The policy will prohibit automakers from building new plants to expand capacity unless they acquire an existing manufacturer. [China Daily]

A government plan to encourage more mergers and acquisitions between China's automakers is expected to be released in the next few months as policymakers follow through on their avowed aim to reshape the country's highly fragmented industry.

According to Chinese media reports, the Ministry of Industry and Information Technology has already drafted consolidation guidelines and is seeking advice from related governmental bodies.

According to a report of Shanghai Security News, the policy will prohibit automakers from building new plants to expand capacity unless they acquire an existing manufacturer.

The Chinese government has long been making its position clear that it wants consolidation in the auto industry.

Even an industry development policy from six years ago called for more strategic restructuring to form large, strong auto groups.

According to the national auto industry revitalization plan released last year, policymakers hope that by 2012 consolidations will result in two to three large-scale auto groups, each with annual production capacity surpassing 2 million units, and four to five companies with annual output of more than 1 million vehicles.

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Only five had sales of more than 1 million units last year. The country's top 10 carmakers moved a total of 11.89 million vehicles in 2009, accounting for 87 percent of overall sales.

"In an industry where the vital few carry much more weight than the trivial many, it is necessary to reduce the number of small manufacturers and form production giants that can compete globally - a transition from being large to becoming strong," said Marvin Zhu, a senior analyst at JD Power Consulting (Shanghai) Co Ltd.

Countries with strong auto industries usually have a small numbers of carmakers, but they are big. According to JD Power, among the top five auto producing countries in 2009, China has 65 light vehicle producers, while there were only 15 in the US, nine in Japan, eight in Germany and four in South Korea.

The current top four Chinese auto groups are SAIC, FAW, Dongfeng and Chang'an. Carmakers including Beijing Automobile, Guangzhou Automobile, Chery, Geely and Sinotruk form the second tier in the country's auto industry.