May 4, 2017 10:00 am JST

China to allow majority foreign ownership for car ventures

Rule change could mean more green tech for carmakers and less trade friction

SHUNSUKE TABETA, Nikkei staff writer

Spectators view cars at the 17th Shanghai International Automobile Industry Exhibition on April 21. (Photo by Akira Kodaka)

BEIJING China will allow foreign majority ownership of automotive joint ventures by 2025, the government said April 25, a move that prompted cheers abroad but apprehension at home.

A government plan for the domestic auto industry states that restrictions on investment in joint ventures will be relaxed "in an orderly manner." Authorities have not given a detailed time frame for the deregulation, or explained its scope.

China is the world's biggest auto market, with some 28 million vehicles sold last year. Foreign automakers hold a roughly 60% market share. But the investment limits have frustrated some Japanese manufacturers. They complain that their inability to exert management control hinders capital investment and makes research and development less effective.

For Japanese carmakers, Chinese ventures in which they hold majority stakes will be fully reflected in the earnings of parent companies. One manufacturer welcomed the change, saying the degree of managerial freedom will rise.

Chinese partners at these joint ventures are more circumspect, with many claiming that the development of homegrown brands will face obstacles under the new rules. Some want the current regulations extended.

China is easing controls on foreign ownership against the twin backdrops of the green vehicle revolution and trade friction with the U.S.

The deregulatory move is meant to send a message to the U.S. that China is further opening its car market. U.S. President Donald Trump has made helping domestic carmakers a priority by pressing trading partners to ease restrictions.

The meeting in early April between Chinese President Xi Jinping and Trump produced a 100-day plan geared toward reducing trade imbalances between the two countries. By signaling a conciliatory stance regarding cars, Beijing hopes the U.S. will back off from demands to open up its energy sector and others it deems strategically important.

China is also hoping to gain access to new technology by relaxing the rules on auto investment. Automakers have stepped up production of electric vehicles and plug-in hybrids, and the development plan calls for sales of 7 million "new-energy vehicles" in 2025, nearly double the target of the previous blueprint. The plan also envisions fully autonomous vehicles hitting the streets that same year.

China is hoping the joint ventures will give it access to advanced green car technology. Japan's Toyota Motor owns 50% stakes -- the maximum allowed -- in separate joint ventures with FAW Group and Guangzhou Automobile Group. Similarly, Nissan Motor operates a 50-50 venture with Dongfeng Motor Group.

LEAKS AND SPATS Many Japanese and Western automakers active in China are leery of transferring technology under 50-50 partnerships. Several of their Chinese partners produce under their own badges, and the overseas carmakers worry their proprietary technologies will end up in Chinese cars.

But when China begins allowing majority foreign ownership of joint auto ventures, and grants overseas automakers managerial control, they will be able to put strict rules and other mechanisms in place to prevent technology leaks.

The easing of capital restrictions may not guarantee majority ownership by foreigners. Such arrangements are still subject to approval by Chinese partners, and they may push back for fear of losing influence.

With respect to Japan, there is the added complication of strained relations between the two countries. "There are probably many Chinese [automakers] who would permit increased stakes from U.S. or European concerns, but not from Japanese counterparts," said one analyst.

China first threw open the auto market to foreign competitors in the 1980s under the late paramount leader Deng Xiaoping. Rising incomes whetted Chinese appetites for cars, until purchases surpassed those in the U.S. in 2009. Now China is by far the largest market in the world, with sales exceeding those in the U.S. by 60%.

International automakers are baking these capital reforms into their business strategies to put themselves in a stronger position. Germany's Volkswagen currently leads in unit sales, followed closely by General Motors of the U.S. The Japanese contingent is topped by Nissan, followed by Honda Motor and Toyota.

Asia300

Guangzhou Automobile Group Co. Ltd.

China

Market(Ticker): HKG(2238)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 23,600.3M
Shares: 6,514.39M
Asia300

Dongfeng Motor Group Co., Ltd.

China

Market(Ticker): HKG(489)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 11,019.6M
Shares: 8,616.12M
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