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JAC-Volkswagen: a milestone, a match “tailor made” and a potential policy buster

The blockbuster news of the week is the signing of an MOU on September 6 between Volkswagen AG and Jianghuai Automobile Co., Ltd. (JAC) to jointly develop battery-powered electric vehicles in China and potentially establish a joint venture.

The MOU comes less than a year after Premier Li Keqiang visited JAC last October and publicly said he would help relay the message personally to Volkswagen CEO Matthias Müller that JAC is interested to talk.

The MOU and the potential tie-up between JAC and Volkswagen in the form of a vehicle JV is a major industry milestone because it means Volkswagen will have established a third vehicle JV in China (after SAIC-VW and FAW-VW), which breaks the requirement that foreign automakers can only have two JVs of the same vehicle type (passenger vehicle, commercial vehicle or motorcycle) as stipulated in the Automotive Industry Development Policy (AIDP) in place since 2004.

How would this be possible?

The simple reason is support from the very top – Premier Li himself and Chinese President Xi Jinping, who have both voiced their support for new energy vehicles in public speeches and visits to JAC within the past year. It became apparent that talks between JAC and Volkswagen elevated to an economic interest between China and Germany, as an industry insider told CBU/CAR bluntly that “when the Premiers of the two countries agree on something, who can stop it?” A JAC-Volkswagen JV, were it to come to fruition, would be a match “tailor made.”

It is interesting to note that in the description of the two-JV restriction clause for foreign automakers in the AIDP, neither “new energy vehicles” nor “electric vehicles” were included in the wording of the vehicle types, which is kind of a loophole for JAC and Volkswagen to take advantage of.

For Volkswagen, teaming up with JAC is clearly a key tactic of its “Together-Strategy 2025” that would see it launch more than 30 new and purely battery-powered EVs worldwide (including 15 from SAIC-VW and FAW-VW alone). Frankly Volkswagen has been behind in its efforts to launch locally-produced EVs. Teaming up with JAC, one of the industry leaders in the EV space with good R&D and cost control capabilities, unique corporate culture inherited by former Chairman Zuo Yan’an, and a company somewhat like Volkswagen (JAC produces a wide range of passenger and commercial vehicles), seemed to be a natural fit.

JAC, on the other hand, is one of the few remaining major local state-owned automakers still without a JV. Volkswagen obviously gives JAC that “aura” and a strong brand influence.

How exactly will the JV play out will depend on the next phase of negotiations over a period of at most five months – a timeframe agreed by the two companies before a formal contract is signed.

That contract, if it results in a full blown vehicle JV (which CBU/CAR thinks will), could very well change the landscape of the industry by busting open the AIDP, and Volkswagen will have its hands full balancing the interests of three partners.

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