Date
16 December 2017
Li Shufu of Volvo Cars and Geely is among those calling for an end to controls on foreign ownership in Chinese auto ventures. Photo: Bloomberg
Li Shufu of Volvo Cars and Geely is among those calling for an end to controls on foreign ownership in Chinese auto ventures. Photo: Bloomberg

The raging debate over foreign caps in auto ventures

Should China scrap the 50-percent ownership cap for foreign firms in automobile joint ventures in the country? That is a raging debate in the industry right now, with both the proponents and opponents of the reform putting forth compelling arguments to buttress their case.

Those who reject the proposal — the list includes First Automobile Works (FAW), Changan Automobile (200625.CN, 000625.CN), Guangzhou Automobile (02238.HK, 601238.CN) and many other state-owned giants — and those who advocate it — like private automaker Geely Automobile (00175.HK) — however point to the same thing: the central leadership’s mandate to foster the development of indigenous brands.

Meanwhile, the China Association of Automobile Manufacturers (CAAM), which should have stayed on the sidelines, wasn’t shy about voicing its strong opinion on the issue. A deputy secretary general of the industry body went so far as to say that “anyone that agrees to cancel the cap are traitors to the country”, according to the Southern Weekend.

Promulgated in 1994, the 50-percent equity cap was a cardinal part of Beijing’s policy package to nurture homegrown brands. Foreign giants wishing to sell marques in China can only do so by picking a local partner to set up a joint venture.

The shareholding structure was designed to let the Chinese side have a final say and more easily absorb core technologies and marketing strategies from foreign counterparts, so that one day the domestic firms will become strong enough to compete on their own.

Yet, what happened during the next two decades was something that was contrary to the original policy goal. Foreign giants as a whole have taken the Chinese market into their pockets and local brands had lost ground.

CAAM figures show that more than 3.159 million cars (including SUVs and MPVs) were sold in China during the first two months this year, up 11.3 percent over the same period in 2012. However, sales of indigenous models shank by 1 percent and their market share has eroded further to 38.4 percent, a decline of 4.8 percentage points compared to a year ago.

The joint ventures are often cash cows for the SOE partners. Changan Automobile, for instance, would have sunk into the red in 2012 without the hefty contribution of 1.6 billion yuan from Changan-Ford. The same was the case with Brilliance China Automotive (01114.HK) that year as revenue from its BMW franchise effectively offset its loss in other operations.

Forget about these SOEs’ self-branded marques as many of the offerings are indeed copycats of outdated models developed by their foreign partners. For instance, Venucia {啟辰}, Dongfeng’s own brand, piggybacks heavily on Nissan’s hatchback series Tiida.

Given this situation, it is no surprise that the SOEs strongly oppose any proposal that could reduce their stakes in the joint ventures.

Meanwhile, advocates of a lifting of the ownership cap obviously include overseas giants which are relying a lot on the Chinese market — Nissan president Carlos Ghosn was once quoted as saying that beside cheap labor and some marketing channels, the firm’s Chinese partner makes “virtually zero contribution”. Reports have also said that Volkswagen is in talks with FAW to boost its stake in a joint venture.

It, thus, brings up the question: what exactly is prompting Geely to call for the lifting of the foreign ownership cap in Chinese auto ventures?

Volvo Cars is still regarded by Chinese authorities as a foreign carmaker even after Geely’s takeover more than three years ago. Li Shufu {李書福}, the billionaire chairman of Volvo Cars and Geely, had to set up nominal joint ventures between the two firms under the current regulatory regime for domestic production. If the cap is lifted and foreign firms can invest through a sole proprietorship business, it will be a lot more convenient for Li to jumpstart Volvo Cars in China.

Recent remarks by officials are sending out signals that some policy loosening is on the horizon. Minister for Industry and Information Technology Miao Wei {苗圩} admitted that key industries, including the auto sector, will have to be fully opened to all investors as China seeks to join the Trans-Pacific Partnership. Commerce Ministry spokesman Shen Danyang {沈丹陽} has said restrictions on things such as registered capital and equity structure will be gradually lifted in the near future.

– Contact the writer at [email protected]

RC

EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe