Chinese Auto Tie-Ups Losing That New-Car Smell

October 24, 2013, 11:16 AM

Chinese Auto Tie-Ups Losing That New-Car Smell

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.GM -1.02% and Ford Motor Co.F -0.45% hold 50% shares. One notable exception isVolkswagen AGVOW3.XE -0.59%’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 transcriptof 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.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: