BMW’s China joint venture hits speed bump

The Financial Times, July 31, 2013

China’s environment ministry has criticised an application by BMW to double capacity at a joint venture factory in the country, citing insufficient investment in environmental protection measures at the facility.

While the roadblock may prove temporary, the environment ministry’s willingness to delay a flagship investment project by one of the world’s leading luxury carmakers highlights a growing debate over the real costs of China’s rapid economic growth over the past three decades.

“Drinking polluted water while driving BMW sedans is certainly not the type of industrialisation we are looking forward to,” China’s environment minister, Zhou Shengxian, said on Wednesday in an interview with the People’s Daily.

China’s growth slowed to 7.6 per cent year-on-year in the first half of 2013, down from 7.8 per cent last year. The Chinese government’s apparent willingness to countenance a slower rate of growth in the world’s second-largest economy has spooked investors and some economists, who fear a knock-on effect.

BMW’s joint venture in the northeast industrial centre of Shenyang, BMW Brilliance Automotive, had applied for permission to double production capacity to 400,000 sedans a year, while also expanding an affiliated engine plant.

But according to an “opinion” posted on the environment ministry’s website, the joint venture submitted an “insufficient” environmental impact report and failed to meet government pollution reduction targets. It also noted that the planned Rmb9.23bn ($1.5bn) investment included just Rmb70.3m in new money for environmental protection measures.

A spokesman for the Munich-based carmaker said the ministry had requested additional documents and details and that the application had not been rejected. “We have no signal that [the investment] will not be approved, but we are confident,” he said. The ministry declined to comment.

The environment ministry’s notice, dated July 26, also signals the Chinese government’s increasing willingness to take on well-known multinational companies in the country, accusing them of everything from corruption to inflated pricing and poor customer service.

“Lately China has been on a mission,” said Bill Russo, a Beijing-based automotive consultant. “There’s definitely a pattern here of the government making an example of high-profile foreign companies.”

The central government’s most recent target has been UK pharmaceutical group GlaxoSmithKline, accusing some of its employees of involvement in widespread bribery and corruption.

BMW Brilliance celebrated the third-phase expansion of the Tiexi plant earlier this month with much fanfare, telling local reporters its production capacity in Shenyang could reach 300,000 units by the end of the year. The joint venture sold 140,000 cars last year.

The joint venture’s establishment a decade ago has been widely regarded as a dramatic success story. Demand for BMW sedans soared in a market previously dominated by cheaper models produced by Volkswagen and Audi. In the 10 years since BMW Brilliance was established, China’s car market has grown rapidly to surpass the US as the world’s largest.

BMW’s China sales increased 31 per cent year-on-year in May, compared with overall growth of 23 per cent for the industry.

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