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50:50 JV equity rule may be history by 2020

The Auto Industry Mid- to Long-Term Development Plan released on April 25 is the clearest indication yet that the relaxation of the 50:50 equity requirement for vehicle joint ventures in China is now just a matter of time.

And that time may come sooner rather than later, judging from the tone and urgency of the Plan that has set an overall goal of cultivating China into a global automotive powerhouse in 10 years.

The Plan essentially replaces the existing Automotive Industry Development Policy (AIDP), which has been in place since 2004, and acts as the newest guideline and roadmap for the Chinese auto industry as it tries to take the lead in the global rollout of new energy and intelligent connected vehicles.

The 50:50 JV equity rule, which requires a foreign automaker own no more than 50 percent of its share in a vehicle JV, has been in effect ever since it was put into place in 1994 with the Automotive Industry Policy (AIP). The rule was seen as a protective measure necessary to buy local independent Chinese carmakers time to build their own brands and absorb technologies from their foreign counterparts in exchange for market.

But this so-called “market in exchange for technology” has never really worked to Chinese brand’s favor. Somehow it protected the foreign brands instead because they owned the brands and channels and reaped profits not only from their share of equity but also from technology transfer payments. It was never truly “50:50.”

Luckily, Chinese brands who are ahead of the pack have built up their brands through different ways without the benefit of JVs. Geely bought Volvo Cars, Great Wall Motor focused on SUVs and BYD had first mover advantage on EVs. Even big groups like SAIC Motor, Chang’an and GAC that had depended heavily on JVs in the past have found their mojo for their own brands.

Chinese brands are stronger than ever before and are now able to compete head on with their foreign counterparts, be it in design, technology, craftsmanship or quality. Nowhere was this more evident than at the recent Shanghai Auto Show.

With the rise of the Chinese brands, deepening of reform to open up the market further and maybe a bit of pressure from western trading partners, the government believes it has bought enough time for Chinese brands and time is ripe to lift the regulatory protective wings.

The relaxation of the 50:50 JV equity rule should not come as a surprise for the industry and CBU/CAR believes it may officially happen by the turn of the decade. That however does not mean foreign automakers will go “solo” immediately upon the relaxation of the rule because they have cultivated deep relationships with their Chinese partners and it would take a fortune to acquire the equity shares of JVs from their Chinese partners, even if they are willing to sell. One company that could benefit from the relaxation of the rule is Tesla, whose CEO Elon Musk met with Chinese Vice Premier Wang Yang in Beijing the day the Plan came out.

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