Looser policy on auto joint venture expected

China's policy on automotive joint ventures is expected to be loosened and the ceiling for foreign capital investing in joint ventures raised, the Economic Observer quoted an insider as saying.

"The shareholding structure for Sino-foreign automakers will likely be not that strictly restricted in the future as economic reform deepens," said Zhang Xiaoyu, executive vice chairman of the China Machinery Industry Federation, at a recent industry forum.

Currently, foreign automakers are not allowed to own more than 50 percent in their Chinese joint ventures. But some signs suggest the policy might be loosened.

Loosened policy

"More and more larger auto groups in China finance in the overseas capital market, so strictly speaking, the Chinese side also has overseas capital," said Zhang. "You can't say the Chinese side is purely domestic or State-owned assets."

According to China's automobile industry policy in 1994, in a Sino-foreign joint equity or cooperative venture producing whole automobiles, motorcycles or engines, the share of the Chinese side cannot be lower than 50 percent.

But in 2007, a supplemental provision on Sino-foreign motorcycle or engine companies was released, and under the provision shareholding proportions are not restricted.

"In addition to auto joint ventures, the whole auto industry is opening up," said Luo Zhongwei, an industry economics researcher with the Chinese Academy of Social Science.

Luo said that auto financing, one sector under stringent control, is opening up. At present, foreign companies can not only open auto financing companies in China, but also operate expanded businesses according under new management measures issued in January this year.

Insisting on the 50:50 proportion is pointless as the auto industry is not a sector of vital importance to the nation's economy and the people's livelihood and the industry's growing momentum and China's economic development speed have changed significantly since 2001, when China joined the WTO, according to Wang Zhigang, a research fellow at the State-owned Assets Supervision and Administration Commission of the State Council.

"We used to worry foreign capital would manipulate China's auto industry by controlling technologies, brands and markets, but Chinese automakers performed well and avoided a recession following WTO membership," said Wang.

"Joint ventures are compliant to their foreign sides in most aspects, and their development strategies are formulated by their foreign sides, too," said Qian Pingfan, vice director of Research Department of Industrial Economy of Development Research Center of the State Council.

It's better to open up the industry appropriately to stimulate and pressure large auto groups than enforce an unhelpful restrictive policy, Qian said. 

Foreign executives from auto joint ventures also point out the 50:50 structure lacks efficiency. Strategies and decisions are discussed again and again at the expense of market opportunities.

Different opinion

Chinese sides of joint ventures will lose their rights if the 50:50 proportion is not enforced, as they have no brands and no core technologies, according to Xu Changming, deputy director of the Department of Information Resources under the State Information Center.

The proportion is in accord with the interests of Chinese enterprises, which are in weak positions in joint venture management, said Han Lei, vice secretary-general of the China Association of Automobile Manufacturers.

"Right now, foreign companies transfer profits through auto parts premium and technologies. If the policy is loosened, it will be more difficult for Chinese companies to get technologies and voices," said Dong Zhiyuan, vice general manager of Beijing Automotive Holding Co Ltd.

The 50:50 shareholding policy on auto joint ventures won't change in the next two to three years at least, said Li Honglu, vice general manager of Beijing Hyundai Motor Co Ltd. "Chinese automakers are weak and discarding the policy goes against their interests," Li said.

However, "The restriction won't be abolished in the near future because Chinese auto enterprises are not yet mature," said Dong Suhua, press principal of PSA China.

Innovation: the real challenge

Investment liberalization is inevitable. Foreign companies, especially Japanese firms, are hoping for continued investment liberalization, and China continues to resist external forces.

Most automakers in China know independent innovation is the real challenge for them. Fortunately, Chinese automakers like FAW, Shanghai Automotive Industry Corp, Guangzhou Automobile Industry Group and Dongfeng are speeding up their independent innovations.

Most Chinese auto groups have also announced heavy investments in independent brands and technologies.

Smaller Chery, Geely, Great Wall Motor and Brilliance Auto have also put together their independent product and technology portfolios.

"There isn't much time left for China's auto industry," said Qian Pingfan, adding it's time to wake up for large automotive groups from sweet dreams of relying on joint ventures.

"Chinese automakers should speed up independent innovations, research and development," Qian said.