Key Takeaways
- Beijing's push to create a giant state-owned automotive firm could jumpstart a long-awaited consolidation of China's oversupplied auto industry.
- The resulting entity, which will rank as one of the world's largest carmakers, will leverage expanded resources to improve its competitiveness in electric vehicles.
- Before the industry completes its restructuring, which we expect to play out over 2027-2030, competition will remain fierce, weighing on carmakers' volumes, margins and cash flows.
The Chinese auto sector is at the start of a sweeping consolidation. We believe capacity cuts are necessary to restore profits, with many entities on an unsustainable path.
For state-owned carmakers, the next two to three years could be make-or-break. Competition is cutthroat in China's electric vehicle (EV) market. For many firms, a merger or some form of partnership will be necessary for survival.
The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) on March 29, 2025, said it wanted to restructure the central government-owned auto companies. We assume this will involve a merger of parts of--or all of--Dongfeng Motor Corp., China Changan Automobile Group Co. Ltd. and China FAW Group Co. Ltd. (A/Stable/--).
The news builds on media reports about a potential merger among the state-owned carmakers that has been brewing since the start of the year. On Feb. 10, 2025, Hong Kong-listed Dongfeng Motor Group Co. Ltd. and Shenzhen-listed Chongqing Changan Automobile Co. Ltd. said their controlling shareholders were planning a restructuring.
A Giant New Carmaker May Be In The Works
A merger of Dongfeng and Changan would create the world's sixth largest carmaker, by unit sales. If China FAW Group were added to the mix, the resulting entity would be the world's third largest carmaker.
While scale matters, it's not the focus of the restructuring. SASAC said it wants to turn the combined entity into a world-class automobile group with market-leading technology.
Chart 1
The event would mark the start of a broad industry rationalization. This would include China's privately owned pure EV makers, which are all lossmaking except for BYD Co. Ltd. and Li Auto Inc. China's auto sector is grappling with excess capacity and a prolonged price war, and is overdue for consolidation, in our view.
Chart 2
Declining sales of internal combustion engine vehicles and the increasing number of EV players have hit capacity utilization rates. This has fueled price competition, squeezing profits.
Chart 3
Chart 4a
Chart 4b
The state-owned carmakers are laggards in EV development. They have lost market share to the private carmakers, which have excelled in electrification and have fully capitalized on the country's EV transition.
Chart 5
Chart 6
The state-owned firms will be fighting for EV market share in the middle of an intense industry shakeout.
By integrating their research and development capability and financial resources, the merged firm will be better placed to develop more competitive EVs. The company will also have more flexibility in its EV strategy. SASAC has put less emphasis on profit as a key performance metric for state-owned carmakers. This gives them more freedom to accelerate their EV business, which will be lossmaking at first.
With carmakers investing heavily in electrification, intelligent cockpits and connectivity, the stakes are large. The top three EV startups in China alone have spent Chinese renminbi 145 billion on research, development and capital expenditure over 2018-2023. According to SASAC, the three sate-owned carmakers' direct investment in EVs rose 35% in 2024 and accounted for 70% of their total investment.
Chart 7
The Next Few Years Will Be Key
In our view, meaningful industry consolidation may happen during 2027-2030, when China's EV sales reach about 60%-70% of total light-vehicle sales.
Industry leaders such as BYD will continue to ramp up capacity, to expand market share. Some EV startups have sufficient funds to operate for up to three years, even with substantial cash burn and no new capital.
Deep-pocketed traditional carmakers, including the state-owned ones, have ample financial resources to support their EV transition.
As participants jostle for market share, competition will only escalate, and so will the pressure to consolidate. We assume that by 2030 the top three-five EV makers will increasingly leave their competitors behind. Dozens of weaker players will likely have exited the market at this time, on shrinking volume and deteriorating liquidity.
Writer: Jasper Moiseiwitsch
Related Research
- China Industrials: Policy Patches Will Ease Some Of The Strain, Feb. 11, 2025
- Impact Of U.S. Tariffs On China's Auto Sector: Watch For Second-Order Effects, Feb. 10, 2025
- China Auto: Survival Of The Fittest, Oct.17, 2024
- China EV Startups Struggling To Stay Afloat, May 28, 2024
This report does not constitute a rating action.
| Primary Credit Analysts: | Claire Yuan, Hong Kong + 852 2533 3542; Claire.Yuan@spglobal.com |
| Stephen Chan, Hong Kong + 852 2532 8088; stephen.chan@spglobal.com | |
| Secondary Contact: | Danny Huang, Hong Kong + 852 2532 8078; danny.huang@spglobal.com |
| Research Assistant: | Claire Sun, Hong Kong |
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