Auto Company Joint Ventures in China Lose That New-Car Smell

The Wall Street Journal, October 24, 2013

Shanghai General Motors Co. is a joint venture between General Motors and SAIC Motor. The company hosted a booth at the Wuhan Motor Show.

Global auto companies reap big sales in China from their partnerships with Chinese brethren. Might they someday be allowed to go it alone?

Under current regulations, global auto makers can only own as much as half of their joint ventures in China. Most foreign car companies such as General Motors Co. and Ford Motor Co. hold 50% shares. One notable exception is Volkswagen AG’s joint venture with FAW Group, the German automaker holds 40%.

But talk of allowing foreign players to operate on their own occasionally pops up. The latest instance was at an auto forum that began last week in Wuhan.

In response to a question from the Beijing Times at the conference, Chen Lin, a counselor at foreign investment and economic cooperation department of China’s Commerce Ministry, appeared to agree that a review was in order, suggesting the government and car companies study the impact a rule change might have.

“I think we should put it on the agenda,” said Mr. Chen, according to official transcript of his comments.

In a closed-door session accessible only to Chinese media, Ford Motor Chief Executive Alan Mulally responded to questions on the issue, saying: “I think the different ranges for equity are natural evolution of opening up the market…we are pleased to be part of the solution.”

Later he told foreign reporters including China Real Time that Ford was “very, very pleased” with its joint ventures.

Weiming Soh, a member of the board of management at Volkswagen Group China, told China Real Time the topic of VW expanding its share of its joint venture with FAW has been on the cards for some time.

“We are in the process of extending our joint-venture contract … We would like to do more and therefore this is something that we have been discussing with our joint-venture partners.” He gave no timeframe for a conclusion to such talks.

Analysts such as Bill Russo, president of automotive consulting firm Synergistics Ltd., said foreign car makers were hoping for a rule change because the current limits discouraged them from using China as an integrated part of global operations. “Foreign auto makers could really step up their game if China didn’t have these joint-venture rules,” he said.

Auto makers wouldn’t be keen to build factories in China to make cars for global markets because under the current system they would have to share half of profits with their Chinese partners.

But any attempt to change the status quo is unlikely to be popular with the Chinese partners–most of whom are state-owned behemoths that rely heavily on the cash generating cars sales their lucrative joint ventures yield.

“If China allows foreign car makers to have a bigger stake or drop the ownership limit, Chinese auto makers will be put in an extremely unfavorable position to negotiate with foreigners,” said Sa Boni, an analyst at market-research company IHS.

Mr. Russo said the joint-venture rules were originally put in place to ensure Chinese could have an equal footing with foreign partners. “But these joint-venture companies are now well-established, so those concerns are no longer there,” he said.

Most analysts say a change in regulations to allow greater foreign participation is unlikely to happen anytime soon.

Even if the policies were modified, Chinese auto makers would be loath to give up their shares in joint ventures well-positioned to benefit from China’s booming auto market—the world’s largest for new passenger car sales.

China is also forecast to be the biggest luxury car market as soon as three years from now, according to consultancy McKinsey & Co.

“Many state-owned companies that are partners in the auto joint ventures in China are not profitable as standalone organizations,” said Mr. Russo.  “I don’t see local partners giving up share without receiving a significant amount of money.”

–Colum Murphy and Rose Yu

Click here to read this article at WSJ.com

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