BMW sees China easing JV rules soon

on Jun7

China has hinted it could ease rules that limit foreign automakers to a
 50 percent share in joint ventures. BMW is “monitoring that very closely.”

SHENYANG, China — Beijing may allow foreign carmakers to acquire majority control over their lucrative Chinese joint ventures within a couple of years, and BMW AG may be one candidate to do so.

Several months ago, China’s central government hinted that it might allow global automakers to ease rules that limit foreign automakers to a 50 percent share of their partnerships.

For the past 30 years, Beijing relied on this policy to protect domestic automakers and foster the transfer of technology. But that is about to change, and BMW is following the government’s deliberations.

“The government … is examining the joint venture relationship and is indeed prepared to change it,” said Ulrich Kastner, chief of BMW China. “It’s too early to say, but we are monitoring that very closely and are in talks.”

One key issue — as yet unresolved — is how to protect state-owned Chinese automakers that rely on their joint ventures’ profits, Kastner said during a press briefing here late last month.

The government’s statement “ends with the phrase, ‘We will do this in an orderly manner,’ which means it’s not going to be hasty,” Kastner cautioned.

The BMW executive, who previously served as chief of its joint venture with Shenyang-based Brilliance China Automotive Holdings, believes the government may start liberalizing its rules in a year or two.

China is the single largest market for companies as diverse as General Motors to Porsche. Volkswagen is particularly dependent on it, since half of the 6 million vehicles the brand sold worldwide last year were delivered to customers in China.

Nevertheless, the VW Group cannot book the operating profit from its two joint ventures, which account for over 95 percent of all group vehicles sold in China.

Were Volkswagen able to acquire even a bare majority of its joint ventures with Shanghai Automotive Industry Corp. or China FAW Group Corp., international accounting standards would let it consolidate the results on its income statement.

If its struggling VW brand had consolidated the profits of its venture with SAIC, the carmaker’s operating margin last year could potentially have been as high as 6.2 percent instead of 2.1 percent.

That would be a game changer for Volkswagen. In one fell swoop, the brand would achieve its targeted profit margin for 2025.

BMW also would benefit, since it sells many large sedans and crossovers with high profit margins. According to its annual report, BMW Brilliance Automotive earned 1.33 billion euros ($1.49 billion) before taxes, and it paid a cash dividend of $150 million to BMW Group.

But even if Beijing allows foreign automakers to acquire bigger stakes in their partnerships, there are two big obstacles to overcome. One is the more practical valuation problem. What are these joint ventures worth?

Volkswagen, for example, has been negotiating with FAW to raise its stake from 40 percent to the maximum 50 percent allowed. But the two sides so far have failed to agree on a price.

There is another, more subtle problem. The state-owned car companies have excellent ties to politicians and bureaucrats. When a joint venture needs permission to build an assembly plant, they can grease the wheels.

Since their joint ventures are so profitable, the state-owned companies have not felt much pressure to develop their own brands. But that could change if those profits dry up.

State-owned automakers would have to compete head-on with foreign brands. On their own, global automakers might then find themselves struggling to untangle the bureaucracy’s red tape by themselves.

In the meantime, foreign automakers must wait for Beijing to issue new rules for joint ventures, and it’s not at all clear what those rules might be. Kastner says he expects restrictions will be eased step by step.

“Can a partner buy 5 percent more, or 10 percent?” Kastner asked. “Is he allowed to own all of it? That’s pretty radical. I don’t see that anytime soon at all. I think they will ease into it.”

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