Analysis: Motives behind FAW-VW's ownership reassessment

Gasgoo.com (Shanghai) - At the end of last month, approval of FAW-Volkswagen's decision to change the ratio of its stock ownership caused a media uproar. Volkswagen China has been attempting to change the value of its joint venture with FAW Group many times now, with the most recent attempt being made during the opening construction ceremony of its Foshan factory. FAW Group has agreed to yield 9 percent of its stock to VW subsidiary brand Audi. VW Board Chairman Martin Winterkorn discussed the issue with executives from the Ministry of Industry and Information Technology.

Prior to FAW-VW's stock, fellow joint venture Shanghai General Motors underwent a similar reassessment, with SAIC increasing its ownership stake from 50 percent to 51 percent and gaining majority control. The event was the first of its kind for co-owned Sino-foreign joint ventures. In exchange for the transfer, SAIC paid $84.5 million to General Motors China. The two companies later jointly opened an investment company in Hong Kong to help further plan how to develop in the East Asian and Southeast Asian markets.

Being VW's second largest joint venture in the Chinese market, what reasons motivate the FAW-VW reassessment? Gasgoo.com (China) has undertaken a study to find out the answers.

9 percent of ownership control is being given over to Audi rather than VW as a direct result of the luxury brand's outstanding performance in the country. The move is also a clear sign for the joint venture's plans for Audi.

According to recent reports, all parties involved in the transfer have already submitted their materials to the relevant government authorities. After the transfer is completed, FAW will control 51 percent of the company, while VW and Audi will hold 30 percent and 9 percent respectively. Although the transfer has yet to gain official approval, 84 percent of the survey respondents believe that it will go through.

FAW-VW saw its returns reaching 22 billion yuan ($3.43b) last year, constituting one-third of the German manufacturer's global revenue. It is not in VW's interest to abandon the Chinese market because of government policies regarding joint ventures.

On the other hand, 9 percent of FAW-VW's stock is worth approximately 1.98 billion yuan ($308.4m). Why would FAW be willing to fork over such a large portion of its profits? For certain, FAW will gain VW's support via the move.

The relationship between the Chinese and foreign parties in joint ventures is very complicated. Earlier in its 20-year history, FAW's control of the joint venture was around 60 percent, however it had little to no say in regards to products, technology and management. If VW wants to increase its share of ownership, FAW has little choice but to move aside.

In order to cut down on potential losses, VW sold a portion of the joint venture's auto part operations. The price offered by VW was much higher than the industry average, with FAW having choice but to accept. 

Presently, competition between VW's two Chinese joint ventures with SAIC and FAW has seen to be beneficial for the group as a whole. With the threat of transferring technologies and products to its competitor as a bargaining chip, VW has the power to persuade FAW Group to follow its line during discussions. By looking at this most recent transfer, it is clear that the balance of power in Sino-foreign joint ventures is still far from equal. Likewise, VW holds similar power in Shanghai VW, despite only holding 40 percent of that joint venture's controlling share.

In the aftermath of the global financial crisis, FAW-VW became a big target for VW's European executives to aim at when considering where to cut costs. However much strong sales from the joint venture have convinced VW of its importance, FAW does not have many chips on the table when sitting down at the negotiations table with its partner.