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Relinquishing equity control may not open the flood gate for foreign brands

The subject of removing equity control over foreign investment in vehicle assemblies reminds people of the famous debate between two ministers in China. One was He Guangyuan, former minister of Machinery Industry, and the other Long Yongtu, former vice minister of Foreign Trade and Economic Cooperation.

There was so much attention over the debate that Long Yongtu was even accused of being a “traitor” for advocating the relinquishment of the 50:50 equity control.

But people who criticized Long failed to remember that for many years he had been China’s chief representative for WTO negotiations. It was under his leadership that China was able to secure the best of terms in protecting its fledgling automobile industry.

China at the time had a very weak automobile industry, with factories that made only trucks. There was not a single car assembly line in the modern sense. The policy that Chinese partners must have no less than 50 percent of the equity share in a JV assembly plant was clearly meant to protect the country’s fledgling auto industry. The purpose of offering multinational carmakers an equal share was to give them China market access in exchange for capital and technology.

But after 20 years, China’s goal of getting automotive technology has failed to materialize. Some of the Chinese partners in joint ventures are happily immersed in fat profits and have become China’s new breed of compradors. Some large state-owned automakers have been talking loudly about building independent brands but have accomplished little. In comparison, grass-root local carmakers, such as Geely, Great Wall and BYD, have emerged and grown through market competition.

It is no longer necessary in trying to debate what is right or wrong about the country’s JV policies. The market reality today is that local independent brands barely take up 30 percent of the market shares, almost all in the mid- to low-end segments. The higher-end segments are controlled by multinational brands. The 50:50 equity share split between foreign and Chinese partners should have offered the Chinese side 50 percent of the profit. However, due to China’s weak supplier industry, foreign partners are able to take away over 90 percent of the profit through parts and components supply. Moreover, foreign partners also control vehicle technology and JV financials, leaving Chinese partners in a subordinate position. JV companies are in essence assembly plants of the foreign brands.

Unhappy with such an outcome of their own policy design, decision makers have tried to make it up by enticing JV companies to develop the so-called JV independent brands. After some initial unwillingness and even tough resistance, multinational carmakers have now agreed to go along with such a new policy by rebranding their outdated vehicle models and reducing equipment so as to compete in the low-end segments. The direct result of such a move is encroaching into the market share of local independent brands.

Maybe decision makers need to consider a new way of thinking. A coin always has two sides. When you choose one, the other side comes along. If we did not have the equity share regulations in the first place and let the market take care of investment, what would have happened? In the principle of market competition, consumers would opt to select commodities with the best price-performance ratio. Similar to the situation of joint venture manufacturing, there would have been competition among multinational carmakers in China and they would all have to employ local staff and labor. Local players would also have entered the market and there would have been a similar exchange of talents among multinational and local automakers.

Maybe China would have to go through a period when automobiles are priced much higher than their worth. But this is the same as what happened with controlled equity share joint venture establishment. Remember the early days when the Santana was sold at over ¥200,000 ($32,000) a piece and it was purchased mainly by the government? But a complete opening up in equity investment may have prevented the degeneration of state-owned automakers into accomplices of foreign capital.

Some state-owned automakers have wasted tremendous financial and human resources in the name of developing independent brands. They have come up with vehicles based on foreign vehicle platforms in an effort to win over government procurement. This is unfair to real local independent brands and manufacturers.

Geely is now 16 years old, BYD 10 and Lifan seven. These independent carmakers are ready to fully compete in an open market. If you ask for their comments, they would prefer that the government does away with equity share control. Once the market is open, the pseudo independent brands manufactured by some state-owned automakers will lose their protected advantages. With the coming of real and fair market competition, the fledging local independent brands in China are expected to take off in their development.

Of course, some uncompetitive enterprises will fall in real competition. These enterprises do not have a promising future even if government protection remains. The existence of some state-owned enterprises means little more than a waste of financial and human resources. 

(Rewritten by Wayne Xing based on author’s blog on auto.sina.com.cn)

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