The new "joint venture" era | reshuffle 2022: equity competition and abandonment drama are staged at the same time

In less than half a month, the red line of "foreign shares of joint venture automobile companies cannot exceed 50%" that has lasted for nearly 30 years in China will officially disappear.

From the current point of view, BMW Brilliance is about to become the first traditional joint venture car company to be controlled by a foreign party. BMW Brilliance is only one of the cases in which foreign car companies seek more equity in joint ventures. In addition to BMW Brilliance, such successful cases include Volkswagen Anhui (formerly Jianghuai Volkswagen), which has increased its holdings from Volkswagen, and cases that are still in the game stage include Beijing Benz and DPCA.

The change in the shareholding structure itself will not directly change the way the joint venture company operates, but a more advantageous share ratio means a higher profit sharing, which will increase the enthusiasm of foreign shareholders to invest in the joint venture. This enthusiasm is particularly significant at the critical moment of the electrification transformation of the automotive market.

It should be pointed out that while some joint venture car companies have obtained foreign shareholders' increases, there are also many people who have fallen apart from the old joint venture camp, from the dissolution of Dongfeng Renault, to the demise of FAW Mazda, the establishment of the new Changan Mazda, and then to the rumored withdrawal of Dongfeng Yueda Kia, all of which reflect this.

It is worth noting that the collapse of weak joint venture car companies is not necessarily a bad thing for the shareholders of both sides, because at the same time as the old joint venture relationship disintegrates, a new equity relationship will also be established, and the equity restructuring of the joint venture car companies has also brought new imagination space, which may provide new paths and opportunities for shareholders to get rid of market difficulties.

In fact, whether it is equity competition or camp disintegration, it reflects the transformation of the traditional joint venture model driven by market forces after the full liberalization of policies and the wave of electrification, and in the face of increasingly severe competition and transformation pressure, Chinese and foreign shareholders are more proactive in making their own decisions.

The equity game has entered a new stage

BMW Brilliance's share ratio adjustment has entered the countdown. According to the agreement reached by the parties of BMW Brilliance in October 2018, BMW will acquire 25% of the shares of BMW Brilliance, a joint venture in China, for 3.6 billion euros, and the Sino-foreign shareholding ratio of BMW Brilliance will be changed from the original 50:50 to 25:75, and the transaction agreement will be completed by 2022.

The completion time of the transaction coincided with the moment when the share ratio liberalization policy landed. According to China's "Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Edition)", the automotive industry will implement a transition period of opening up, and the foreign equity restrictions on special vehicles and new energy vehicles will be abolished in 2018; the foreign equity restrictions on commercial vehicles will be abolished in 2020; and the foreign ownership restrictions on passenger cars will be abolished in 2022.

Behind the change in BMW Brilliance's share ratio is the unequal strength and status of the two shareholders, and the weak Chinese shareholder, Brilliance, cannot implement reciprocal rights and responsibilities in this joint venture company. At the same time, Brilliance's dependence on BMW Brilliance and BMW brand automotive products at the performance level has made it difficult for it to withstand the negotiating pressure exerted by BMW.

After the signing of the share ratio adjustment agreement, as part of the commitment, BMW will also increase its investment in BMW Brilliance and its support for the joint venture partner Brilliance, including BMW and Brilliance extending the joint venture agreement with BMW Brilliance until 2040, BMW will increase its investment in BMW Brilliance by 3 billion euros for the Shenyang production base reconstruction and expansion project, and BMW and Brilliance have also signed a large order of 50 billion yuan, covering cooperation from 2023 to 2030.

Compared with BMW Brilliance, the game of Chinese and foreign shareholders around the Beijing Benz stock ratio is more turbulent. In 2013, through the equity exchange of the "Beidaihe" strategy, BAIC obtained a controlling stake in Beijing Benz, and Daimler, the parent company of Mercedes-Benz, became a shareholder of BAIC. In 2019, BAIC became daimler's third largest shareholder, and Beijing Benz also received a tripartite shareholder capital increase, but the share ratio remained unchanged, and the three-party share ratio of BAIC, Daimler and Daimler Greater China was still 51:38.665:10.335.

Recently, BAIC Group announced that it has held 9.98% of Daimler's shares in 2019 by continuing to invest. At the same time, Daimler holds 9.55% of the shares of BAIC Group in Hong Kong-listed BAIC Motor, and 2.46% of the shares of BAIC Group in baiqi blue valley, an A-share listed company. This shows that BAIC surpassed Geely to become Daimler's largest shareholder.

Rebalancing interests in the context of electrification

In addition to the policy of liberalizing the share ratio itself, another incentive for foreign shareholders to actively increase the share ratio of the joint venture is the unequal contribution of sales and profits of the joint venture in China. Taking Volkswagen as an example, according to the financial report, in 2019, Volkswagen's sales in China accounted for 38.6% of global sales, while Volkswagen's operating profit from joint ventures in China accounted for only 25.8% of the total operating profit. In 2020, the sales contribution rate of the Chinese market will reach 41%, and the profit contribution rate will be about 33%, and the gap between the two data is still obvious.

The unequal contribution of sales volume and profit in the Chinese market is considered to be closely related to the shareholding structure of the joint venture. In SAIC Volkswagen, volkswagen and SAIC both hold 50%; in FAW-Volkswagen, Volkswagen holds 40% of the shares, while FAW holds 60% of the shares. This means that as the absolute pillar of Volkswagen's performance in China, a large part of the profits of the two joint venture car companies will be taken away by FAW and SAIC.

For foreign car companies, this asymmetry is still acceptable in the era of traditional fuel vehicles. In the view of Yan Jinghui, an analyst in the automotive industry, in the era of traditional fuel vehicles, many of the imports of foreign shareholders into joint ventures in China are mature technologies and products that have been landed in China and overseas for many years, and the research and development costs of these technologies and products may have been recovered before landing in China. In addition to the cost of materials, these products in China belong to selling one to earn one, the profit sharing is lower, the problem is not big.

But with the advent of the era of electric vehicles, things have changed. At present, the electrification of foreign car companies is generally still in the stage of large-scale "burning money". Yan Jinghui said that in order to compete with the popular Chinese car companies, foreign car companies in China are the latest and most advanced electrification technology and platform, the R & D investment is huge, the demand for cost recovery is strong, so it is bound to pay more attention to the joint venture share ratio, because this is directly related to the sustainability of its electrification transformation investment.

In fact, volkswagen's willingness to adjust the stock ratio in recent years has indeed been very strong. From the current point of view, Volkswagen's two projects in China that have successfully obtained joint venture controlling rights belong to the field of electrification. In December 2020, Volkswagen announced the completion of the capital increase of JAC Volkswagen, and JAC Volkswagen changed its name to Volkswagen Anhui, and the shareholding ratio held by Volkswagen increased from 50% to 75%. JAC Volkswagen is Volkswagen's third joint venture in China, mainly engaged in electric vehicle business.

At the same time, although Volkswagen has not realized the increase in its shareholding in FAW-Volkswagen, it has obtained a controlling stake for the first time in a new joint venture with FAW around the Audi brand. In January this year, Audi, Volkswagen and FAW jointly announced that the Audi FAW BJEV joint venture will settle in Changchun, and Audi and Volkswagen will hold 60% of the shares of Audi FAW. Audi FAW will be responsible for the production of pure electric models on the Audi PPE platform in China, and the PPE platform is a high-end electric platform jointly developed by Audi and Porsche.

Audi FAW's joint venture model is full of game atmosphere. Some analysts believe that FAW may have given Audi a joint venture control to exchange the Audi PPE platform and models to settle in Changchun, and the sales of Audi FAW products have not been freed from the FAW-Volkswagen system, and will still be responsible for FAW-Volkswagen's wholly-owned subsidiary FAW Audi Sales Company, which is also a compromise.

In addition, in the field of power batteries, we can also see the importance that Volkswagen attaches to the controlling stake in the electrification joint venture. On December 15, Guoxuan Hi-Tech, the leading domestic power battery supplier, completed the registration and listing of new shares to Volkswagen China in a non-public offering, and Volkswagen China officially became the controlling shareholder of Guoxuan Hi-Tech. Power batteries are one of the core components of electric vehicles, and they are also one of the key investment directions for Volkswagen's electrification transformation.

The weaker camp wa explains the new opportunities

Not all joint venture car companies are fragrant in the eyes of both shareholders. Recently, Dongfeng Yulong, the parent company of Nazhijie, which is on the verge of bankruptcy, was listed on the Beijing Equity Exchange to attract investors and look for pre-restructuring investors. As a joint venture between a mainland company and a Taiwanese company, Nachijie's sales have declined rapidly after 2017 and have now been completely marginalized by the market.

An insider who was in charge of internal propaganda work in Dongfeng Group told the Economic Observer that the personnel stationed by Dongfeng Yulong had been basically evacuated more than two years ago, but due to policy and other reasons, it had not been withdrawn, and Dongfeng had actually given up Nazhijie a long time ago.

The abandonment of Nachijet is in line with Dongfeng's overall corporate strategy. Since Zhu Yanfeng was transferred to the chairman of Dongfeng Motor Group in 2015, Dongfeng has begun to set off a large-scale "slimming" operation, with the important purpose of cleaning up negative assets.

Although the bankruptcy reorganization of Dongfeng Yulon is not good news for both Dongfeng and Taiwan Yulon, it is expected to become a "bridge" for new car-making forces to enter the Chinese market. Previously, it was reported that Taiwan Yulon will repurchase the shares held by Dongfeng Yulon Zhongdong and will cooperate with Foxconn after the repurchase is completed. Foxconn has taken a fancy to Dongfeng Yulon's car-making qualifications, which can pave the way for Foxconn's electric vehicles to enter the mainland for production and sales.

At present, another Joint Venture Company under Dongfeng Yuelong in a similar situation is Dongfeng Yueda Kia. There are reports that Dongfeng will withdraw from Dongfeng Yueda Kia next year, and if there is no accident, the equity held by Dongfeng may be taken over by Hyundai Kia. In recent years, dongfeng Yueda Kia's market performance has been unsatisfactory, and its sales volume in 2020 fell by 11.97% year-on-year.

Dongfeng Yueda Kia Automobile was jointly established by Dongfeng, Jiangsu Yueda and South Korea's Kia, with 25%, 25% and 50% of the three shares respectively, and Dongfeng's voice in Dongfeng Yueqia is not high. The general perception of the outside world is that Dongfeng's investment in Dongfeng Yueda Kia resources is not active compared with its other joint ventures, so the news of its withdrawal is not surprising.

In addition to meeting the needs of Dongfeng to clean up negative assets, this round of equity changes of Dongfeng Yueda Kia is also in line with the corporate direction of Dongfeng's comprehensive efforts to develop its own brands. In the industry's view, instead of keeping the joint venture brand that does not make money, it is better to save this part of the resources and energy for the development of independent brands or for other joint venture brands with better efficiency, which will be more conducive to Dongfeng's long-term goal.

Another car company that has attracted public attention this year due to the collapse of the joint venture is Mazda. In August, FAW announced the transfer of all its shares in FAW Mazda to Changan Mazda, and FAW Mazda bid farewell to the historical stage and merged into Changan Mazda. Usually, the "death" of the joint venture car company marks the defeat of foreign shareholders in the Chinese market, but the collapse of FAW Mazda has helped Mazda realize its long-cherished wish to unify its channels in China, which Mazda regards as the key to its return to the right track of development in China.

In addition, the merger of North-South Mazda has also created a new joint venture model. This is because the change in FAW Mazda's equity is different from the withdrawal of shares by ordinary joint venture car companies. At the same time as FAW Mazda merges into Changan Mazda, FAW will also acquire a 5% stake in Changan Mazda.

In other words, Changan Mazda will change from a joint venture between Changan and Mazda to a three-party joint venture between FAW, Changan and Mazda. Although the effect of the tripartite joint venture is still unknown, Changan Mazda has undoubtedly pulled faw from the equity level to the FAW line, and it is expected to obtain resource input from FAW in the future.