China auto consolidation will come thick and fast

TOYOTA MOTOR

15/09/2026 13:00

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Katrina Hamlin
HONG KONG, Sept 15 (Reuters Breakingviews) - Mounting losses and rising trade barriers overseas are strengthening the case for shuttering China's underutilised auto factories and stomaching job losses. On Monday evening, Guangzhou Automobile Group 601238.SS announced it is preparing a tie-up with FAW, maker of President Xi Jinping's official car and the late Chairman Mao’s favourite limousine. Though recent efforts to join state-controlled automakers in the country have failed, the consequences of inaction look increasingly risky for Beijing to chance.
GAC, which makes cars under its own brands such as Trumpchi and Hyptec as well as in partnership with foreign marques Honda Motor 7267.T and Toyota Motor 7203.T, has signed a letter of intent to acquire part of FAW’s equity in an unnamed joint venture. The terms have not been finalised but, if successful, the stock-based deal would make FAW, known for its luxurious Hongqi marque, a top shareholder of the $6.5 billion buyer. 
The pair look well suited. GAC's target is most likely FAW’s joint venture with Toyota Motor, which also has its own tie-up with the Guangzhou-based group. Those two ventures' combined sales have fallen 13% so far this year, per Citi analysts, in part because some models are in direct competition. Bringing them together would put an end to that and create a larger player with over one million sales a year, saving on manufacturing and other costs. A deal also ought to improve Toyota's profitability in China, which last year accounted for about 17% of its total sales.
GAC needs to take action either way. It used only 60% of its production capacity last year, its annual report shows, while its bottom line turned an 11.5 billion yuan ($1.7 billion) loss. Unlisted FAW does not publicly disclose its earnings.
Since last year's failed attempt to join two other state-backed rivals, Chongqing Changan Auto 000625.SZ and Dongfeng Motor 0489.SG, China's dependence on exports has risen sharply. These made up about 35% of auto sales in the year to August, compared with roughly a fifth in the same period last year, a trend vexing major trading partners like the European Union who now find themselves flooded with Chinese cars. 
Changan Auto and Dongfeng's deal fell apart after the two squabbled over key details such as role reductions, Caixin Global reported at the time, citing unnamed sources. Closing factories remains a sensitive issue thanks to China's rising unemployment rates, but it's clear that a change of gear is needed for Beijing to retain access to key Western markets. 
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CONTEXT NEWS
Shanghai-listed Guangzhou Automobile Group (GAC) intends to acquire part of FAW's stake in a vehicle-manufacturing joint venture, GAC said in a statement on September 14.
GAC intends to issue A-shares to fund the transaction. If completed, FAW is expected to become ​GAC's second-largest shareholder with strategic influence, GAC added.
GAC’s Hong Kong-listed shares rose as much as 8% in morning trade on September 15. Its Shanghai shares were suspended. 
FAW group’s core passenger-vehicle business is not listed.

(Editing by Una Galani; Production by Ujjaini Dutta)
((For previous columns by the author, Reuters customers can click on HAMLIN/katrina.hamlin@thomsonreuters.com; Reuters Messaging: katrina.hamlin.thomsonreuters.com@reuters.net))