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Beijing turns to deregulation to spur automaking innovation

Plan to scrap foreign ownership cap has domestic players bracing for competition

BEIJING -- China is gearing up to push its domestic automakers out of the nest by unleashing foreign competition at home. The government sees the move as essential for reinvigorating a slowing market, but for companies, it is a do-or-die moment.

In the early days, Beijing was keen to nurture its auto industry by encouraging technology transfers from global giants. Now, China is the world's No. 1 auto market and has been for eight straight years, with sales 60% higher than those of the U.S.

Having decided that domestic automakers are now competitive enough to venture overseas, Beijing is working on ways to facilitate that process, as it did with other key sectors, including high-speed rail and nuclear power plants.

That means, among other things, accepting more foreign investment. While the government currently allows Chinese automakers to acquire foreign brands, foreign ownership of joint ventures in China is capped at 50%. This flies in the face of World Trade Organization rules and has drawn intense criticism internationally.

To quiet the critics and help its own companies receive better treatment abroad, Beijing announced in late April that it will allow foreign players to hold majority stakes in automaking ventures by 2025. The proposed measure is part of the government's medium- and long-term development plan for the auto, aimed at transforming China from merely a "large automotive country" into an "innovative automotive country."

Whether China can follow through on this plan is an open question, but automakers are already bracing for its effects.

Bracing for the impact

Xu Liuping, chairman of Chongqing Changan Automobile, recently instructed his employees to "speed up our Changan-brand vehicle's expansion into India." Based in the industrial city of Chongqing, the automaker racked up total sales of 3 million units in 2016, mostly within China. Xu issued his directive, a Changan official said, "because the elimination of foreign ownership restrictions could intensify competition in the Chinese auto market, and we need to quickly gain a foothold in a promising foreign market."

Changan's history is bound up with that of the Chinese auto industry as a whole. Its predecessor was a military supply company in Shanghai launched in 1862 by Li Hongzhang, a leading statesman and general who spearheaded the modernization effort of China in the late 19th century. This company expanded into producing guns and other arms and later moved to Chongqing.

In 1979, following paramount leader Deng Xiaoping's instructions, the People's Liberation Army announced that it was repurposing military factories for civilian use. In partnership with Suzuki Motor, the Shanghai facility began making cars in 1984 using the Japanese manufacturer's technical know-how.

Changan later set up a string of joint ventures with U.S. automaker Ford Motor, Japan's Mazda Motor and others. These tie-ups set the stage for Changan to become China's flagship automaker.

In recent years, Changan has been focusing on developing more models under its own brand. The automaker pours more than 5% of its sales into research and development, and now has R&D centers in Japan, Italy, the U.K. and the U.S. New models, including a Changan-brand SUV, have helped the company's popularity grow. More than half of its 2016 sales were of own-brand vehicles, and Changan is now the third-largest automaker in China, after General Motors and Volkswagen.

Chairman Xu's plans for India indicate that global expansion is in the cards.

Compatriot Zhejiang Geely Holding Group is likewise champing at the bit. Chairman Li Shufu, an entrepreneur said to be on familiar terms with Chinese President Xi Jinping, announced in May that his company would acquire a 49.9% stake in Malaysian automaker Proton Holdings. In 2010, Geely purchased Sweden's Volvo Cars from Ford Motor.

Great Wall Motor, meanwhile, which initially manufactured only pickups, has set up an R&D center in Yokohama, Japan, to focus more on SUVs. CEO Wang Fengying is looking to gain the technological chops needed to move into such markets as Australia, South Africa and Russia.

Following the leaders

The growth strategies of these and other Chinese automakers are in line with the government's development plan for the industry, which points out both the strengths and weaknesses of domestic carmakers. In particular, the plan highlights the slow progress in building international brands and the growing risk of excessive production capacity.

One of the goals laid out in the plan is to have a number of Chinese carmakers rank among the global top 10, hence the move to scrap the foreign ownership cap "in a gradual and orderly manner."

On the surface, many Chinese automakers are unhappy with the plan, saying that it is too early to open up the market entirely. Speaking in private, however, an official at a Chinese auto manufacturer said that slowing growth in the domestic market has made overseas expansion unavoidable. "We have no choice but to eventually accept the deregulation -- which we expect to be completed by around 2024 -- if we want to get approval for our acquisition of foreign automakers."

China is already moving in that direction. In May, Volkswagen announced it has received government approval for its third joint venture, an electric vehicle production project with China's JAC Motors. Previously, foreign automakers were limited to just two joint venture partnerships.

With deregulation looming in 2025, Chinese automakers will be under pressure to step up their overseas expansion drive. For many, this will be through partnerships with global powerhouses.

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