FAW-GAC deal tests a new path for China’s auto consolidation

(By Caixin journalists Zhai Shaohui, Yu Cong and An Limin)

A long-discussed restructuring between state-owned carmakers China FAW Group Co. Ltd. and Guangzhou Automobile Group Co. Ltd. (GAC) has shifted into a higher gear.

On 14 September, GAC disclosed that it had signed a letter of intent that day with FAW Co. Ltd., a wholly owned subsidiary of FAW Group. GAC plans to issue shares on the mainland to acquire the subsidiary’s stake in a joint venture (JV). Caixin has learned that the latter is FAW Toyota Motor Co. Ltd. Details of the deal remain under negotiation.

Once the transaction is completed, FAW Co. Ltd. will become GAC’s second-largest shareholder. GAC will remain under the effective control of Guangzhou’s state-owned assets authority.

FAW’s stake in GAC could range from 10% to 20%, while GAC’s ownership interest in FAW Toyota could be below 25%, according to China Automotive Strategy and Policy Research Center (CASPRC) estimates.

A person close to GAC said the industry increasingly believes China’s auto market has largely exhausted its expansion phase, with domestic sales potentially contracting by 10% to 20% year-on-year by 2027. Against that backdrop, consolidation among state-owned automakers is beginning to take shape.

People familiar with the matter said the FAW Toyota transaction is likely only a starting point, and investors are hoping for a deeper restructuring between the two groups.

Another person familiar with the situation said FAW has already surveyed some managers about the possibility of moving to south China and could later send personnel to GAC.

The two groups could also use an equity swap to forge deeper capital ties, according to a CASPRC research report. The significance extends beyond the companies themselves: joint technology development, shared product platforms, integrated sales channels and standardised parts could provide a model for industry-wide cooperation and lower costs.

Driving the deal

The market had previously speculated that FAW might acquire a stake in GAC through asset transfers or other means. But in the transaction now under discussion, FAW Toyota has emerged as the fulcrum for broader consolidation.

“It is unexpected, but it makes sense,” said one auto-industry executive.

FAW Toyota was established in 2000. It is currently owned by Toyota Motor Corp., Toyota Motor (China) Investment Co. Ltd. and FAW Co. Ltd., which holds a 50% stake.

In 2004, Toyota and GAC formed GAC Toyota Motor Co. Ltd. GAC also holds a 50% stake in the venture. Historically, the two JVs, which have separate product lineups and sales networks, have competed with one another and are commonly known in China as the “northern” and “southern” Toyotas.

Several people close to the state-owned auto giants believe Toyota played a role in securing a preliminary agreement between FAW and GAC.

The proposed arrangement would spare both sides from using cash reserves at a time when automakers across the industry are being squeezed by thin margins. GAC would issue new shares to acquire part of FAW Toyota, reducing the practical difficulty of executing the deal.

The valuation question

FAW Toyota’s wholesale sales totalled roughly 395,000 vehicles in the first eight months of 2026, down more than 20% from a year earlier, according to the China Passenger Car Association.

GAC Toyota sold about 455,000 vehicles wholesale over the same period, a decline of just 2.5%.

The balance of power within Toyota’s China operations has already shifted. JPMorgan Chase & Co. estimates that GAC Toyota’s share of Toyota’s China sales rose to 48% in 2025 from 33% in 2009. During the first seven months of 2026, that share climbed further to 54%.

“GAC Toyota is currently GAC’s best asset,” said a person close to the group. “FAW Toyota is still profitable, but its sales are under pressure. FAW has scale and status in the industry, while GAC holds a strong card in GAC Toyota.”

In similar transactions, both parties typically begin with their own internal valuation expectations before negotiating towards a compromise, the finance executive said.

The negotiating balance

FAW Toyota’s valuation may have limited flexibility. Its parent is backed by the central government, meaning it must consider state-asset management requirements when valuing subsidiaries, said a finance executive at a centrally backed state-owned enterprise. That is likely to make its pricing approach cautious.

GAC, by contrast, is a listed company with a clear market benchmark for any new share issuance. However, weak earnings results have put sustained pressure on the stock price. By the final trading day before the suspension of its Shanghai-listed shares, the stock had fallen 37.6% year-to-date.

By the end of the first half of this year, GAC’s net assets attributable to shareholders stood at about 100.4 billion RMB (US$14.96 billion), according to the company’s interim report. Its market capitalisation, based on its Shanghai share price, was only about 52 billion RMB.

One industry executive said the company faces two possible paths if it stays independent. It could reverse its decline, or its operations could deteriorate further.

If it fails to turn itself around, restructuring may eventually become unavoidable, which could weaken its negotiating position, the executive said.

Strategy over commercial logic

The core purpose of the transaction is to bind FAW and GAC, said an auto industry executive, arguing that its strategic value outweighs its commercial logic. Even if FAW Toyota is priced somewhat aggressively, GAC would probably accept the deal if the financial terms and procedures comply with regulations, the executive said.

GAC would gain a stake in FAW Toyota and share in its profits, helping ease the group’s losses, another person familiar with the matter said. “That is the most immediate benefit.”

For FAW, meanwhile, GAC would become an equity-accounted affiliate, meaning GAC’s vehicle sales could theoretically be included in FAW’s books. FAW could also place its Toyota JV, which is currently in decline, under GAC’s management and benefit through its GAC shareholding if the business improves.

“FAW gains stature. GAC gets a near-term boost to its financial statements. Toyota’s joint ventures can also improve quality and efficiency through unified operations,” the person familiar with the matter said. “It is a relatively favourable plan for all sides, Chinese and foreign.”

FAW Group has yet to complete a listing. Only its commercial-vehicle maker FAW Jiefang is publicly traded.

FAW seeks a reset

Industry observers say integration between FAW Toyota and GAC Toyota could proceed relatively smoothly because Toyota already controls product decisions at both ventures. The greater challenge could lie in coordinating the groups’ domestic brands.

The China Automotive Technology and Research Center (CATRC) said the two groups have complementary strengths. FAW owns the premium Hongqi brand, while GAC’s EV marque Aion has performed well in the mass market. FAW has deep expertise in traditional areas such as gasoline engines and chassis systems, while GAC moved earlier into electrification. FAW is strong in northern China and government procurement; GAC has a deep presence in southern China and sits close to export ports.

Still, the difficulty of integration should not be underestimated. The merger will involve corporate cultures, talent, brands, supply chains and management systems, said one industry executive. The hardest task may be integrating underlying research and development systems and technology platforms, an area that will require someone with authority to make final decisions.

FAW is also facing challenges in its hometown of Changchun, Northeast China’s Jilin province. A draft of Changchun’s 15th Five-Year Plan for auto-industry development, released in June, noted that FAW is the city’s only major vehicle-making group. If FAW’s production and sales fall short of expectations, the consequences for Changchun’s industrial economy could be substantial.

The plan also said Changchun’s new-energy-vehicle (NEV) sector remains weak; local vehicle-makers have been slow to transition towards electrification; and the city’s auto exports remain limited.

“FAW’s urgent task is to produce critical new-energy technologies and products,” said a person involved in policymaking for the automobile sector.

Changchun’s plan calls on vehicle-makers to invest in, or acquire, high-quality companies and brands with technological capabilities and competitive strength through equity investments and technology partnerships.

Regulators offer support

Authorities have repeatedly emphasised the need to guide automakers towards faster consolidation.

On 10 September, nine government departments, including the Ministry of Industry and Information Technology (MIIT), issued a 15th Five-Year Plan for the development of the intelligent connected NEV industry. The plan called for stronger support for mergers, reorganisations and cross-regional integration among auto companies, as well as deeper reform of group-level management.

Zhang Yongwei, chairman of the China EV100 Research Institute, said recently that restructuring will be a central market focus in the coming years. But he warned against administratively arranged “forced matches” and said the market should see more deals based on companies’ commercial intentions.

“The market should be at the core of restructuring,” Zhang said. “The government should create the conditions to ensure market mechanisms function effectively.”

An MIIT official said policy support is only one side of state-owned auto consolidation. Companies themselves must identify suitable partners and devise specific transaction structures.

The FAW-GAC arrangement is aligned with national industrial policy and offers one way to break the ice, the official said.

Once ‘cash cows’ for Toyota

Many multinational automakers operate more than one joint venture in China. These ventures, which share a foreign parent but have different Chinese partners, often compete. The northern and southern Toyota ventures are a prime example. For years, they have sold “sister models” side by side.

During the golden age of gasoline-powered vehicles, foreign brands such as Toyota enjoyed strong consumer recognition, and the conflict between sister models was less acute.

But as the market shifted from conventional vehicles to new-energy models, joint-venture brands have been slow to respond and have steadily lost market share.

Domestic brands’ share of China’s passenger-vehicle market rose to 65.4% in 2025 from 41.2% in 2021, according to the China Passenger Car Association, reversing the competitive balance with joint-venture brands. Over the same period, Japanese brands including Toyota saw their share fall to 12.1% from 22.6%. Domestic brands’ share rose further to 66.2% in the first eight months of 2026.

Toyota sold 1.944 million vehicles in China in 2021. That fell to about 1.78 million in 2025. During the first seven months of 2026, Toyota’s cumulative China sales totalled 809,000 vehicles, down 18.2% from a year earlier.

The two Toyota ventures were once major “cash cows” for Toyota, said the person close to GAC. China remains an important pillar of Toyota’s global sales, but its contribution to profits has fallen sharply.

A solution to the JV dilemma

CASPRC said closer cooperation between the two Toyota ventures could offer a solution to the sister model problem.

The companies could coordinate supply-chain controls, share sales channels and divide manufacturing responsibilities, reducing internal competition among vehicles built on the same platforms and concentrating scarce resources on genuinely differentiated technology and products, CATRC said.

A direct merger would be difficult in the short term because both ventures involve complex ownership balances between state-owned Chinese partners and Toyota, the person close to GAC said. A more practical first step may be integration in sales, where Chinese teams already play the leading role.

Cooperation between the northern and southern Toyotas could serve as a useful reference for other foreign brands operating dual or multiple joint ventures in China, CASPRC said. Volkswagen AG, Honda Motor Co. and Ford Motor Co. also face problems involving sister models and overlapping sales channels.

Chen Bo contributed to this article.

This article was first published by Caixin Global as “Cover Story: FAW-GAC Deal Tests a New Path for China’s Auto Consolidation”. Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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