Passenger car joint venture share ratio restrictions are about to be released The "profit cow" battle is about to begin

Economic Observer Network reporter Zhou Ju With the release of the new version of the negative list for foreign investment access, the restrictions on the joint venture share ratio of the automobile industry will be completely relaxed after 27 years of implementation.

On 27 December, the National Development and Reform Commission and the Ministry of Commerce issued the Special Administrative Measures for Foreign Investment Access (Negative List) (2021 Edition) and the Special Administrative Measures for Foreign Investment Access in Pilot Free Trade Zones (Negative List) (2021 Edition). According to the new version of the negative list, from January 1, 2022, China will remove the restriction on foreign ownership in passenger car manufacturing and the restriction that the same foreign company can establish two or less joint ventures in China to produce similar vehicle products.

This means that the passenger car joint venture share ratio limit will be officially "opened" after nearly 30 years of implementation. According to the Special Administrative Measures for Foreign Investment Access (Negative List) (2018 Edition) issued in June 2018, the restrictions on foreign investment in the automobile manufacturing industry have been implemented for a three-year opening transition period. Among them, the restriction on the share ratio of special vehicles and new energy vehicles will be abolished in 2018; the restriction on the foreign ownership ratio of commercial vehicles will be abolished in 2020, and the restriction on the proportion of foreign shares in joint ventures will be abolished at the same time; and the restriction on the proportion of foreign shares in passenger car manufacturing will be abolished in 2022.

In addition to the joint ventures of electric vehicles such as Volkswagen and JAC, Great Wall and BMW, Mercedes-Benz and Geely since 2018, in 2020, a number of wholly-owned enterprises including Scania, Volvo and Sichuan Hyundai have also poured into the commercial vehicle field.

Today, this open plan is at its final stage at a rhythm. In 2022 and beyond, whether it is a new energy vehicle or a traditional fuel vehicle project, foreign car companies can not only increase their shareholding ratio to more than 50% or even achieve sole proprietorship, but also establish more than two joint ventures.

Unlike the previous situation where the joint venture share ratio of electric vehicles basically only involves new joint ventures, the full liberalization of the passenger car stock ratio will bring far-reaching changes to the camp of traditional joint venture car companies that have existed for many years. Because before that, the signs of foreign parties wanting to increase their shareholding in joint ventures have appeared frequently, including BMW, Volkswagen, Daimler and so on.

BMW Brilliance is the first passenger car joint venture to reach an agreement to increase foreign ownership. As early as 2018, BMW reached a strategic agreement with Brilliance Group, saying that it would increase BMW Brilliance's shareholding ratio from 50% to 75% by 2022. Now, 2022 is approaching, but the agreement on BMW's capital increase and share expansion has not yet been finally implemented, which is believed to be related to the fact that Brilliance Group is in the bankruptcy reorganization stage and the restructuring plan has not been released.

In addition to BMW Brilliance, Volkswagen is also eager to increase the equity of the joint venture. Previously, Volkswagen has repeatedly expressed its desire to increase its stake in a joint venture in China, but in the absence of a share increase, Volkswagen took new energy as a new foothold last year, increasing its stake in JAC Volkswagen to 75% in December 2020. With the complete relaxation of the restrictions on the share ratio, the increase in the public's holdings in the north and south of the public may set off a new round of mediation. At present, Volkswagen accounts for 40% of the total equity of FAW-Volkswagen and 50% of SAIC Volkswagen.

The change in Daimler's stake with its Chinese partner BAIC Group is also of great concern. Recently, BAIC Group officially announced that it has held 9.98% of the shares of Daimler Group through continued investment in 2019, which means that BAIC has surpassed Geely to become the largest shareholder of Daimler Group. At the same time, Daimler will also hold 9.55% of the shares of BAIC Group listed companies in Hong Kong and 2.46% of the A shares. After the restrictions on the share ratio are completely relaxed, it is worth paying attention to whether the equity between the two parties has changed again. In the current Beijing Benz joint venture, the equity ratio of BAIC and Daimler is 51:49.

After the liberalization of the shareholding ratio restriction, the equity change of the joint venture company has attracted attention mainly because the traditional joint venture car companies have always been the "profit cow" of the domestic automobile group, and at the same time, based on the huge scale and sustained growth potential of the Chinese automobile market, the foreign party also regards the Chinese joint venture company as an important profit output platform. It can be expected that with the official liberalization of equity restrictions, the equity competition of the joint venture parties may be concentrated.

Taking BMW's 25% increase in equity according to the agreement as an example, the biggest impact of the foreign equity increase on the Chinese side is that it will lose the corresponding proportion of profit division rights.

According to data available from publicly available sources, in 2019, Volkswagen's two joint ventures in China earned an operating profit of 4.4 billion euros, or nearly 32 billion yuan. Based on the proportion of equity, this means that the profits obtained by the Chinese FAW and SAIC from Volkswagen's joint venture in China are at least higher than Volkswagen's 32 billion yuan. If calculated according to the general desire of foreign investors to increase their equity by 15%-25%, China will lose about 10 billion to 16 billion yuan.

SAIC-GM's net profit contribution to SAIC motor in 2020 is 4.103 billion yuan, and if GM increases its stake in the joint venture from the current 50% to 65%-75%, then SAIC's net profit will be reduced by about 1.2 billion to 2 billion yuan.

In addition, BMW Brilliance brought a net profit of 7.626 billion yuan to Brilliance in 2019, such as BMW will increase its equity to 75%, Brilliance's net profit will be reduced by at least 3.8 billion yuan; Beijing Motor (HK 1958) 2020 net profit of nearly 13 billion yuan, according to previous calendar data, Beijing Benz's contribution rate is about 90%, that is, the net profit contributed by Beijing Benz is likely to exceed 10 billion, if The equity of Mercedes-Benz is increased by 15%-25%, then the profit of Beijing Motor will be reduced by 3 billion to 5 billion yuan.

Based on this calculation, once the equity of the Chinese and foreign parties of the joint venture car enterprises increases by 15%-25%, the profits that chinese shareholders may lose range from as little as a few billion to tens of billions. The same is true of Japanese joint ventures such as Honda, Toyota, and Nissan. In the face of huge profits, it is difficult to avoid the share ratio battle of joint venture car companies.

However, after nearly two years of market turmoil and reshuffle, not all joint venture car companies can still maintain the positioning of "profit cow". For some joint venture car companies that are not in a good state of survival, the change of equity is also happening, but it is not an equity competition, but the shareholders are busy exiting. For example, the recent "dissolution" of Dongfeng Yueda Kia, dongfeng officially announced its withdrawal, and the previous dissolution of Dongfeng Renault, Dongfeng Yu Grand Rectification, and the integration of North and South Mazda are all performances of the joint venture party's timely stop loss. In addition, for Beijing Hyundai, Changan Ford, DPCA, etc., which have performed relatively weakly in recent years, the equity aspect is also considered to be adjusted.

Needless to say, with the restrictions on the share ratio of the auto industry being lifted after 27 years of implementation, the auto industry will usher in a new round of adjustments from 2022 onwards.