Home: Motoring > Automobile hot topic Q&A (Ep.188)

What will JVs future be like in zero-tariff era?

From:Internet Info Agency 2018-12-07 16:43:50

Author:He Lun, IIA’s Co-Chief Content Officer, Deputy Head of IIA Academy of Auto

Automobile hot topic Q&A (Ep.188)


Daimler plans to increase its stake in a joint venture (JV) with Chinese partner BAIC Motor to more than 65%, becoming the second multinational auto giant in China after BMW to break the 50% share of the whole vehicle joint venture, which sparked heated discussion in the industry. What will the future of the vehicle joint venture be like?

Q: Sources say that Daimler AG has raised the prospect of boosting stake in its joint venture Beijing Benz Automotive Co., Ltd. (BBAC), but it has not been officially confirmed. Do you think the source is reliable?

A: At the time when the news that BMW wanted to increase share-holdings in the joint venture was spread, its Chinese partner called it “nonsense”. But everyone have seen what happened next? So, now, who dare to confirm that Mercedes-Benz’s news is a fake one?

From my perspective, perhaps the most important thing is not the news itself, but whether it will be a trend for the foreign vehicle joint ventures. The answer is yes. Especially in the context of zero tariff, this trend is likely to accelerate.

Q: Even though all are talking about the coming of the zero-tariff era, it still remains uncertain. However, once it comes, how will it affect the investment decisions of multinational auto giants?

A: First of all, if zero tariffs are realized, non-tariff barriers will also be removed. By then, the cost gap between imported and China-made vehicles will be greatly narrowed. At this time, if the car is produced in China, the comprehensive cost is not much different from that imported from Europe or Japan. However, the imported car also has the so-called "original import" marks, and half of the profits of the domestic car will be taken by the Chinese side of the joint venture. Then you will find that imports are more affordable. The result will eventually lead to the stagnation or even shrinkage of the brand's China-made car business. Another way is to increase the share-holding of the joint venture, allowing the profit of the China-made is higher than that of the import production, and all models that can be produced will be China-made. In this case, it is certainly not a good thing for the Chinese joint venture partners, but for the Chinese market, the number of China-made models has increased, bringing in corresponding taxes, creating new jobs, and increasing output value, which is undoubtedly a good thing.

Q: In addition to the impact of tariffs and non-tariff barriers, what do you think about the role of other factors in multinational giants' capital increase and share enlargement in joint ventures?

A: Profit-driven capital. But the key is how best to maximize profit. For foreign investors, when the company is 100% self-employed, the efficiency of decision-making will be greatly improved, and the profits will be all of its own. This seems to be the best choice. But this is not the case. When Volkswagen came to China 40 years ago, joint ventures were necessary. However, there was no limit to the share-holding at the time, and there was no joint venture law. The Chinese auto industry lags behind the international market, which couldn’t be called a real automobile market. At that time, the way for selling cars was government distribution. In this situation, to hold shares was difficult, let alone sole proprietorship. If foreign investors want to make a profit, it is necessary for them to integrate various resources that only Chinese partners can provide. SAIC Volkswagen's Chinese and foreign party shares account for 50% each, which are discussed by stakeholders. The main purpose is to share risks and achieve common profit. This stock ratio was inevitable at the time, and later became a clause in the automobile industry policy to limit the ratio of foreign shares.

40 years have passed, multinational auto companies have also grown stronger in China, and exclusive resources of Chinese partners have been decreasing. The problem of inefficient decision-making caused by the dispute over discourse power has become increasingly prominent in competition. The idea of foreign investment in controlling is also increasing. What’s more, China will release the share ratio and quantity limit of the vehicle joint venture in 2022. It is inevitable to turn this idea into practice.

Q: What other factors caused multinational auto companies must hold shares?

A: According to the long-term framework agreement signed by BMW Group and Brilliance Auto on the long-term development of BMW Brilliance, BMW Brilliance will become the production base of global products. By 2020, the first pure electric vehicle BMW iX3 will be made-in-China and exported to the world. This is an important point. For multinational automakers, a product produced in a place can be exported to a surrounding or global market under certain conditions while meeting local demand, achieving economies of scale and maximizing profits. This is undoubtedly the best choice and an inevitable choice for implementing global strategy by multinational companies. However, if this export model utilizes the network resources and brand effects of multinational auto companies in other countries, but half of the profits are taken away by the Chinese side at 50%, do multinational automakers also willing to engage in exporting local products? For China, if foreign investors hold shares, the income of Chinese joint-venture partners will correspondingly shrink, while exports will soared, and the capacity of local production, taxation, and jobs will increase accordingly, which is also a good thing.

Joint venture products have rarely been exported for a long time. The share-holding limit is probably the main reason. The Volvo XC60 exported to the US market and did well, but that is because Volvo is a wholly-owned subsidiary of Geely. This is also a unique advantage for Volvo to establish a foothold in the Chinese market and achieve effective allocation of resources in the global market.

Q: In general, factors such as the relaxation of investment policies, efficiency of decision-making, profit distribution, and economies of scale brought about by product exports have made foreign-controlled holding vehicle joint ventures a major trend, and zero-tariff will further accelerate this trend. Therefore, in this case, what will the future of the joint venture look like?

A: I think there are four general categories: the first one is SAIC GM, the only one, because the Chinese partners have done a good job, and they can do a good job when leaving GM, which is their foreign investor, and the ratio maybe even smaller than that of foreign stocks; the second category are joint ventures such as Volkswagen, Toyota, Nissan, and Honda. The two parties have relatively balanced voices and current performances. The system is large and mature, and resource transfer and cutting are difficult. Moreover, Japanese-funded enterprises also need the Chinese side to offset the negative impacts of historical and ethnic issues. Therefore, in the foreseeable future, the share-holding is more difficult to change or sole proprietorship; the third are strong brands such as BMW and Mercedes-Benz. The joint venture foreign party is originally in a dominant position, and it is relatively easy to increase capital and expand shares. The fourth category are those joint ventures with poor performance and many contradictions between the two parties. It is not a pity that the foreign side will get rid of this burden. In the end, the Chinese partners had to compromise, and it would be good to let the foreigners stay.

In short, in the face of this trend, the Chinese partners of the joint venture is to be prepared for the rain. If you don't think about making progress, you will only eat your own food in the future.

Q: Will luxury brands such as Lincoln, Lexus and Porsche that have no joint ventures be directly becoming sole proprietorship?

A: Although Lexus is purely imported, its sales growth and dealer profit are the best in the industry. The main reason is that it has no joint venture currently, and the foreign side can engage in zero inventory sales mode without any obstacles, thus stabilizing the price, enhancing the brand value, protecting the interests of the dealers, and the sales volume has also grown very well. If Lexus has a Chinese partner, its primary appeal is to expand China-made car sales and release production capacity, while Lexus is to balance growth, control rhythm, stabilize prices, avoid pressure, and build brand building. What will be the result? It's hard to say.

Just as what I said 3 years ago: "In the long run, China-made production is definitely necessary. After all, the cost of production in Japan is very high. Because of the cost, Toyota has made the hybrid system localized at any cost. And it is now harvesting. Chinese luxury car market is still expanding, China-made luxury car sales are also growing, costs and prices are also decreasing, while the cost of importing Lexus costs has been limited, unless going through the multilateral trade negotiations and making the current 25% import car tariff be significantly reduced or even canceled. Now the possibility of zero-tariff increases, which means that Lexus is more likely to be non-China-made.

Lincoln is an American brand. If it is only imported, for the longer supply cycle than that of Lexus, it is difficult to adjust the supply according to the changes in market demand in the same way as Lexus to achieve zero inventory, and the long-distance transportation cost is also relatively high. If you want to develop better in China, maybe achieve local-made, if possible, will be inevitable, and sole proprietorship is naturally the best choice.

As for Porsche, it belongs to the ultra-luxury brand, and its reputation of European origin is an inseparable attribute. Unless it wants to be a popular luxury brand like Mercedes-Benz, BMW and Audi.

Editor:He Lun