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Beijing turns a big corner: Privatizing troubled automakers
Yang Jian | 2018/6/8

SHANGHAI -- China has a lot of inefficient state-owned automakers. And for years the Chinese government has tried in one way or another to revitalize them, but to no avail.

Running out of options, the government has finally realized that the only way to ensure these companies¡¯ survival is a takeover from private or outside investors.

Privatization is likely to happen first at Chery Automobile Co., a major state-owned carmaker that has been struggling in the red for years. 

Last month, representatives of Chery¡¯s work force approved a plan to seek a cash injection of no less than 20 billion yuan ($3.1 billion) from private investors for the company, according to official Chinese media such as Beijing-based  Securities Daily  and Shanghai¡¯s  China Business Network

Chery is controlled by the city government of Wuhu in east China¡¯s Anhui province, where the company is headquartered. To secure new investment, the Wuhu government would allow private businesses to own a majority stake in Chery, Chinese media reported.

Chery has been operating at around half of its annual production capacity of more than 1 million vehicles, and financial losses have snowballed.

In the first quarter, the company¡¯s core business -- auto manufacturing -- racked up a loss of 676 million yuan ($106 million at current exchange rates), quadrupling the amount in the same period last year, according to China Lianhe Credit Rating Co., a Beijing credit rating agency.

Chery¡¯s financial woes are not the only reason behind the Wuhu government¡¯s move to privatize the company. 

The central Chinese government has begun to bless such moves.

When Xi Jinping became president of China in 2013, the central government enacted a policy to encourage state-owned companies to attract private investors and establish a ¡°mixed¡± ownership structure comprising state-owned and private shareholders. 

The goal of the policy is to improve the efficiency of state-owned companies; private businesses including carmakers are generally nimbler players compared with state-owned peers. 

Since then, state-owned companies in a number of other industries such as petrochemicals, telecommunications, railways and civil aviation have tapped private capital.

One reason that state-owned automakers have lagged behind in embracing mixed ownership is that many of them, unlike Chery, run prosperous joint ventures with global brands. 

BAIC Motor Corp. operates a car partnership with Mercedes-Benz while Brilliance China Automotive Holdings runs a joint venture with BMW. The profits the two state-owned automakers generate from the two joint ventures are more than enough to offset losses at their proprietary marques.

But aside from SAIC Motor Corp. and Guangzhou Automobile Group Co., other state-owned automakers have failed to develop competitive brands and have finally caught the attention of the central government. 

The National Development and Reform Commission, China¡¯s central economic planning agency, is drafting a proposal to encourage state-owned automakers to engage private car manufacturers as investors, Bloomberg reported.

In addition to Chery, China FAW Group Corp., one of China¡¯s largest state-owned auto manufacturers, also hopes to woo private investors. 

Last year, FAW failed to attract private investors for its Xiali car brand. But FAW Chairman Xu Liuping told Chinese media in April that FAW will keep up efforts to attract private investors.

China, hoping to avoid a trade war with the U.S., pledged in April to allow global automakers to break up with local joint venture partners by 2022. That means state-owned Chinese automakers likely will lose a vital source of income in five years. 

Beijing also promised last month to cut the tariffs on imported vehicles to 15 percent from 25 percent on July 1. 
While further opening the domestic auto market to foreign brands, the Chinese government is feeling an urgent need to improve the competitiveness of domestic brands. 

To achieve that goal, the government is likely to permit and even courage more state-owned automakers to attract private investors. 

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