Clock ticking for auto 'shells'

A recent announcement from China's Ministry of Industry and Information Technology finally ended the life-tenure validity of production certificates in the auto industry, which is expected to accelerate consolidation in the sector.

According to the notice on the ministry's official website, manufacturers of automobiles and motorcycles that have gone bankrupt will have their production certificate repealed.

And for those companies that have "failed to maintain normal operations" - that is producing and selling only a few or even zero vehicles in the past two years - the ministry will give them two years to fix their business, otherwise it will suspend their certificates.

Previously, the certificate used to be a once-and-for-all offer, so that even when some auto companies struggled or failed to make a living, they didn't really die because they still owned their certificates and the affiliated product licenses.

To prevent overcapacity in the auto sector, the Chinese government has been cautious in approving new automakers and about letting existing manufacturers add new plants, therefore, some little-known, ailing companies, known as "shells", could make a fortune by selling their production certificate and product license.

Mei Songlin, vice-president and managing director of the China operations of consultancy JD Power, told China Daily that the long-awaited policy will have a big impact by eliminating ailing companies.

A clear signal

"It is a clear signal that the government has decided to reduce the number of automakers in China and increase industry consolidation," Mei said.

China now has more than 1,300 companies that manufacture all kinds of vehicles, among which there are 171 automobile companies, 120 motorcycle companies, more than 900 special-purpose vehicle makers and 135 low-speed truck and tricycle makers, according to statistics from the ministry.

And "some of the more than 1,300 companies have suspended production or been close to halting for years", according to the Ministry of Industry and Information Technology.

A list from the China Association of Automobile Manufacturers containing the production and sales performance of 71 domestic companies showed that 11 companies produced no vehicles in the first half this year.

Yet according to industry insiders, the number of companies with no production is far more than that.

Mei noted that the new policy is likely to accelerate acquisition of these "zero-production companies" by automakers seeking to expand.

Good time to buy

"It's a good time to buy these companies at a reasonable price," Mei said, explaining that it's because the "shells" know they have to be sold as soon as possible, otherwise they will be worth nothing once their certificates are withdrawn.

Some "shell" companies have been sold in the past at very high prices as the buyers urgently wanted to expand their capacity.

Ford Motor Co's joint venture with Chang'an Automobile Group in China recently announced a new investment plan in the eastern city of Hangzhou to build high-end vehicles.

Without official confirmation from both partners, domestic media reports quoted insiders who said that a subsidy of Chang'an had acquired little-known Chahua (Camellia) Auto in order to gain a production certificate for the new Hangzhou plant.

The cost of this "shell" was 450 million yuan ($70.5 million), paid by both partners and the local government, the report said.

Similarly, when Volkswagen, Nissan and BAIC Group sought to expand their capacities in new territories, they all acquired local "shells" in order to gain production certificates.

However, Zhong Shi, an independent analyst, said that the elimination of zero-production companies might make it easier for the government to approve applications for new production capacity.

"With someone out, it's easier to let a new one in," Zhong said.

"The new policy is good news," he added, "companies going out and coming into the industry should follow the rules of the market."

Analysts also noted that another important purpose of the new measure is to stop some companies from selling their product licenses to some unqualified manufacturers to make money.

The behavior, mostly by small manufactures of commercial vehicles, is harmful to the society since the product quality can't be guaranteed, they said.

Contact the writer at hantianyang@chinadaily.com.cn