China Economy

Huge Break for Auto Companies as China Removes Ownership Caps

China has removed a 20-year restriction allowing foreign companies to gain a greater share of its market.

China will let foreign automakers from Volkswagen AG to Ford Motor Co. own more than 50% of local ventures, removing a two-decade restriction and giving a boost to global companies seeking to capture a greater share of the world’s largest car market.

Electric-car makers such as Tesla Inc. will see the swiftest benefit, with ownership limitation for such businesses lifting as soon as this year. The cap for commercial vehicles will be eliminated in 2020 and for passenger vehicles in 2022, the agency that oversees industries said on April 17.

The move may help diffuse tensions between China and the U.S. after President Donald Trump’s intensified rhetoric risked an all-out trade war. Companies from Daimler AG and BMW AG to General Motors Co. and Toyota Motor Corp. are set to find it easier to manufacture and do business in China, while local makers will be under increased pressure to speed up the building of their own brands.

China’s announcement comes on the heels of a similar move for the financial industry last week.

“In a decade, foreign carmakers will gradually become all independent and Chinese companies will lose the cash flows from the joint ventures,” said Yale Zhang, an analyst with Automotive Foresight Co. in Shanghai. “Foreign carmakers will be happy as they won’t have to share 50% of the profits with their Chinese partners.”

Stocks Gain
Shares of German carmakers all gained on the news, reversing earlier losses. China accounts for about half of Volkswagen’s namesake brand sales, while the world’s biggest car market is also the most significant buyer of luxury Mercedes, VW’s Audi unit and BMW vehicles. Volkswagen rose as much as 1.2%, and BMW and Mercedes-maker Daimler rose about 0.5%.

German and U.S. carmakers were quick to welcome the news, while reassuring that they won’t abandon local partners. Volkswagen said it will analyze if China’s move leads to new options, saying its existing joint ventures won’t be affected. General Motors said its growth in China is a result of working with its partners, and that it would keep doing so. Tesla declined to comment.

Tesla Boon
Elon Musk’s Tesla, in particular, is in a position to benefit from the relaxed ownership rules. Musk hasn’t been able to secure a deal to open an assembly plant in China, after negotiating with Shanghai’s government for more than a year. The sides have disagreed on the ownership structure, people with knowledge of the situation said in February. The risk of higher import taxes spurred by Chinese trade friction with the U.S. may be allayed if Tesla is able to clinch a local manufacturing agreement.

Those losing out include local new-energy vehicle makers such as BAIC Motor Corp. and BYD Co., with BYD in particular set to face tougher competition from any lower-priced Teslas, said Dan Zhuang, an analyst at Rhb Osk Securities Hong Kong Ltd.

“The pace of the open-up is much faster than the market had thought,” Zhuang said. “If Tesla produces from China, BYD may face the pressure to lower price and thus a weaker margin.”

China has moved toward eliminating the caps in recent years with promises of their eventual removal, with Bloomberg News reporting in 2016 that the government was considering the move. China has required foreign automakers to enter into ventures with domestic partners to operate in the country since 1994, with the overseas company holding no more than 50%.

For years, the so-called “50:50 rule” was a sacred cow for the auto industry, seen as necessary to buy local carmakers time to gain the technology and build their brands before giving overseas carmakers unfettered access to the market. The removal of the cap signals Chinese officials now have more confidence in their home-grown contenders.

The move is “a good stimulus to urge Chinese companies to strengthen their own brands at a faster pace rather than relying on the joint ventures to feed them,” Automotive Foresight’s Zhang said.

Foreign car brands, meanwhile, now have years of experience from operating in China and believe they can go solo without a local partner guiding them, the analyst said. “In their eyes, Chinese have little contribution to the brands and products,” Zhang said.

TAGS: Trade
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