Scrapped Merger Upends China’s State Auto Overhaul

The plan to merge Dongfeng Motor Group Co. Ltd. and Chongqing Changan Automobile Co. Ltd., which had been in development for several months, has been suspended. This development represents a setback for Beijing’s broader strategy to consolidate its state-owned automotive sector, a move intended to create stronger, globally competitive national champions. Changan Automobile announced that its parent company, China South Industries Group Corp., will spin off its automotive assets into an independent, state-owned enterprise, with the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council remaining the controlling shareholder. Meanwhile, Dongfeng Motor stated that it is not currently engaged in any restructuring related to this plan [para. 1][para. 2][para. 3].

The suspension dashes earlier expectations for a merger between these two large state-owned automakers, marking a retreat from SASAC's original consolidation ambitions. China South Industries Group Corp., although primarily known for its military operations, oversees a broad automotive portfolio, including listed companies such as Changan Automobile, Jiangling Motors Corp. Ltd., Harbin Dongan Auto Engine Co. Ltd., and an automotive parts subsidiary. Originally, SASAC’s blueprint called for splitting South Industries Group, assigning its defense business to China North Industries Group Corp. Ltd. (Norinco) and consolidating its automotive assets with Dongfeng Motor. This was confirmed in February 2024 when both Dongfeng and South Industries Group’s listed arms disclosed early discussions with other SOEs about potential restructuring [para. 4][para. 5][para. 6][para. 7].

At a public forum in March, SASAC Vice Chairman Gou Ping stated that strategic restructuring within the auto sector was underway, targeting enhanced industry consolidation, R&D, and manufacturing resources to better compete globally. However, China’s state-owned automakers have struggled to adapt to the rapid local shift toward electric vehicles (EVs), ceding ground to private firms like BYD Co. Ltd., which is currently China’s top carmaker by sales. Notably, BYD’s retail sales grew 14.9% year-on-year to 965,000 vehicles in the first four months of 2024, while both Changan and Dongfeng experienced double-digit sales declines in the same period [para. 8][para. 9][para. 10].

Stock market reactions were mixed: Changan Auto shares rose 3.3%, while Dongfeng’s Hong Kong-listed shares dropped 14% following the announcement. The intended restructuring went beyond a conventional merger, instead envisioning the creation of a new entity tentatively named “China Southern Automobile Group,” to be headquartered in Chongqing and reportedly led by Dongfeng executives. However, the plan faltered due to issues such as power imbalances between the companies, threatened job losses, resistance from local governments, and diluted authority for SASAC caused by increasing local involvement [para. 11][para. 12][para. 13][para. 14][para. 15][para. 16].

Competition in China’s auto sector is intensifying, exacerbated by a market crowded with over 200 licensed manufacturers, many of variable quality. Meanwhile, a BYD-led price war, with discounts matched by competitors such as Geely, SAIC, Aion, and Leapmotor, is further squeezing profit margins, drawing condemnation from the Ministry of Industry and Information Technology and the China Association of Automobile Manufacturers for undermining industry health and consumer rights. The failed merger underlines fundamental weaknesses in state-owned automakers and signals a shift by regulators towards allowing market forces to drive industry consolidation going forward [para. 17][para. 18][para. 19][para. 20][para. 21][para. 22][para. 23][para. 24].