Amid the robust business in China, German auto giant Volkswagen (VW) is renewing its cooperation contract with Chinese state-owned carmaker First Automobile Works (FAW) three years ahead of its expiry in 2016. Not only that, it also wants a significant increase in its holdings in the thriving joint venture.
Martin Winterkorn, chairman of VW, was quoted as saying recently that the company would seek to increase its stake in the JV to up to 50 percent. But interestingly, Winterkorn’s remarks were more of a unilateral statement than a consensus reached between the pair – FAW reportedly declined to respond. Together with its subsidiary Audi, VW currently has a 40 percent stake.
Established in 1991, the FAW-VW tie-up is indeed one of the German carmaker’s pillars of income. The venture is expected to sell 1.5 million cars this year with revenues approaching the 30 billion yuan (US$4.9 billion) mark.
Upbeat and burgeoning as the business is, it may however lay bare the long-standing controversy between VW and FAW when it comes to the equity structure. VW wants to have a bigger say at the JV – many of its rivals including Daimler, BMW and Toyota all own 50 percent shares in their joint ventures in China. But FAW’s response has been apparently lukewarm.
Disclosing issues that both parties have not yet agreed on may easily backfire, as an anonymous FAW executive bluntly commented that the 50 percent stake was “wishful thinking”, The Economic Observer reports.
And the timing of VW’s latest appeal may not be so favorable either as FAW is readying for its much-awaited capital market foray. The venture, which is also the Chinese automaker’s rainmaker, can be a persuasive selling point to boost valuation and woo investors. That’s the reason why FAW won’t easily give up its controlling status.
The odds of a rupture between the two partners are still small since sharing a piece of the buoyant market remains their common aspiration. It is reported that FAW’s bottom line will be a “shares for technologies” solution – FAW is prepared to reduce its holdings to no less than 51 percent in exchange for some key intellectual property. But that is still subject to approval from the state-owned enterprises’ watchdog.
Analysts say the pair can perhaps take a page out of the precedent set by Daimler and Beijing Automotive, which formed a cross-shareholding alliance – Daimler agreed to buy some of Beijing Automotive’s shares and vice versa.
FAW’s upcoming initial public offering can be a good occasion for VW to gain a stake in its Chinese counterpart to pave way for further negotiations.
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