China’s SUV specialist Great Wall Motor Co. Ltd. may, in the end, never get its hands on Fiat Chrysler Automobiles NV’s Jeep division. But expect more and more Chinese automakers to seek out foreign acquisitions. The Chinese government has long dreamed of creating a globally competitive car industry, and having Chinese automakers purchase established companies and brands would seem one obvious way to accomplish its goal.

This should be evident from the fact that Chinese automakers still struggle badly to compete, even at home, despite decades of investment and supportive state policies. Chinese cars have begun to raise their profile domestically, especially in recent years. Still, only three of the 10 best-selling passenger vehicle brands in the first half of this year are from Chinese companies, according to market research firm LMC Automotive. The two largest, China Changan Automobile Group Co. Ltd. and Geely Automobile Holdings Ltd., each have a share of only 4.6 percent, about a third of top dog Volkswagen AG’s.

Meanwhile, Chinese car companies have almost no presence overseas. Exports were smaller in 2016 than two years earlier, and the biggest markets for Chinese cars tend to be in the developing world. So far this year, Iran ranks as the largest importer.

Coddling local automakers, many of which are owned by the state, has weakened rather than strengthened them. China, for instance, still forces foreign automakers to set up operations as joint ventures with Chinese partners. (Ironically, Jeep was the first foreign brand to forge such a JV.) The idea has always been for local companies to exploit these shotgun marriages to glean technology, management expertise and other skills from established players.

Instead, Chinese carmakers have made so much money selling these foreign brands that the joint ventures have dampened their incentive to compete against their partners. The JV system has also fallen terribly out of date with global practice. China’s emerging-market competitors, including India and Russia, don’t place any such restrictions on foreign firms.

Government support has created another problem as well: too many automakers. According to Bill Russo, an expert on the Chinese car industry at Gao Feng Advisory in Shanghai, there are more than 100 registered automakers in China. That’s far, far more than even the world’s largest car market can support. As a result, most manufacturers can claim only a marginal share of the market — even some of the better-known companies. The Chery brand, for instance, commands a mere 1.8 percent of the passenger-car market, while Great Wall’s Haval only has 3.4 percent.

We know from historical experience that even large economies, such as the U.S., can sustain only a handful of car companies. Yet while consolidation is needed, “the fragmented production network and marketplace make it exceedingly difficult for any single Chinese company to emerge as a large player,” Crystal Chang, a lecturer at the University of California, Berkeley who has studied the industry, wrote in an email.

And again, government policy isn’t helping. Many local authorities have their own neighborhood car company that they support in order to generate jobs and investment, and nobody wants to sacrifice their champion for the greater good of the industry. While many of these companies are state-owned, even private players are often treated as local heroes and offered perquisites like tax breaks.

Russo blames this dilemma on the very nature of China’s growth model, which incentivizes provincial officials to promote local fixed-asset investment. Chang adds that more than politics are involved: No executive team at a state-owned enterprise wants to merge with another and possibly lose its authority.

Until these problems are addressed, foreign buyouts can only take China so far. The companies and brands available for purchase will likely be small chunks of bigger firms, or troubled nameplates. Chinese managers, who already lack international experience, will have an exceedingly tough time building these acquisitions into major contenders.

Look at Geely, which bought Volvo from Ford in 2010. The brand has since enjoyed a surprising comeback, with 2016 sales hitting an all-time high. Yet even so, Volvo remains a niche carmaker, with 534,332 cars sold. General Motors, by contrast, sold over 10 million vehicles last year.

If it really wants Chinese car companies to upgrade and develop a global profile, the government is first going to have to abandon the very industrial policies put in place to help them. What Chinese automakers need now aren’t subsidies or foreign acquisitions, but a healthy dose of the free market.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Michael Schuman at [email protected]

To contact the editor responsible for this story:
Nisid Hajari at [email protected]