China's Big Four Automotive Group Dongfeng FAW SAIC Changan Accelerates Component Business Integration

On January 7, 2011, Chang'an Group acquired a 100% stake in Yunnan Internal Combustion Engine Plant. Yunnei Power announced that the original controller, the State-owned Assets Supervision and Administration Commission of Kunming City, has transferred all the equity held by its Yunnei Dynamics major shareholder Yunnan Internal Combustion Engine Plant to China Changan Automobile Group Co., Ltd., a subsidiary of China National Equipment Group Corporation, for free. The latter promised to invest 6 billion yuan in return in 5 years. At the same time, Changan Group is also advancing the reorganization of ST Qingqi. Once the group has completed the reorganization with ST Qingqi, Chang'an Group will own three listed companies of Dongan Power, ST Qingqi and Yunnei Power.

The completion of the integration of the three major component parts business

At present, the parts and components business of FAW, Dongfeng and SAIC's three major automobile groups have basically been completed and the components and parts business of each group has formed a relatively complete business segment.

In February 2010, Dongfeng Automotive Components (Group) Co., Ltd. was established. The company has absorbed 15 Dongfeng's backbone component companies. Its business operations include suspended bearing systems, steering systems, engine thermal systems, and automotive electronic control modules. It is understood that the predecessor of Dongfeng Automotive Components (Group) Co., Ltd. is the parts and components division of Dongfeng Motor. After the establishment of the company, it established a truly corporate governance structure and will allocate resources according to the characteristics of the parts and components business. Shortly thereafter, the company re-integrated Dongfeng Motor Co., Ltd., a listed company, and the overall listing speed of Dongfeng Auto Parts Business continued to increase.

Like Dongfeng, FAW Group and SAIC Group also integrated their own parts and components business by assigning their parts and components business to one or more independent companies. It is understood that FAW Group’s original parts and components listed companies have two financing platforms: FAW Fuwei and Qiming Information. In October 2010, FAW and ST Shengrun signed a reorganization agreement, and plans to adopt a new share swap for the acquisition of Fu Ao Auto Parts Co., Ltd. to carry out major asset restructuring. After the reorganization is completed, ST Shengrun will be renamed FAW Fuao. After listing by FAW Foam, it will become the third financing platform, and the integration of parts and components business of FAW Group will also be basically completed. The three listed parts companies basically include the high-quality parts business of FAW Group. The SAIC Group has already listed its auto parts assets on the backdoor through the backdoor bus company (later renamed as Huayu Automobile), and through further integration, it has created a unified parts business segment.

Why integrate?

Why do major auto groups so much love to integrate parts and components business? This is because the resources of parts and components are very important to the production of the whole vehicle. The development of the whole vehicle cannot be separated from the support of the parts. Although at present, automotive companies can find many parts suppliers outside the system, in terms of the current development of China's parts companies, there are not many parts that can be developed synchronously with the entire vehicle company, even if simultaneous research and development can be achieved. The cost is also higher. Therefore, many auto companies are more willing to own their own parts and components companies. However, many parts and components companies are going their own way and will disperse the resources and efforts of the vehicle companies. To reduce procurement costs, allocate resources reasonably, and ensure the quality of parts and components, they must integrate their parts and components business.

Taking the procurement process as an example, if the company's various parts and components companies have their own procurement systems, each company will invest a lot of manpower and material resources to purchase raw materials or parts, and the operating costs are high. These costs will eventually be passed on to the product, and price competitiveness will be greatly reduced. Integrating parts and components business into a single platform will help to allocate resources uniformly, formulate unified procurement standards, and greatly reduce operating costs.

In addition to this, if the Group's parts and components companies are to be listed, the integration of the parts and components business into the listed company will help increase the competitive strength of the listed company and make it easier to achieve financing in the capital market.

Changan Group's parts and components business needs to be consolidated

It is understood that the Chang'an Group currently owns nine major vehicle production bases in Chongqing, Heilongjiang, Jiangxi, Jiangsu, Hebei, Anhui, Shanxi, Guangdong, and Shandong, and has 21 vehicle manufacturers and 27 component factories. Including more than 20 parts and components companies such as Chongqing Qingshan Transmission Branch Company, Sichuan Jian'an Sedan Branch Company, Hunan Jiangbin Piston Branch Company and Chongqing Changfeng Diverter Company. Among the more than 20 parts and components companies, the annual operating income of the smallest parts factory is less than 100 million yuan. Therefore, it is necessary for the Changan Group to integrate more than 20 parts and components companies into one.

At this point, ST Qingqi entered people's attention. Prior to this, industry insiders had speculated that Changan Group would use the ST Qingqi to achieve the overall listing of the Changan Group. However, as early as the beginning of 2010, Chang'an Group temporarily abandoned the concept of overall listing, and later it plans to reorganize or acquire listed companies, mergers and acquisitions of potential parts and components assets, and eventually set up a number of parts and components listed companies. The current restructuring plan is that Changan Group will replace 100% of the equity held by Hunan Tianyan with all assets and liabilities of ST Qingqi. Industry analysts believe that in the future, there will be more spare parts assets injected into the listed company after restructuring, which will become a platform for parts integration.

In response to confirmation from the relevant persons of the Chang'an Group, the Group did not respond positively. Its relevant person in charge said that in the near future, the group will publish relevant contents of the group's “Twelfth Five-Year” development plan, and will elaborate on the development of parts and components business at that time. Based on this speculation, the Changan Group's parts and components integration plan will be released together with the “Twelfth Five-Year Plan” in the first half of 2011 at the latest, giving people a clear and definitive answer.