Major Chinese Bearing Manufacturers Instructed to Explore Merger

The government of China has publicly urged / supported a second plan to merge three of the country's largest state-run bearing manufacturers.

The National Development and Reform Commission issued the statement, in an apparent effort to move the stalled process along. Involved would be:

• Wafangdian Bearing Group Corp.
• Harbin Bearing Group
• Luoyang Bearing Corp.

Reportedly, more than 10 billion yuan (USD 1.4 billion) in assets and over 40,000 jobs are potentially involved. All three companies are in financial and operating trouble, to varying extents.

Even though the companies are state run, in practice they are each under the direct control of different provincial authorities. These local bureaucrats are vehemently opposed to giving up any control under any circumstances -- control which equates to regulation, political power, financial administration, jobs creation, and many other political and economic factors. Local governments' unwillingness to cede power and authority back to the central government is one reason China's entire system of upper-tier government control and industry agencies is being restructured.

A single merged bearing company would command unprecedented control over and involvement in China's powerful bearing industry, potentially driving the location of production resources, future state funding for the sector, ability to negotiate favorable raw materials and labor costs, and local job creation.

An earlier effort in mid-2007 failed to merge the same three bearing manufacturers. At that time, they would have been pulled under the China National Machinery Industry Corp. umbrella. But that effort quickly decayed as infighting and control issues overwhelmed the talks.

A simple example of the difficulties inherent in this merger is Luoyang Bearing. In mid-2007, INA/FAG parent Schaeffler Group made a run at Luoyang but was rebuffed by a strong wave of protectionism at both the local and state level. That was followed by a similar failure by Zhejiang Tianma Bearing Co. Recently, another effort to save Luoyang would have had it bought out by state-run China Aviation Industry Corp. But Luoyang's fractured finances proved too obtuse for even CAIC to crack, and the idea was abandoned.

The current consolidation effort has its roots in a 2006 State Council position statement, declaring that state-run manufacturing enterprises should be merged whenever possible, to promote maintaining state leadership against foreign competition.