People visit the GAC Group booth. (Photo/Zhang Fan)

Chongqing - Two of China’s major state-owned automakers move to establish closer equity ties.

GAC Group said recently that it had signed a letter of intent with China FAW Corporation Limited, or FAW Co., to acquire part of FAW Co.’s stake in an automotive joint venture by issuing new shares. GAC also plans to raise supporting funds as part of the transaction.

Upon completion, FAW Co. is expected to become GAC’s second-largest shareholder and hold a strategically significant stake in the company.

FAW is one of China’s major centrally administered state-owned automakers. It owns domestic brands including Hongqi and has long-standing joint ventures with global carmakers such as Volkswagen and Toyota.

GAC is controlled by Guangzhou’s state-owned capital and owns domestic brands including Trumpchi and Aion, as well as joint ventures such as GAC Toyota and GAC Honda.

Both groups are major players in China’s auto industry and have long-standing partnerships with global automakers.

If completed, the transaction would mark a case of equity cooperation between a centrally administered state-owned automaker and a major local state-owned auto group.

The deal, however, does not amount to a merger of FAW and GAC. Under the proposed structure, FAW Co. would transfer part of its stake in an automotive joint venture to GAC, while GAC would issue new shares to FAW Co. as consideration.

In effect, GAC would acquire an automotive asset, while FAW Co. would receive shares in the listed GAC Group, creating a more direct equity link between the two sides.

The transaction would not change GAC’s controlling shareholder or constitute a backdoor listing. FAW Co.’s final stake, any potential board representation and the scope of further cooperation have yet to be disclosed in a formal transaction plan.

The proposed deal goes beyond a conventional strategic partnership. Major automakers have previously worked together on joint research, supply chains and other areas, but becoming a major GAC shareholder would give FAW Co. a direct financial stake in GAC’s performance.

One of the biggest unanswered questions is which joint venture is involved.

GAC has not disclosed the name of the target, saying only that it involves an overseas-listed company. Several Chinese media outlets, citing sources familiar with the matter, have reported that the asset could involve FAW Toyota. The parties have not officially confirmed those reports.

If FAW Toyota is ultimately confirmed as the target, the transaction could have implications beyond the FAW-GAC equity relationship, potentially affecting Toyota’s two long-standing joint-venture operations in China.

Toyota operates FAW Toyota and GAC Toyota with its two Chinese partners. The two joint ventures have their own factories, vehicle lineups, marketing operations and dealer networks, with some products targeting similar market segments.

Why China’s carmakers are moving toward cooperation

When China’s auto market was expanding rapidly, the dual-joint-venture structure helped increase production capacity and market coverage. But as competition intensifies, the efficiency of operating two separate systems has drawn greater attention.

Even if the equity transaction moves ahead first, any business integration would take time. Decisions on product lineups, research and development platforms, factory capacity, sales channels and supply chains would involve multiple stakeholders.

By using equity as the link and bringing a company controlled by a central state-owned group into the shareholder structure of a major local automaker, the deal would deepen cooperation between FAW and GAC at the capital level. It also comes as the competitive dynamics of China’s auto industry are changing.

The rapid development of electric and intelligent vehicles has required automakers to invest heavily in batteries, electric drivetrains, assisted-driving technologies, operating systems and software, while product cycles have become shorter. At the same time, Chinese new-energy vehicle brands have expanded rapidly, increasing pressure on traditional joint-venture automakers to accelerate their transition.

Against this backdrop, duplicating similar vehicle platforms, models and sales networks can add costs. Mergers and acquisitions, cross-shareholdings, platform sharing, and greater coordination in research, development and distribution could help automakers use resources more efficiently.

For FAW and GAC, the proposed transaction offers an alternative to a full merger: starting with a specific automotive asset and then building closer ties through direct shareholding.

The deal remains at the planning stage. The identity of the target asset, FAW Co.’s eventual stake in GAC, and whether the two sides will expand cooperation in research and development, products, production capacity and sales will determine whether the transaction remains primarily an ownership restructuring or develops into a broader step toward industry consolidation.