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China to relax equity share control, but not overnight

At a recent news conference, MIIT (Ministry of Industry and Information Technology) spokesman Xiao Chunquan told reporters that China would relax equity share control of joint venture vehicle manufacturers and his ministry would be working on specific procedures in doing so. A revision of the China’s current automotive industry policies would be expected.

This is the 2nd time that a ministry level government agency openly announced such a policy change since last October, when a MOFCOM (Ministry of Commerce) official indicated such a policy change during an automotive industry conference in Wuhan.

China’s plan to relax equity share control of Sino-foreign whole vehicle joint ventures is not surprising because the ruling Communist Party under the new leadership made a strategic decision at its 18th Plenary Session of the Central Committee last year to further reform the country’s economic and political system and open up to the outside world. Specifically, the government plans to remove entry restrictions and equity investment control in ordinary industries and allow the market to determine the allocation of resources.

The current investment control mandates that multinational OEMs are permitted to have no more than 50 percent of the equity shares of a joint venture assembly plant. It was adopted in the late 1980s in an effort to encourage foreign investment in China, with hopes that multinational carmakers would offer China the latest manufacturing technology in exchange for a piece of China’s vast market. The control of equity shares in JVs was meant to protect the interest of large state-owned automakers in China.

The two automotive industry policies released in 1994 and 2004 gave multinational automakers the opportunities to partner with local state-owned OEMs in setting up assembly plants to make and sell passenger vehicles to the government and consumers in China. Thanks to such a policy, China’s passenger car production grew from less than 5,000 units in 1985 to today’s 16 million.

The problem with the 50:50 equity control policy is that it is against the WTO rules and if not removed, it would jeopardize China’s own interests in international trade and investment. China has been involved in both the Transatlantic Trade and Investment Partnership (TTIP) negotiations between the U.S. and the European Union and the Trans-Pacific Partnership Agreement (TPP) talks initiated by the U.S. and nine APCEC countries. China has no alternative but to remove the 50:50 equity controls in automobile manufacturing if it wants to be part of these trade agreements.

Internally the 50:50 equity control policy has largely protected the interests of state-owned automakers rather than benefiting China’s automotive industry per se. As JV partners, state-owned automakers have benefited tremendously in both sales revenue and profits in building and selling foreign branded cars in China. Entry restrictions as well as equity investment control in automobile assembly created an unequal playing field for private and newly established state-owned automakers. This explains why the secretary-general of CAAM (China Association of Automobile Manufacturers), which represents large state-owned automobile groups, has openly claimed that advocating the removal of equity share control would be a “traitorous” act.

It was a “traitorous act” when state-owned enterprises offered multinational automakers the emerging market in China in the first place, quipped veteran automotive analyst and chief editor Jones Zhong. Most of the large state-owned automakers in fact would rather roll in the fat profit and wealth of the JV setup than changing the status quo. In sharp contrast, privately-owned carmakers, such as Geely, BYD, Great Wall, etc., welcome the abolition of equity share control with open arms.

Overall national economic interests will no doubt override the current equity investment control in the benefits of large state-owned automakers. But due to vested interests of both state-owned enterprises and the multinational players in China, the removal of such control is unlikely to happen overnight.

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