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The awkward Geely-Volvo JV

– by He Lun

 

The fact that Geely Holding Group and its wholly-owned Volvo Car Corp. need to establish a joint venture in China to produce Volvo cars has created a weird feeling among industry circles.

Although owned by a Chinese carmaker, Volvo is still defined as a foreign company and must build a JV with its Chinese parent to assemble cars.

According to China’s Automotive Industry Policy, a foreign carmaker must have a Chinese partner in order to manufacture automobiles and its equity shares cannot exceed 50 percent.

Volvo had hoped to build a wholly-owned manufacturing plant in order to achieve the best operational efficiency. However, it is said that because of strong opposition from domestic carmakers, the government still regards Volvo as Swedish company and would not approve its plans in building independent plants.

Volvo showed a good development momentum since it was acquired by Geely, achieving a sales growth of 55 percent in China and 20.3 percent worldwide in 2011. Having to operate as joint ventures, Geely Volvo is facing some real hurdles down the road. On the one hand, the preferential tax is no longer offered to JVs, which means higher cost and the necessity of parts localization. On the other hand, Geely Volvo may have to follow other JV in the necessity to develop new energy vehicles and create a JV independent brand. These will slow down Geely Volvo’s ambition to catch up with leading German luxury brands in China – Audi, BMW and Mercedes-Benz.

At one time many Chinese companies transferred capital overseas to form a foreign entity in order to form JVs back in China and benefit from preferential taxes. Unfortunately for Volvo, its foreign identity today gives it no tax breaks in forming a JV.

The government definition of Volvo as a foreign enterprise not only distorts truth, but is also unfair. Nanjing Automobile (Group) Corp. (NAC), SAIC’s wholly-owned subsidiary, acquired British carmaker MG in 2005. Is the MG still a foreign brand and if yes, why didn’t NAC first form a JV before it could produce the MG in China?

BAIC and Daimler are talking about cross shareholding. If Daimler becomes a shareholder in BAIC, would it violate the 50:50 equity share rule? If according to the old industry policy both sides have to make complicated adjustments, it will incur much more cost and affect the intended cooperation.

Globalization has undoubtedly raised the question about the validity of an equity rule for foreign investment made 18 years ago, creating the current awkward situation for Geely Volvo.

Some believe that equity ratio control is the last bulwark for the protection of China’s auto industry. But globalized economy or trade requires balance and compromise, so does the auto industry.

China has the biggest trade surplus and is now the world’s second largest economic entity. Favorable trade rules have benefited China tremendously but also caused imbalance. Some people indicate that the stagnant WTO Doha Round should be halted after 10 years of talks. A multilateral trade negotiation of a “China Round” should be launched.

As the biggest automobile producing country with prospects of growing export, China will be confronted sooner or later with the issue of JV equity share rules.

If the new WTO negotiation fails, China may become the main victim for trade protectionism. Therefore, compromise is not the worst choice for China.

China had claimed that its fledgling auto industry may face a serious crisis after joining the WTO. In order to protect the auto industry, China made some compromises in agriculture in the negotiations. But in 10 years, China has become in the eyes of foreigners an automotive giant with growing export while at the time still a protected auto market. China allows domestic carmakers to acquire foreign companies, but prohibits the latter from doing the same in China through equity share control. This is not equal treatment.

Removing the equity ratio limit is not necessarily bad for Chinese independent brands. Li Shufu, chairman of both Geely and Volvo Cars, indicated a year ago that it may be the only way out for the development of Chinese independent brands.

Li argues that without an equity share restriction, foreign carmakers will not get government support without the help of Chinese partners and their operations will become much more difficult. Chinese carmakers can therefore focus on growing their independent products and JV companies will gradually disappear.

Only by looking at the auto industry from a global perspective can we realize the necessity to open up equity share control. Since it is happening sooner or later, it is better to get prepared now.

(Rewritten by Frank Shi based on author’s article published in

Guoji Shangbao or International Business Daily Daily) 

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