Guangzhou Automobile Group (GAC) announced on Monday that it planned to acquire part of FAW Group’s stake in an unnamed automobile joint venture with an overseas-listed company. Chinese state media identified the venture as FAW Toyota, raising the prospect of closer integration between Toyota’s two major Chinese operations.
GAC and FAW did not respond to requests for comment, while Toyota declined to comment.
The potential transaction comes as China’s automobile industry faces a major shakeout following years of aggressive expansion. The world’s largest auto market now has significant excess capacity and more than 100 competing vehicle brands, intensifying pressure on manufacturers to cut costs and improve efficiency.
Analysts said the proposed deal could be an early indication of wider consolidation across the industry, particularly as the economics of maintaining parallel production, sales and distribution networks become increasingly difficult to justify.
The auto industry has “long been suffering from involution, or loss-leading competition,” S&P Global Ratings said in a note on Tuesday. The ratings agency said weak demand, excess capacity and the rapid transition to electric vehicles were placing increasing pressure on state-owned automakers and their foreign joint ventures.
“We anticipate a broader wave of industry restructuring over the next two to three years,” S&P Global Ratings said.
Toyota’s two-track China strategy
Toyota has operated in China for decades through separate partnerships with FAW in northern China and GAC in the south. The strategy allowed the Japanese automaker to expand rapidly and establish a broad manufacturing and distribution footprint during years of strong growth in the Chinese market.
However, slowing market growth and the rise of highly competitive domestic manufacturers have weakened the rationale for maintaining two largely parallel operations.
Bill Russo, founder of Shanghai-based consultancy Automobility, said a closer alignment of Toyota’s Chinese operations could make industrial and commercial sense by reducing duplication.
He said there was a “sound industrial logic” to the potential move because Toyota could improve the efficiency of its sales and distribution operations while reducing overlapping investment.
But Russo cautioned that consolidation would not, by itself, address the deeper challenges confronting foreign automakers in China.
“The more fundamental issue is the loss of relevance many global automakers face in consumer-facing technology,” Russo said, adding that consolidation alone would not restore the relevance of Toyota’s products.
“You can become more efficient at building a car that consumers increasingly overlook,” he said.
Foreign automakers lose ground
Foreign manufacturers that once dominated China’s automobile market have steadily lost ground to domestic brands, particularly over the past five years.
Companies including BYD, Geely and Chery have rapidly expanded their market share with electric and hybrid vehicles, while simultaneously increasing their presence in international markets.
The shift has challenged the traditional joint-venture model through which global automakers entered and expanded in China.
Jia Ke, founder of consultancy Auto Business Review, said the model had come under increasing pressure as profits across the industry declined.
“As the industry's profit pool continues to shrink, redundant investment and internal inefficiencies are becoming increasingly untenable,” he wrote in a note.
Toyota’s own position in the Chinese passenger-vehicle market has weakened. Its two Chinese joint ventures accounted for about 7 per cent of passenger-vehicle sales during the first eight months of the year, according to data from the China Passenger Car Association.
That placed the two operations behind BYD, Geely Auto and Volkswagen.
The decline is particularly notable compared with 2021, when FAW Toyota and GAC Toyota together ranked second in the market, behind only Volkswagen.
Toyota has consequently begun looking for ways to streamline its Chinese business. Reuters reported in late 2024 that the company was considering bringing its sales and production operations closer together as part of efforts to reverse its declining market position.
Dealer networks shrink
The pressure is also visible in Toyota’s dealership networks.
FAW Toyota’s dealer network has fallen by more than 15 per cent to 651 stores this year, from a peak of 773 in 2022, according to data from China Automobile Dealers Association analyst Li Yanwei.
GAC Toyota has also reduced its network, with the number of dealerships declining by more than 10 per cent over the same period to 620 from 693.
The reductions reflect the broader difficulties facing manufacturers and dealers in a market where intense competition has forced companies to compete aggressively on price.
China’s automobile sector has become caught in a prolonged price war, driven in part by years of investment and rapid expansion of production capacity. The resulting pressure has squeezed manufacturers’ margins and increased the urgency of restructuring.
Government authorities have repeatedly raised concerns about excess capacity and the damaging effects of price competition.
Official data showed that profit margins in China’s vehicle manufacturing sector had fallen to 1.5 per cent, their lowest level in nearly a decade.
Last week, China’s top economic planner again expressed support for mergers and restructuring among major automakers, reinforcing expectations that consolidation could become a more prominent feature of the industry.
Broader restructuring
Toyota is not alone in facing pressure to reassess its Chinese operations.
Volkswagen, which was China’s largest foreign automaker for much of the past three decades, also operates through partnerships with FAW and SAIC. Those arrangements were established during a period when rapid market growth rewarded manufacturers for expanding production capacity and establishing broad geographical coverage.
Other Japanese automakers have also scaled back their Chinese operations.
Honda and Nissan have reduced production in China as sales weakened, while Mitsubishi Motors has stopped producing vehicles in the country altogether.
Zhou Xiaoying, founder of automotive supply-chain platform Gasgoo, said the traditional joint-venture structures had served an important purpose during China's period of rapid automotive expansion, but that the industry's priorities were now changing.
The emerging model, she said, would place greater emphasis on speed, cost control and coordination.
“Priorities are changing,” she said. “Faster decisions, lower costs and a more unified market strategy.”