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Business deals

BMW raises China venture stake to 75% in $4.2bn deal

German automaker will be first to seize on Beijing's easing of ownership rules

Inside the BMW factory in Shenyang, Liaoning province. The increased stake in the joint venture will allow the German automaker to reap a greater share of the profits.   © Reuters

BEIJING/FRANKFURT, Germany/TOKYO -- BMW will lift its stake in its Chinese joint venture to 75% from 50%, it said Thursday, spending 3.6 billion euros ($4.18 billion) in a deal that would make it the first foreign automaker to take control of a business in the country.

The German luxury carmaker aims to strengthen its dynamically growing China business, Chairman Harald Krueger said at a strategy presentation on BMW's China business in the Liaoning Province city of Shenyang, northeast of Beijing.

Though no date was set, the deal for BMW Brilliance Automotive -- which it co-owns with Brilliance China Automotive Holdings -- will likely go through in 2022, the year Beijing has said it will loosen investment restrictions to let foreign passenger-car manufacturers take majority stakes in local joint ventures. Other international automakers in China, who tend to rely more on their powerful local partners than BMW does on Brilliance, look to be wary of taking that plunge.

The deal will put BMW in the driver's seat of the joint venture, as well as let it reap a greater share of the profits.

The automaker said Thursday it will extend its contract with Brilliance through 2040, and invest over 3 billion euros in new and existing Chinese plants, aiming to lift annual production capacity for BMW cars to 650,000 units from 450,000. The effort will create 5,000 new jobs, the German company said. The partners will also put more effort into developing electric cars and other so-called new-energy vehicles.

China is BMW's largest market, surpassing its home turf, and further growth for luxury cars is expected. Sales for its Chinese unit jumped 15% year-on-year to 590,000 for 2017. But it faces stiff competition there from compatriot Daimler, owner of the Mercedes-Benz brand, as well as Sweden's Volvo Cars, owned by China's Zhejiang Geely Holding Group.

The deal announced Thursday appears partly intended as a response to the U.S.-China trade war. Last year, BMW exported roughly 80,000 sport utility vehicles made in American factories to China, and was forced to raise prices after the Chinese government slapped additional tariffs on U.S.-made vehicles. Lifting its stake in the venture and expanding Chinese production capacity will let it reduce its reliance on American plants.

Other major international players in China -- such as Volkswagen, Ford Motor, General Motors, Toyota Motor and Nissan Motor -- appear hesitant to take majority ownership of joint ventures with Chinese players, owing to concerns over how to handle unique local regulations and opposition from their partners. Many of the foreign automakers are paired with powerful state-owned players like Dongfeng Motor Group and SAIC Motor.

Most foreign companies rely on their Chinese venture partners to deal with the ruling Communist Party, the government and labor unions. Moreover, those partners are often wary of losing control. But in BMW's case, because Brilliance is relatively small, the deal faced "little opposition," said a source connected to the matter.

It is unclear whether other global automakers will take the leap on buying greater stakes in Chinese partners. While doing so would give them the ability to flexibly adjust local production, it would also risk upsetting delicate cooperative balances. Many companies are expected to wait and see how the Chinese side behaves.

Major Japanese automakers with ventures in China, for instance, are focused on maintaining the status quo, having achieved expansion there by running operations smoothly with the cooperation of their local partners. They have also built deep relationships on the sales strategy and product-development fronts, such as with Honda Motor advancing brands unique to its local joint ventures with Dongfeng and Guangzhou Automobile Group.

Besides the auto field, China's government has also said it will relax investment limits in shipbuilding, aircraft manufacturing, energy, resources, infrastructure, transportation and logistics. The aim appears to be making a show of openness amid the trade war, as well as having foreign players stimulate the domestic economy.

"With the economy slowing down amid the trade war with the U.S., we hope the easing of ownership rules for foreign companies will invite them to invest more," said a Chinese local government official.

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