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BMW and Brilliance will spend 3 billion euros to expand the production capacity at their two Shenyang plants to more than 650,000 vehicles a year.
 
German automakers' strategies differ on changing China JV stakes
Christiaan Hetzner | 2019/5/3

SHANGHAI -- Germany's three major automakers are adopting different strategies for controlling their joint ventures in China.

Volkswagen Group believes the rapid market developments in a technologically progressive country such as China require the automaker to at least rethink its entire ownership structure.

By comparison, Daimler sees no need to act, while BMW Group in October seized the opportunity to secure a greater share of profits from its joint venture.

The situation stems from a new law that loosens the decades-old requirement permitting foreign automakers to operate in the world's largest light-vehicle market only through a joint venture with a local partner in which foreign companies are allowed to own a maximum of 50 percent.

Manufacturers of electric vehicles can now operate independently to encourage further electrification of the nation's fleet, while automakers focused on combustion-engine vehicles will have to give JV partners time to prepare for the new policy.

BMW was the first to take advantage of the new rules, changed last year as part of a move to soothe trade tensions sparked by U.S. President Donald Trump.

In October, the company agreed with its local partner, Brilliance China Automotive, to increase its stake to 75 from 50 percent by no later than 2022, when the gradual phaseout ends. Shareholders of the privately owned Chinese automaker approved the deal at a January meeting.

"The Chinese premium-car market is growing faster than any other part of the world, and we want to have a larger share of the pie," BMW CFO Nicolas Peter told Automotive News Europe last month on the sidelines of the Shanghai auto show.

As part of the landmark deal, the joint venture partners will spend 3 billion euros (about $3.35 billion) to expand production capacity at their two Shenyang plants to more than 650,000 units annually early in the next decade, from 490,000 vehicles produced in 2018.

Describing the move as a "logical step," Peter said BMW was satisfied with its majority stake but had no plans to expand the stake.

"We believe it is sensible when doing business in such a big market to keep our partner in the boat," said Peter, who is also responsible for China at a board level. "It will remain a very attractive proposition for them as well, since 25 percent of a larger pie will still be a lot of money."

VW Group CEO Herbert Diess said automakers face a "turning point" in China. After decades of being a production base and key market for European models, the country now finds itself at the forefront of smart mobility technology, Diess told reporters in Shanghai.

"China is the only major economy in the world with a clear plan to establish electric mobility as the new standard," he said. "This country sets the pace."

VW Group is responding by localizing research and engineering, with half of its 20,000 r&d experts focusing on the country.

The stakes are high: VW Group is far more dependent on China than BMW. Across all brands, roughly 42 percent of all VW light vehicles delivered last year were destined for China, and the automaker controlled nearly a fifth of the overall car market.

But VW is in a more complicated position than BMW, sources at the company say. As the first automaker to enter China in 1985, VW helped transform the country's automotive industry, and its VW core brand continues to dominate the volume segment.

Any attempt to increase its 50 percent stake in Shanghai Volkswagen Automotive or its 40 percent holding in FAW Volkswagen could cost a small fortune. Large state-owned enterprises SAIC Motor and FAW Group have multiple joint ventures with foreign automakers. That makes them much stronger and more assertive than Brilliance, a privately owned company essentially dependent on BMW for its profits.

Last month Diess justified a decision to assume responsibility for China by explaining his plan to decide sometime this year on an overhaul of the group's strategy for the market, including a potential change in its equity stakes.

Reports have suggested that VW for the first time could also buy an economic interest directly in its third and latest partner, JAC, a move Diess confirmed in Shanghai. JAC would develop a new entry platform for small EVs with VW's Spanish subsidiary, Seat.

Asked whether discussions over a potential increase in the stakes might already be proceeding, Diess chose to be vague: "We have new plans in mind for all three joint ventures; we will need each in the future, and our strategy will be of mutual benefit for all."

Daimler, by comparison, is taking a noncommittal view. While outgoing CEO Dieter Zetsche said the company has taken note of the new regulations, he expressed no desire to broach the subject with partner BAIC Motor.

"If we were to consider any conclusion out of that, certainly our partners would be the first ones [with whom we would] discuss that and not the public," Zetsche told reporters.

Nonetheless, he challenged VW CEO Diess' underlying thesis that new competitors and technologies should prompt a new approach.

"We don't think the competitive landscape requires a different setup from the one we have today; these are two independent questions," Zetsche said. "We strive hard to move forward in the different fields of transformation, but this is not related to the question of shareholding."

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