Volkswagen Group CEO Dr. Herbert Diess’ comments last week during the German automaker’s annual media conference that the company was thinking about reorganizing its interests in China (e.g. adjusting equity share in its vehicle joint ventures there) as part of a broader strategy rethink (see Diess, e-mobility, Volkswagen, China and shareholding) under a new regulatory environment created quite a stir back in China this past week.
So much so that the PR department of Chinese partner SAIC Motor issued a statement expressing its displeasure over that intent because of the sensitive nature of the matter, which caused the domestic-listed automaker’s stock price to drop following media reports of that intent. The displeasure mainly surrounded Volkswagen expressing such intention first without a formal discussion between the partners, but the statement ended on a happy note by indicating that they have since communicated and cleared up the misunderstandings.
It’s just one reflection of the dynamics and delicate nature of partnerships between Chinese and foreign automakers, especially so after China announced plans to lift limits on foreign equity in vehicle manufacturing projects almost a year ago.
And here it’s just not any partnership. We are talking about the partnership between China’s biggest automaker and one of the world’s biggest multinational automakers.
No matter how you slice it, Volkswagen’s intention to raise stakes in its China JVs was obvious.
We cannot blame Dr. Diess for trying to increase his company’s equity stakes in China JVs. First, it is possible now that China has announced a time schedule to completely open up the manufacturing industry. Second, it would be nice to have the profits from these JVs reflected in his company’s operating profits rather than accounted for as equity. Nearly €5 billion in the proportionate earnings it got from those JVs last year would be huge for Volkswagen, who had operating profits of €17.1 billion before special items. Third, BMW has already increased its stake in its China JV with Brilliance to 75 percent (granted, Brilliance might be a weaker partner compared with SAIC Motor) and Tesla has gotten the greenlight on a wholly-owned manufacturing facility. Were Volkswagen and any other foreign automakers for that matter, going to be just bystanders?
But, as Dr. Diess also noted, increasing its stakes, even if just by 1 percentage point, will not be cheap. The plan seems to be to have some sort of agreement reached as part of a broader new strategy roadmap by yearend or early next year. But even then there is no guarantee that Volkswagen will get its wish as far as becoming a majority shareholder in any of its three vehicle JVs in China. SAIC-Volkswagen could even continue as a 50:50 JV long into the future.
For SAIC Motor and any other Chinese automakers that currently have vehicle JVs with foreign counterparts, it should no longer be surprising that such possibility that foreign partners would like to increase their stakes in their JVs even exists.
As CBU/CAR has pointed out many times before, the end of the 50:50 JV equity requirement would mean that it will all be business decisions from here on out for Chinese and foreign partners. Will 50:50 be the best option going forward? Will having a majority share necessarily be a better option for foreign partners and having a minority share for Chinese partners necessarily be a worse option? These ought to be thought out carefully.