Two of China's largest state-owned automakers create formidable manufacturers of automobiles and military vehicles, but are in high-level discussions to merge with contracts that could cause problems for the US and Japanese partners.
Dongfeng Motor and Changan Automobile are in detailed discussions on how to combine their businesses, and have communicated their intentions to foreign partners, said two people with detailed knowledge of the discussion that they were not allowed to comment.
Little is known outside of China, but each company produces slightly more cars through its own brands and joint ventures than global automakers such as Mercedes-Benz and BMW. Together, Dongfeng and Changan make around 5 million cars a year. It's more than Ford Motors and is roughly the same as the giants General Motors and Stellantis, which own Fiat, Chrysler and Peugeot.
The merger of Dongfeng and Changan represents another indication of a major consolidation of the world's largest Chinese automotive market and a rapid embrace of electric vehicles. Both companies have significantly more factory capabilities than they require gasoline-powered vehicles.
Beijing's hope is that the total company can close the extra factory for gasoline vehicles and become more successful with electric vehicles.
China's central government owns control over Dongfeng and Changan shares. Dongfeng is a leading supplier of military vehicles to the People's Liberation Army, and Changan is a subsidiary of Chinese military contractors, which can attract unwanted attention from the Trump administration to new large military suppliers and their joint ventures.
Chongqing-based Changan has been a major partner in Ford in the Chinese automotive market for over 20 years. Wuhan-based Dongfeng is a long-time Chinese partner at Nissan Motor and one of Honda Motor's two major Chinese partners.
Changan and Dongfeng produce gasoline-powered cars primarily for joint ventures. Mergers that focus on unique branded electric vehicles can have an impact on international partners.
Ford and Nissan declined to comment, while Honda did not immediately respond to requests for comment.
According to global consulting firm Alixpartners, in an industry where factories need to operate at 60-80% of their capabilities to make a profit, Dongfeng's factory ran at 48% and Cangan at 47% last year.
China's State Asset Supervision and Management Committee directly owns control of Dongfeng and holds similar interests indirectly to Changtan through a large military contractor of the China South Industrial Group.
In a speech on Saturday, the committee's deputy director, Gou Ping, called on China to “develop a strategic restructuring of central automotive companies for full vehicle production,” focused on electric vehicles.
The shares of the two companies are publicly traded by Dongfeng in Shanghai, Hong Kong and his boss, Changgun. Each issued a statement on February 10 that the parents of the company were considering dealing with changes to their ownership structure. The companies did not mention each other in their statements.
A woman in Changan's securities division said, “We are currently awaiting further notice from shareholders.” A Chinese South Industrial mission, the controlling shareholder of Changan, said he had no information about Changan. Dongfeng officials did not respond to requests for comment.
China faces enormous excess capacity in automobile production. The state-run bank offers almost unlimited loans at low interest rates to businesses that want to build electric car plants. As a result, the car company was in construction.
Battery-electric vehicles and plug-in gasoline-electric vehicles have slightly surpassed half of the cars sold in China since last summer. China has enough factories to build more than twice as many cars as they can sell domestically, increasing exports. The US and the European Union have placed tariffs on vehicles from China to limit imports.
The combined company after the merger of Dongfeng and Changan could become a major military contractor.
Dongfeng's production includes personnel carriers like trucks and humvees, as well as more specialized vehicles for firing drones, missiles and hand-rena bullets.
When Beijing held a major military parade in 2015 to mark the 70th anniversary of Japan's defeat in World War II, Dongfeng supplied 180 military vehicles. Another parade is scheduled for September this year to mark the 80th anniversary.
Dongfeng was the leader of Beijing's efforts to ensure that China produces all military materials within the country's borders. The official Chinese newspaper said in 2015 that Dongfeng's light tactical vehicles, from engines to small screws, are made entirely in China.
Siyi Zhao contributed to research from Beijing, while Akira Davis River contributed to report from Tokyo.
