Two of China’s biggest state-owned automakers are in advanced discussions to merge, in a deal that would create a formidable manufacturer of cars and military vehicles but could also create problems for their American and Japanese partners.
Dongfeng Motor and Changan Automobile have conducted detailed talks on how to combine their operations and told their foreign partners of their intentions, said two people with detailed knowledge of the discussions who were not authorized to comment.
Although little known outside China, each company produces slightly more cars for its own brands and through joint ventures than global automakers like Mercedes-Benz or BMW. Dongfeng and Changan together make about 5 million cars a year — more than Ford Motor and almost as many as General Motors or Stellantis, the giant that owns Fiat, Chrysler and Peugeot.
A merger of Dongfeng and Changan would represent a significant consolidation of China’s auto market, the world’s largest, and another sign of the country’s rapid embrace of electric vehicles. Both companies have considerably more factory capacity for producing gasoline-powered cars than they need.
Beijing’s hope is that a combined company will be able to close excess factories for gasoline cars and become more successful in electric cars.
China’s national government owns controlling stakes in Dongfeng and Changan. Dongfeng is a leading supplier of military vehicles to the People’s Liberation Army and Changan is a subsidiary of a Chinese military contractor, which could draw unwanted attention from the Trump administration to a new, larger military supplier and its joint venture partners.
Chongqing-based Changan has been Ford’s principal partner in the Chinese auto market for more than 20 years. Dongfeng, based in Wuhan, is the longstanding main China partner for Nissan Motor and one of two main partners in China for Honda Motor.
Changan and Dongfeng mainly produce gasoline-powered cars for their joint ventures. A merger that leads to a greater emphasis on electric cars for their own brands could affect their international partners.
Ford and Nissan declined to comment and Honda did not immediately respond to a request for comment.
In an industry in which factories need to operate at 60 to 80 percent of capacity to make a profit, Dongfeng’s factories last year ran at 48 percent and Changan’s at 47 percent, according to AlixPartners, a global consulting firm.
China’s State-owned Assets Supervision and Administration Commission directly owns a controlling stake in Dongfeng and holds a similar interest indirectly in Changan through a large military contractor, China South Industries Group.
In a speech on Saturday, Gou Ping, the commission’s deputy director, called for China to “deploy strategic restructuring of central automotive enterprises for the production of complete vehicles” and focus on electric cars.
Shares of both companies are publicly listed, with Dongfeng trading in Shanghai and Hong Kong and Changan in Shenzhen. Each issued statements on Feb. 10 that their corporate parents were considering transactions to change their ownership structures. The two companies did not mention each other in their statements.
A woman in Changan’s securities department said that, “we are currently awaiting further notification from the controlling shareholder.” The duty person at Changan’s controlling shareholder, China South Industries, said he had no information about Changan. Dongfeng officials did not respond to a request for comment.
China faces enormous overcapacity in car production. State-controlled banks offer almost unlimited loans at low interest rates to companies that want to build electric car factories. As a result, car companies have been on a construction binge.
Battery-electric vehicles and plug-in gasoline-electric cars have represented slightly over half the cars sold in China since last summer. China has enough factories to build more than twice as many cars as can be sold domestically and is ramping up exports. The United States and European Union have put tariffs on cars from China to limit imports.
The combined company after a merger of Dongfeng and Changan could be a big military contractor.
Dongfeng’s production includes trucks and Humvee-like personnel carriers as well as more specialized vehicles for launching drones, missiles and grenades.
When Beijing held a big 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 expected this September to mark the 80th anniversary.
Dongfeng has been a leader in Beijing’s effort to make sure that China makes all its military materiel within the country’s borders. The official China Daily newspaper said in 2015 that, from the engine down to each tiny screw, Dongfeng’s light tactical vehicle is made entirely in China.
Siyi Zhao contributed research from Beijing and River Akira Davis contributed reporting from Tokyo.