BMW will be among the first foreign auto makers to take advantage of the relaxed ownership norms in China and the relaxation in investment restrictions – aimed to provide more control to foreign companies in the largest auto market of the world
In a deal that is worth $4 billion, its ownership in its Chinese joint venture would be hiked up to 75 per cent by BMW by 2022.
The new norms for ownership and control for foreign automakers in mandatory Chinese joint ventures was announced by China in April this year. The mandatory joint ventures had a 50-50 break-up of ownership with a domestic Chinese company. Under the new regulations which would be introduced in phases, all ownership restrictions would be lifted for electric vehicle manufacturers by this year and by 2022 for conventional auto manufacturers.
The German company BMW said in a statement that there would be an increase in production capacity, including that for new energy vehicles, through the joint venture with local company Brilliance Auto Group in the northern city of Shenyang. The statement added the joint venture would continue till 2040.
As a result of the increase in ownership, the venture will be consolidated into BMW’s financial statements.
Benjamin Lo, an industry analyst at Nomura, says that a larger share in the joint venture would give foreign auto makers in China such as BMW increased control over business and increase in overall margins because Chinese operations are generally more profitable for auto makers than in other parts of the world.
“In the past, with ownership divided 50-50, they have to reach a consensus on longer-term decisions,” he added. “When things are good there is not much disagreement, but when things are not good then it delays decision making.”
It was way back in the 1980s that the clause of joint ventures and ownership restrictions was introduced in China with the aim that the local joint venture partners would ultimately be able to gain knowledge of the technology from the foreign partners. However, most of the local joint venture partners have not been able to establish a significant brand of their own from joint ventures even though China became the largest market for cars over taking the US and about 29 million vehicles were sold in the market last year.
The bargaining power of the foreign auto companies compared to that of their joint venture partners would determine the extent to which such foreign automakers would be bale to increase their ownership, say analysts.
For instance, Zhong Shi, an expert committee member of the China Automobile Dealers Association, pointed out the case of GM’s partner in China, SAIC Motor, which “has a much stronger brand in comparison, meaning GM might not be as daring in its share demands”.
However, compared to BMW, Brilliance is a much small company. “They already are a weak party in the joint venture — all of their profits need to rely on BMW and their own Chinese brand segments are losing money,” said Xing Lei, chief editor of China Automotive Review.
(Adapted from FT.com)