BMW: The first foreign automobile company to take control of a joint venture in China
It is said that BMW will take 25% of the shares (totaling 3.6 billion euros) of Brilliance BMW—the joint venture set up by BMW and a Chinese company, increasing its shareholding to 75 %. It means that BMW will be the first beneficiary after China loosens the shareholding ratio constraints and more importantly, this is the termination of the era that foreign automobile companies only can hold up to 50% of total shares of the joint venture in China. The takeover will take effect in 2022 while the share price of Brilliance Auto Group( 1114.HK) decreased sharply by 17.47%.
(the share price trend of Brilliance Auto Group after the release of news, source: Yahoo Finance)
In the meantime, at the commencement ceremony of the new manufacture factory of Brilliance Auto Group, BMW announced that they will inject 3 billion euros for the added and the existing infrastructure in China, the action actually is consistent with the larger Chinese market plan for BMW. Harald Krüger, the chairman of BMW group, confirmed that BMW will have a bigger investment plan in China and China is not only a huge market, but also it will become a worldwide production base to export auto to other markets, during a meeting with the Premier, Li Keqiang. It is clear that the less restrictive policy will give more freedom and a bigger stage for foreign automobile companies in the Chinese market. Actually, the National Development and Reform Commission affirmed that there will be no restriction in the automobile industry in the next 5 years, the same year that the takeover of BMW will be completed. Not only for BMW, but more and more foreign automobile companies are also seeking opportunities in the Chinese market. As we have covered before, Tesla established a sole proprietorship in Shanghai for its production of Plug-in electric vehicles. The “super-factory”—the factory with R&D, manufacturing, sales departments will be constructed in 2-3 years, producing more than 500k pure electric vehicles. Also, not only for conventional automobile field, according to Bloomberg, Daimler AG is considering setting up a new joint venture with Geely, a Chinese multinational automotive manufacturing company, providing car-hailing service for its new electric brand.
So, what does this mean to Chinese automobile companies? Since 1994, in order to protect and give room for the development of Chinese automobile companies, the Chinese government regulated that foreign automobile companies can only take up to 50% of shares for the joint venture in China. Actually, there is one famous word in China to describe “using the market to exchange technology.” However, it seems that things develop in the opposite direction. Most of the Chinese automobile companies recapped profit so easily that they did not put effort on the research and development. At the same time, the foreign corporations have strict protection for their core manufacture technologies and processes(e,g. engine, electronic fuel injection system, transmission, etc) , turning those Chinese automobile companies into only foundries. Taking SAIC Motor (600104.SS)as an example, in 2017, the total sales of SAIC Motor reached to nearly 7 million, while the sales from joint venture brand comprised of more than 90% (SALC VOLKSWAGEN, SALC GM, SAIC Maxus are all joint venture).
(source: the 2017 annual report of SAIC Motor)
We can imagine that those big state-owned automotive groups will encounter a huge set back from the no restrictive policy. Actually, some ambitious companies have leveraged their resources on the self-owned brands. SAIC Motor’s self-owned brands of new energy passenger won a steady market presence in the middle-and-high market. In 2017, among the 440,000additional sales of SAIC Motor, an increase in sales volume of self-owned brands hit 227,000, contributing 51.6% to the increase in sales volume. Unfortunately, those self-owned brands have not yet reached profit-loss balance. There are five years left for the implementation of new policy and the Chinese automobile corporations can still get the infusion from the joint venture. Besides, most of the mainstream joint ventures renewed the contract in the past 2 years, leaving room for negotiation even though there will be no restriction in terms of shareholding ratio. However, it is time for Chinese automobile companies to consider how to compete with those mature foreign counterparts in the free market.