The restriction on foreign ownership in passenger car manufacturing will be lifted next year, and the automotive industry is expected to usher in a reshuffle

China's auto manufacturing sector will be further liberalized next year.

On 27 December, the National Development and Reform Commission (NDRC) announced the Special Administrative Measures for Foreign Investment Access (Negative List) (2021 Edition), which abolishes the restriction on foreign ownership in passenger car manufacturing and the restriction that the same foreign company can establish two or fewer joint ventures in China to produce similar vehicle products.

For more than two decades, China has been strictly restrictive about the shareholding ratio of joint venture car companies.

From 1984 to 1985, the first batch of joint venture car companies in China, including Beijing Jeep, Shanghai Volkswagen and Guangzhou Peugeot, were established one after another, and since then, the joint venture car companies have developed rapidly in the Chinese market.

In 1994, the "Automobile Industry Policy" was promulgated, stipulating that the foreign capital of vehicle enterprises in China's joint venture projects should not exceed 50%. At that time, the foundation of China's automobile industry was relatively weak, and it was necessary to exchange the market for technology. The move is mainly to protect China's independent automobile industry from the impact of foreign brands.

On June 28, 2018, the National Development and Reform Commission and the Ministry of Commerce officially issued the Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Edition) stipulating that the automotive industry will implement a transition period of opening up by type, and the restriction on foreign ownership of special vehicles and new energy vehicles will be abolished in 2018; the foreign equity ratio limit for commercial vehicles will be abolished in 2020; the foreign ownership limit for passenger cars will be abolished in 2022, and the restriction on no more than two joint ventures will be abolished.

After the 2018 version of the negative list of foreign investment access removed the foreign ownership restriction on new energy vehicles, Tesla became the first automobile company in China to build a wholly-owned factory. Since tesla's Shanghai gigafactory was put into operation, Tesla has become an uncompromising "catfish" that has stirred up the development of China's new energy vehicle market.

The number of shares often determines the right of the joint venture parties in the operation of the enterprise. With the introduction of the new policy, whether to maintain the status quo or expand the proportion of one party will become a choice that many joint venture car companies have to make, and the automotive industry may usher in a reshuffle.

Cui Dongshu, secretary general of the Passenger Car Market Information Joint Association, once analyzed that the product strength of some joint ventures has been slow to improve, the introduction of new technologies is lagging behind, and some joint ventures have suffered serious losses in profits in this year's "lack of core" environment due to the rigid supply chain. After the liberalization of the joint venture share ratio in 2022, the withdrawal of one party to some joint ventures is a reasonable choice.

Cui Dongshu said that the most important task of the joint venture is to make a profit, and if the company continues to be unprofitable, its existential value is also worth thinking about. At present, the operating status of joint ventures has a tendency to differentiate.

In the past two years, with the rise of traditional independent brands and new car companies, the main position of joint venture brands has been shrinking. According to the data of the Association, in November this year, the retail sales of mainstream joint venture brands in the Chinese market were 780,000 units, down 23% year-on-year; the retail sales of independent brands were 830,000 units, an increase of 2% year-on-year.

Looking at the new energy vehicle market, the performance of joint venture brands is even more dismal. According to the data of the Association of Automobile Associations, the domestic retail penetration rate of new energy vehicles has reached 20.8% in November this year, of which the penetration rate of new energy vehicles in independent brands is 37.4%, and the penetration rate of new energy vehicles of mainstream joint venture brands is only 3.6%.