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For global automakers, the urgent but delicate need to take control of China JVs
Yang Jian | 2019/3/22

SHANGHAI -- Now that Beijing has promised to relax limits on foreign stakes in vehicle manufacturing and marketing joint ventures, it¡¯s time for global carmakers seeking to gain control of Chinese joint ventures to launch formal talks with local partners.

Delaying such talks could only create bad blood between partners, add complexity to future talks and undermine operating flexibility at a time of rapid change in China¡¯s auto industry. 

The world¡¯s biggest light-vehicle market is becoming a major development and production hub for plug-in hybrid and electric vehicles. And by taking more control of Chinese joint ventures, global automakers will reap more cash and profits to deploy for critical investments in autonomous driving, EVs and other emerging technology. 

Consider what has happened with Volkswagen Group and SAIC Motor Corp. this month and other major partnerships in recent months.

The Chinese government, under pressure to adopt broad market reforms, pledged in June 2018 to phase out by 2022 the 50 percent cap on foreign automakers¡¯ interest in joint ventures formed with local companies.
 
In October, BMW Group became the first global carmaker to establish control over a partnership, with Brilliance China Automotive, by raising its interest in Brilliance BMW to 75 percent from 50 percent by 2022. 

BMW is not the only foreign automaker eager to take control of joint ventures in China.

Had it not been for restrictive Chinese rules enacted in the early 1980s, no global car manufacturer would have chosen to build light vehicles at joint ventures formed with local peers without a final say on how products are built and distributed.

It¡¯s no surprise that VW Group CEO Herbert Diess disclosed at a news briefing in Germany last week that VW is evaluating the possibility of raising its stake in China-based joint ventures.

Diess said he hopes VW and its Chinese partners can hold more talks on how to adjust stakes in their partnerships in the second half of 2019 or early 2020, according to Chinese media at the briefing.

Diess¡¯ remarks drew a quick rebuke from SAIC, which said in a statement this week it is "regrettable" that VW commented on important matters regarding shares in its joint ventures in China without consulting local partners.

SAIC is VW¡¯s first Chinese partner. Their joint venture, SAIC Volkswagen, was established in 1985 in Shanghai. It is equally owned by SAIC and VW and delivered 2.07 million cars under the VW and Skoda brands in 2018, accounting for 49 percent of VW Group¡¯s sales in China in the year.

Given ¡°the outstanding contributions it has made to the joint venture¡¯s development along with Volkswagen Group,¡± it is ¡°entitled to the same level of decision power on important matters of the joint venture" as Volkswagen Group, SAIC said in the statement. 

¡°SAIC hasn¡¯t negotiated with Volkswagen Group on adjusting the shares" in their joint venture, the state-owned Chinese automaker said. ¡°Neither has Volkswagen Group proposed plans to SAIC on talking about the shares.¡±

Beginning in 1984, when Beijing opened its domestic auto industry to foreign investment, until 2013, when Renault struck a partnership with Dongfeng Motor Group, one after another global carmaker had started output in China through a joint ventures in which its interest was capped at 50 percent. 

The restriction was intended to enable China to foster a domestic auto industry with locally grown automakers.

But as the deal between BMW and Brilliance China has demonstrated, it is not easy for a foreign carmaker to persuade a local China partner to transfer shares and give up control. 

Brilliance China didn¡¯t agree to the deal until BMW offered to pay 3.6 billion euros (27.4 billion yuan) and spend another 3 billion euros to expand output. 

New-vehicle sales in China last year declined for the first time since the 1990s. While the market contraction has continued his year, electrified vehicle demand is surging. 

Gaining control of joint ventures would enable global brands to move quicker to adapt local operations to the fast-changing conditions in the market. 

To smooth the process, global carmakers looking to obtain controlling stakes in China-based joint ventures shouldn¡¯t waste time and start negotiations sooner rather than later.

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