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Domestic carmakers fear losing restrictions on foreign partners
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Believe it or not, the firm red line on joint venture ownership by foreign carmakers is now starting to blur and might be in retreat.
A deal reached between Germany’s Daimler AG and its Chinese partner BAIC Motor this year is a case in point. By buying a 12 percent stake in BAIC and selling BAIC 1 percent in the partnership’s production company Beijing Benz Automotive Corp, Daimler will be able to increase its actual interest in the venture to 55.12 percent without surpassing the current 50 percent direct shareholding limit.
Rumors that the ceiling for foreign investment in Chinese ventures may be lifted didn’t just come out of thin air. Shortly after Daimler completed its BAIC deal last month, Ministry of Commerce spokesman Shen Danyang told a media briefing that the government would like to relax foreign investment restraints, including stake ownership in certain industries that include automotive manufacturing.
When China first wooed global carmakers to invest in its domestic industry in the early 1980s, many foreign investors were content to take minority shareholdings to avoid what were perceived as political and economic uncertainties about China’s market-opening policies. It was not until 1994 that 50 percent was set as the maximum limit for foreign ownership.
The wheel of fortune always turns, though. As China emerged to become the largest car market in the world, the attitude of foreign carmakers changed. They wanted a bigger piece of the action, only to find themselves arrayed against opposition from the state-backed China Association of Automobile Manufacturers.
Holding sway
Dong Yang, secretary-general of the association, recently noted that foreign partners with advantages of technology and management expertise often hold sway in a joint venture even if they hold only half the shares.
“The Chinese would very likely lose control of their joint-venture businesses if they backed down on the stake issue,” he wrote in a post. “And from the development perspective, the 50 percent limit doesn’t seem to have damped the enthusiasm of big international companies for investment in China. Why should we open up further?”
It’s understandable that China’s auto industry fears “losing its last line of defense.” But are those fears really justified?
The joint venture business aside, foreign carmakers are still in rivalry with Chinese carmakers. But don’t forget the universal wisdom that there are no permanent enemies or allies, only permanent interests.
In what amounts to a swap deal, Daimler managed to form a closer tie with BAIC, while BAIC has succeeded in bringing the German premium carmaker on board as a strategic investor. That will very likely drive up its valuation in any future initial public offering.
Furthermore, as part of the agreement with Daimler, BAIC will be able to use the platform of the Mercedes-Benz E-class long wheelbase sedan at no charge to develop its own premium product. It is also expected to gain access to the key technologies of the car model’s front and rear axles.
‘Share for technologies’
Since the original idea of exchanging moneymaking opportunities for advanced technologies seems to have utterly failed as a business model in joint-venture carmaking, might “shares for technologies” be a better alternative? At least, it lays to rest the misguided notion that foreign carmakers would one day be only too happy to share intellectual properties with China, as almost a charitable giveaway.
If the stake-holding issue is seen from a purely business perspective, then bringing down the foreign investment barricades means nothing more than letting market forces resume control over resource allocation. Selling shares is just another opportunity for Chinese carmakers to strive for what they want, be it advanced technologies or huge inflows of cash, to support their own research and development grand plans.
Opinion leaders encouraging Chinese carmakers to sell shares to foreigners were once called the “traitors” of China’s auto industry by extremists. But given the choice of a domestic carmaker that takes initiatives to lift its game and one content to muddle along on joint-venture profits and trade protection, which is the real patriot?
Sometimes, it is really hard to tell at first glance. Selling shares in joint ventures, which means puncturing a cash cow, is a tough call for many state-owned and listed Chinese carmakers that cannot afford to let their investors down. But on the other hand, the money they made from joint-venture businesses and spent on developing their own brands didn’t prove very successful, given lackluster sales of domestic model brands.
A lot of that money went into acquisition of technologies from foreign carmakers. BAIC, for example, developed its mid- to high-end Shenbao series based on Saab’s platform.
It is a smart research and development route, but not necessarily a sustainable one. Very often, technology transfer is a one-hammer deal, especially if Chinese carmakers fail to keep up with the latest trends.
Yes, retreating on the 50 percent foreign ownership red line could be dangerous, but only if Chinese carmakers become addicted to raising money by selling shares to feel good about themselves.
China’s industry is now big enough to be the world’s assembly plant, but not strong enough to be a research and development powerhouse. This status quo cannot be changed only by adjusting shareholding structures of joint ventures.
The defining factor is how Chinese carmakers see themselves — as a protected victim or as a fighting underdog. Industry policy can easily be tilted in their favor, but will consumer favor follow suit?
Car buyers don’t want lectures on patriotism. What they want is a car that offers value for money, a good experience behind the wheel and trouble-free driving.
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