sports utility vehicles. It has plants in Hangzhou and Taizhou of Zhejiang province as well as in Dongying, Shandong province.

GAC's general manager Zeng Qinghong admitted that Gonow's production capacity for minibuses is what the group needs.

"GAC doesn't have enough time to establish minibus facilities - cooperation with Gonow can save us time and investment," Zeng said.

Eyeing rural areas

GAC wants a share of growing rural demand for minibuses, which are popular for their affordability and versatility in carrying both people and cargo, said Marvin Zhu, a senior market analyst at JD Power Consulting (Shanghai) Co Ltd.

Last year, 1.9 million minibuses were sold in China, 18 percent of the country's total passenger vehicle sales. Zhu said JD Power predicts the figure will grow by 20 percent to about 2.3 million.

"Yet the growth will slow in the next few years since demand for minibuses has been drawn in advance between 2009 and 2010," Zhu said, adding that in the long term the minibus will gradually be eliminated from the market due to its lower technology and poor safety.

He said the more valuable gain for GAC is additional production capacity, which could later be used to produce sedans in addition to minibuses.

New government guidelines widely expected by the industry would prohibit automakers from building new plants. Acquisition of existing automakers would then be the only way to boost capacity.

Zhang Xin, an automotive analyst with Guotai Jun'an Securities, agreed that GAC's foresight is not limited to making minibuses.

"Gonow's existing capacity could also be used to make economical cars," he said.

GAC's sales to date have trailed far behind the top five domestic auto groups. In the mid-term, it aims to increase sales to 2 million from about 610,000 vehicles last year, a goal that could be achieved faster through acquisitions and collaboration.

Previous move

In May last year, GAC bought a 29 percent stake in Shanghai-listed SUV producer Changfeng Motor Co Ltd for 1 billion yuan and became the largest single shareholder in the company, which has facilities in Changsha, Hunan province.

Already the partner of Toyota Motor Co and Honda Motor Co, GAC is now constructing a plant in Changsha for its tie-up with Fiat SpA, which is set to have capacity of 250,000 cars a year.

Analysts say GAC's move also reveals its ambition to expand geographically. Headquartered in the southern city of Guangzhou, GAC could extend north to markets in Zhejiang and even Shandong province after the deal.

Gonow could benefit from the deal as well since it gets capital for further development, said Zhang.

Zhu also noted that State-owned GAC could also help boost sales of Gonow vehicles.

"We need big companies like GAC to help with the development of Gonow. Their management is mature and their technology and talent pool are much stronger than Gonow," said Liao Xuezhong, president of the little-known manufacturer, who will remain his position in the new venture.

The 39-year-old Zhejiang entrepreneur was once among the senior management of Geely, the biggest privately owned automaker in China. He left Geely in 2002 and set up his own auto company Gonow a year later.

Though Liao had an ambition to lead the pickup truck and minibus segments, his company grew slowly in the past several years. Gonow sold just 32,000 vehicles in 2009.