China Gears Up for Auto Industry Shakeup

The auto industry is set for a complete overhaul. General Motors recently announced plans to eliminate several lines including its Saturn brand. European carmakers are in the same boat.

Here in Asia, Japanese automakers are in much better shape. However, given the global downturn, companies such as Toyota, Honda and Nissan have enforced production holidays.

Baijing Auto Show

Over in China, the local auto sector looks set to undergo a consolidation phase as intense competition and a sales slump is likely to force out smaller manufacturers.

There are around 57 automakers in China. Subtract the subsidiaries from that list, and there are still looking about 40 domestic automakers. This might not seem a big deal if you take into account a population of over a billion people. But not every single Chinese person drives.

The latest global transportation statistics compiled by the United Nations, shows per capita vehicle ownership in China at just 10 autos per one thousand people.  Compare that with 765 vehicles per thousand in the United States, 426 per thousand in the UK and 158 per thousand in Singapore.

Ten vehicles per thousand -- the numbers speak for itself. There are too many automakers in China. The small ones should really disappear, especially if they’re non-productive. It's way too expensive in terms of technology to compete against the big boys.

But, this is a great opportunity for mid-tier companies to come to the fore and make their mark. Why so? They export. Companies like Geely, Chery and Hafei sell cars to emerging markets like Africa, Eastern Europe and parts of Asia. Chances are, you might have never heard of the Chery QQ or Hafei Lobo unless you're driving one in Singapore. They most certainly are unknown entities to Americans.

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Individually, the likes of Geely and Chery are currently competing against each other. But combine them together -- they'll be able to take on the established players. Now we’re talking!

Leave China's big three of SAIC, FAW Group and Dongfeng Motor to their own devices.  These three produce and sell vehicles for the domestic market. But Geely, Chery, Hafei and perhaps a few other mid-size players should merge and consolidate themselves into the number four auto manufacturer in China, and focus on exporting their products.

Perhaps this means the government’s intervention to broker a marriage. If that happens, China would have an aspiring global carmaker with both scale and a very decent distribution network.

And if that possibly leads to a potential suitor for a beleaguered American auto company, that’s globalization for you. Take over the technology, use the brand, (as Lenovo did with the Thinkpad,) get their safety ratings up to scratch, and you’re faced with a force to reckon with. Chrysler would be a good start for the Chinese. They’ve even got a CEO who’s willing to work for just one dollar.

© 2012 CNBC  Asia