BMW to gain control of China venture in milestone deal

October 11, 2018 14:11
BMW will lift its stake in its venture with Brilliance China to 75 percent from 50 percent, with the deal closing in 2022. Photo: AFP

Germany’s BMW said it will take majority control of its main China joint venture for 3.6 billion euros (US$4.2 billion), the first such move by a global carmaker as Beijing starts to relax ownership rules for the world’s biggest auto market, Reuters reports.

The luxury carmaker will lift its stake in its venture with Brilliance China Automotive Holdings Ltd. (01114.HK) to 75 percent from 50 percent, with the deal closing in 2022 when rules capping foreign ownership for all auto ventures are lifted.

The move is likely to spur BMW to shift more production to China, helping boost profits amid a worsening trade war between Washington and Beijing that has raised the cost of BMW importing cars manufactured at its South Carolina plant.

The deal also marks a milestone for foreign carmakers which have been capped at owning 50 percent of any China venture and have had to share profits with their local partner.

“We are now embarking on a new era,” BMW chief executive Harald Kruger said in a speech in the northeast Chinese city of Shenyang where the joint venture is based. He thanked Chinese Premier Li Keqiang who he said had “personally supported” the plan.

Beijing has been keen for global carmakers to invest more in China, including easing restrictions that cap foreign ownership of electric vehicles businesses at 50 percent this year.

As trade tensions have escalated, China’s government has also pledged to open up its markets more widely, including cutting taxes on imported vehicles, cancer medicines and a range of consumer goods.

The country’s leaders have also played up other milestone deals such as German chemical maker BASF winning approval in July to build China’s first wholly foreign-owned chemicals complex.

The rule changes have already helped Tesla Inc. gain Beijing’s approval for a wholly owned China manufacturing and sales company in Shanghai, marking the first time a foreign carmaker will be able to establish a full presence in China without a partner.

“Given the trade dispute between the US and China, there is a powerful incentive for automakers to produce vehicles in the market where they sell them,” said independent auto industry analyst James Chao.

He said control of the joint venture could spur BMW to bring production of models like the BMW X4, X5 and X6 sport utility vehicles, which are currently built in the United States, to China.

Brilliance shares dim

BMW’s Hong Kong-listed partner, Brilliance China, which makes the vast majority of its revenue from BMW-branded cars, has seen its shares tumble nearly 50 percent this year on talk that such a deal was in the offing. The company’s shares were suspended on Thursday morning.

BMW said the aim of the move was to increase production capacity at its existing manufacturing sites in Shenyang and expand the localization of additional models including so-called new energy vehicles.

BMW is one of the biggest exporters of vehicles from the United States to China, putting the carmaker firmly in the crosshairs of a trade war which has seen both sides raise tariffs on a multitude of goods, including automobiles.

Kruger said the joint venture, BMW Brilliance Automotive, planned to add a new plant at its site in the city, spending over 3 billion euros on a large-scale expansion of the existing production facility.

The term of the joint venture is also to be extended to 2040 from 2028, the German automaker said.

Yale Zhang, head of Shanghai-based consultancy Automotive Foresight, said the move would probably spur other global carmakers to push for higher ownership of their China ventures, though it remained to be seen how the new structure would work in practice.

“Others will follow over time, but the divorce schedule depends on how strong or capable the local partner is,” he said.

A number of carmakers, including Mercedes-Benz parent Daimler and Japan’s Honda Motor Co. said earlier this year they had no immediate plans to change their China JV structures despite the planned rule changes.

In addition to its Brilliance partnership, BMW is also working on a new venture for its Mini brand with China’s Great Wall Motor Co. (601633.CN).

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