The Joint Venture As We Know It Is Going To Die

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The Chinese government has announced far-reaching new rules for Chinese-foreign car making joint ventures. The most important change, as per BBC:

China’s state planner said on Tuesday it would remove foreign ownership caps for companies making fully electric and plug-in hybrid vehicles (NEVs) in 2018, for makers of commercial vehicles in 2020, and the wider car market by 2022.

China imposed ownership restrictions in 1994, limiting foreign carmakers to owning no more than a 50% share of any local venture.

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So how is this going to change the automotive landscape?

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For existing joint ventures there won’t change much, for now. Joint ventures are usually long-term agreements, for 10 to 20 years, and these agreements won’t change under the new rules.

The question is what happens after an agreement ends. Let’s say for example that the Shanghai-GM joint venture agreement ends in 2023. Theoretically GM is then free to leave Shanghai and go for it alone.

But will they? Probably not. Shanghai and GM have invested billions together, they work together very well, the operate joint R&D centers, GM makes money by selling platforms to Shanghai’s own brands, and thanks to Shanghai’s influence they stand very good with the government.

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GM however could try to extend its share to over 50%. Or to start another operation next to Shanghai-GM. Many possibilities, automakers better start thinking soon.

Shanghai-GM is an example of a happy joint venture. But others are less happy. Like FAW-VW, with endless tensions and distrust between the partners. It seems likely that Volkswagen goes out of that one as soon as they can.

Another interesting example is Dongfeng-PSA. As Dongfeng is shareholder in PSA is seems very unlikely that the French will be able to extend their share, let alone walk away. PSA is trapped.

The cap on foreign ownership of companies making NEVs is ending this year. Incredibly fast. That most likely means that the Zotye-Ford NEV joint venture is not going to see the light of day. At this moment parties are still negotiating and final government approval hasn’t been granted yet. But why would Ford go through with it? Soon they will be able to set up their own NEV plants, without the need for a Chinese partner. Other NEV joint ventures under negotiation will likely be cancelled too.

It will be interesting to see what happens at JAC-VW. That was mostly a political marriage, arranged by high-ups in Beijing. VW didn’t really need the joint venture. But they can’t get out now. The agreement has been signed and the first cars are underway. But I seriously doubt they will put much more effort and money in.

The same goes for that other Chinese-German NEV marriage called Denza. After all those years they still make only one car. Daimler will likely be out as soon as the agreement ends, and won’t invest a penny until then.

So the changes depend on the state and kind of a particular joint venture. Looking further ahead; it is also possible that new joint ventures are agreed, with a smaller ownership for the Chinese side.

And in the short term, who will benefit most? Probably Tesla, the company that kept postponing a decision about making cars in China, waiting for the rules to change. What did they know..? Anyway, the rules have changed now, so I expect Tesla to come and have a good look in China soon.

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  1. At this point, I don’t see many companies rushing to end their joint ventures. You mention some ventures that have not panned out, and other newer ventures that will no longer make sense, and I agree with this assessment. The cost of building a new manufacturing infrastructure for conventional vehicles is beyond what most companies want to spend at a time when NEV tech is coming into play. I can see new factories built without Chinese partners in order to protect proprietary technology in the NEV field. However , I think that many of these JVs will continue for many years to come.


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