Chinese state-owned auto giants such as SAIC Motor Corp Ltd (上海汽車) and Dongfeng Motor Group Co (東風汽車) might see billions of US dollars in profits evaporate if the government lifts protectionist measures and lets foreign companies operate without a local partner.
China requires overseas carmakers such as General Motors Co (GM), Toyota Motor Corp and Volkswagen AG to form joint ventures with locals in order to sell their brands in the world’s biggest market.
The policy enacted two decades ago capped foreign investment at 50 percent, helping local brands develop manufacturing expertise while still profiting from sales of foreign brands.
Photo: Reuters
Those alliances seem to be working for domestic automakers, which earned 67 billion yuan (US$9.73 billion) with their partners in 2014, the latest China Association of Automobile Manufacturers (CAAM) statistics showed.
Yet, the government might relax the restriction as it tries to make state-run businesses more efficient and to respond to changes in trade policy being pushed by US President Donald Trump.
“Automakers that aren’t competent enough would be destroyed by the policy change,” China Passenger Car Association secretary-general Cui Dongshu (崔東樹) said. “Rising competition from not only the foreign joint ventures, but also from homegrown makers has been weighing on the weak performers.”
The prospect for lifting the restrictions comes as carmakers meet in Shanghai this week for Asia’s biggest auto show.
Ford Motor Co and Hyundai Motor Co are among the foreign automakers displaying models at the trade show that compete with those produced by local partners.
Less than half the record 23.9 million cars, sport utility vehicles and minivans sold in China last year were local brands.
Market share for Chinese-brand cars has stayed fairly constant, rising from 41 percent a decade ago to 43 percent last year, CAAM data showed.
GM, Volkswagen and Nissan Motor Co all count China as their biggest market by sales volume and they might potentially earn billions of dollars more in profits if they had more control over their Chinese operations.
The market has higher profit margins than the US, Europe and Japan, Bloomberg Intelligence data showed.
Ford CEO Mark Fields said that tangible reforms and opening up are needed in the China car market.
Ford partners with Chongqing Changan Automobile Co (重慶長安汽車) and Jiangling Motors Corp (江鈴汽車).
Daimler AG and BMW AG executives said they are “very happy” with their ventures in China.
“Even if we were totally free to choose, we certainly would continue with a partner in China, perhaps with a different percentage,” Daimler CEO Dieter Zetsche said in a Bloomberg Television interview at Auto Shanghai.
BMW sales chief Ian Robertson yesterday said that the Munich, Germany-based automaker continues to grow in China, which is “really the measure of success here.”
Renault SA Asia-Pacific chairman Francois Provost said at the show that the French automaker’s joint venture with Dongfeng Motor was “doing well.”
BMW has a tie-up with Brilliance China Automotive Holdings Ltd (華晨中國汽車控股), while Daimler has partnered with BAIC Motor Co Ltd (北京汽車).
Some lane changes are already coming. Starting on July 1, car dealers would be allowed to sell vehicles from multiple brands in the same store without first getting clearance from the makers.
In addition, automakers would no longer be able to force dealers to put unpopular models on display.
Debate on altering or even eliminating the percentage cap dates to at least 2013, when a Chinese Ministry of Commerce official said automakers should prepare for such a move.
That was reiterated last year by the then-chairman of the Chinese National Development and Reform Commission.
Most recently, China was ready to relax the policy during Chinese President Xi Jinping’s (習近平) visit to Florida earlier this month for a summit with Trump, according to Bloomberg BNA.
US trade relations with China were a cornerstone of Trump’s campaign, as he accused the nation of unfair trade practices and threatened to slap a levy on Chinese products of as much as 45 percent.
He ordered a study to identify the forms of “trade abuse” that contribute to US deficits with all foreign countries.
“That does hamstring companies from being able to compete freely in China,” Boston Consulting Group head of the automotive practice Brian Collie said of the joint venture limit. “Those same requirements don’t exist here.”
One local argument for removing the cap is that it would force Chinese automakers to innovate and improve the quality of their vehicles.
Zhejiang Geely Holding Group Co (浙江吉利), owner of Volvo Car Group, is one automaker advocating a change.
Local manufacturers are still in the early stages of brand building, Great Wall Motor Co (長城汽車) chairman Wei Jianjun (魏建軍) said.
CAAM has pushed back in the past, with its then-leader in 2014 saying that local brands would be “killed in the cradle” if the cap was lifted.
Three of the largest state-owned carmakers by sales volume — SAIC, Dongfeng and Guangzhou Automobile Group Co (廣州汽車集團) — earned a collective US$7.7 billion in net income last year, almost four times their profits in 2007, data compiled by Bloomberg showed.
Yet, that surge has been fueled largely by record sales of foreign-branded cars to the middle class. Their own brands remain little-known outside China and mainly occupy the low end of the market.
For Shanghai-based SAIC, the biggest automaker that has production ventures with GM and Volkswagen, about 6 percent of the 5.67 million passenger vehicles it sold last year carried its own nameplates, such as MG and Roewe.
As China works to rebalance its economy, the joint venture rule is an obstacle to a more market-oriented auto industry, JSC Automotive Consulting Singapore-based managing director Jochen Siebert said.
Foreign firms often prop up their domestic partners to help them stay in business and keep the assembly lines rolling, Siebert added.
If the cap is lifted, some partnerships would take years to unravel as the parties haggle over the price. Yet, carmakers owned by local governments might dissolve their marriages quickly so officials can use the proceeds to invest in ventures such as improving public transportation, Siebert said.
“Rebalancing would lead to a much more efficient and healthy automotive industry in China,” he said.
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