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China's Push for Consolidation Irks Global Automakers

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China’s proposed plan to push consolidation in the fragmented auto industry has made the global automakers apprehensive. According to the draft policy, China seeks to cut down excess production capacity, whereas several auto giants desire to expand in the mainland. It has been proposed to clamp down the current capacity by one-third in the world’s largest auto market.

In other words, the National Development and Reform Commission of China wants to control the ways automakers invest in new green field capacity to manufacture traditional gasoline-powered as well as electric vehicles. Instead, the Commission favors more orderly investments in forms of mergers and cooperation.

Moreover, as per the proposed rules, vehicle manufacturers would now have to comply with several criteria before investing to manufacture vehicles in China. These criteria include – working harder than its peers in existing factories, setting aside part of their profit for research and development, pledging to manufacture green cars and many others.

Autos’ China Bumps

In recent times, the auto industry of China has been growing by leaps and bounds. A host of factors, including doling out subsidies, government finance and attempts made by several provinces to create jobs, has aided this development. As an outcome, the presence of numerous auto manufacturers and excess capacity has been witnessed. According to a study conducted by PricewaterhouseCoopers (PwC) in 2017, around one-third of China’s overall capacity in 2018 or 14 million of the 42.8 million vehicles a year capacity is estimated to be idled. This might have prompted the planners in China to come down hard on auto manufacturers.

That said, the proposed rule has come at a time when several global auto giants — including Toyota Motor Corporation (TM - Free Report) , Nissan Motor Co. (NSANY - Free Report) , Geely Automobile Holdings Ltd. (GELYY - Free Report) and BMW AG (BAMXF - Free Report) — are trying to expand their manufacturing capacity in China. In fact, foreign automakers are betting high on China and investing largely in green field manufacturing capacity. In 2017, foreign auto majors sold more than 3 million cars in China. Toyota has major plans for China and intends to manufacture 3.5 million vehicles every year there by 2030, up from a little over a million now. It is true that it would not be easy for the automakers to pay less attention to China. But, if this proposal comes into effect, even if in a diluted form, it can impede the global automakers’ route to China to some extent.

Presently, while both Nissan and Geely have a Zacks Rank # 2 (Buy), each of Toyota and BMW carries a Zacks Rank # 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among the four stocks, while Toyota has risen by 4.5%, the other three have declined over the past year. BMW, Nissan and Geely have declined by 6.8%, 8.8% and 20.1%, respectively over the past year.

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