China's auto industry, the world's most competitive, will likely consolidate from next year as slowing demand and rising material costs crimp margins, an official from the National Development and Reform Commission (NDRC) said.

"Some weak brands and less competitive players will start to be pushed out next year," Cheng Xiaodong, head of the vehicle-price monitoring arm of the NDRC, said. "Local carmakers with small profit margins will be hit first."

Chinese carmakers have been forced to slash prices, even as steel costs rise, to stand out among the 52 brands on sale, the most in any country. Car sales in Asia's largest auto market have also fallen for the last two months as rising fuel prices and a 64 percent stock market slump curb demand.

"In a downturn, only strong players can survive," said Huang Zherui, an analyst at CSM Asia in Shanghai. "Local carmakers may be hit the most by slowing demand as buyers of their vehicles have less purchasing powers than motorists opting for higher-end products."

Still, combining with money-losing rivals may damp earnings at profitable carmakers. Dongfeng Motor Group Co, the country's second biggest listed carmaker, plunged the most in a year in Hong Kong trading on concerns it will have to buy rivals.

"It will be a painful process for major carmakers like Dongfeng to absorb smaller players," said Vivien Chan, an analyst at Sinopac Securities Asia Ltd in Hong Kong. "They will have to go that way though, given that it's the direction set by the government."

Local brands are being squeezed in China as rising wages enable drivers to buy more expensive overseas models. Chery Automobile Co, the country's largest carmaker without an international partner, ranked sixth in car sales in the first nine months, compared with fourth for the whole of last year. The top two spots were taken by Volkswagen AG ventures in both periods.

China's domestic carmakers face more competition as overseas rivals including General Motors Corp and Toyota Motor Corp have boosted investments in the country to offset slowdowns in the United States, Europe and Japan. China's car sales doubled in the five years to 2007, and rose 11 percent to 5.1 million in the first nine months of this year. In the US, vehicle sales dropped 13 percent in the first nine months. European sales sank 4.4 percent.

The competition may force carmakers to cut prices as much as 3 percent this year, Cheng said. The country's stockpile of unsold new vehicles stood at a four-year high of 170,000 at the end of last month, he added. Prices fell 2.1 percent in the first nine months, he said. Toyota and Mazda Motor Corp have both made temporary production cuts because of slowing demand.

Consolidation among Chinese carmakers has already begun. SAIC Motor Corp, the country's largest automaker, took over Nanjing Automobile Group Corp's automaking assets, including the MG Car brand last year.

Still, other attempts at combinations have been hindered by the fact that most major carmakers are owned by the central or local governments, said Huang.

Jiangxi Changhe Automobile Co and Hafei Automobile Group, two State-owned carmakers, have spent seven years looking for partners to help them improve their competitiveness, China Business Journal said on October 6. Their latest efforts failed because the two companies didn't have full control over the negotiations, the report added.

(China Daily October 17, 2008)