The joint venture share ratio has been officially liberalized – China's automotive industry may face a new round of reshuffle

From January 1, the 27-year restriction policy on the joint venture share ratio of automobiles was officially abolished, and the liberalization of the passenger car stock ratio that began to transition from 2018 was finally hammered, which should be a landmark event in the history of China's automobile development.

In 1984, Beijing Jeep set a precedent for Sino-foreign auto joint ventures, of which BAIC accounted for 68.65% and the United States accounted for 31.35%. In 1985, the Shanghai Volkswagen Joint Venture was formally established, with Both China and Germany holding 50% of the shares. After this, the first batch of joint venture car companies, including Guangzhou Peugeot, were established one after another.

Since the domestic automobile industry base was relatively backward at that time, China needed to attract foreign parties to invest in China and learn advanced technologies; foreign parties hoped to occupy a place in China's auto market. Therefore, cooperation is the best option to solve the problem, and "market for technology" has become the theme of industry development. In short, it is to take what you need.

However, in the early stage of cooperation, the automotive joint venture also encountered some problems. Taking The Santana produced by Shanghai Volkswagen as an example, after three years of assembly, santana has produced tens of thousands of vehicles, but only tires, radios and batteries can be localized, and the localization rate is as low as 2.7%. That is to say, the core technology of many parts and components has not been mastered, and the Chinese side only plays the role of FOUNDry.

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%, mainly to protect China's independent automobile industry from being impacted by foreign brands. In fact, only automakers with state-owned capital backgrounds were able to establish joint ventures with foreign parties.

Under the restrictions of the joint venture share ratio policy, the joint venture car enterprises have brought a lot of positive influence to China's automobile industry, helping China's automobile industry to quickly accumulate a large number of basic resources, cultivating a mature supply chain system and a modern vehicle manufacturing system, and more importantly, it has trained a large number of outstanding engineers and technicians, as well as management talents of various departments.

However, with the continuous development of China's automotive industry, the stock ratio limit, as a "product" of the times, is also being adjusted accordingly, which can be understood to some extent as a new round of reshuffle of the automotive industry.

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), which stipulates 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 ownership 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 that, Tesla became the first approved wholly-owned car company in China. Tesla Shanghai Gigafactory officially started construction on January 7, 2019, with a total investment of 50 billion yuan, which is also Tesla's first gigafactory outside the United States. According to Tesla's commitment, the annual sales revenue of the Shanghai factory will not be less than 75 billion yuan.

As Tesla's new export center, the Shanghai Gigafactory has delivered more than 400,000 units in 2021 to about 413,000 units thanks to intelligence, digitalization and an 86% parts localization rate. It is worth mentioning that the Model 3 and Model Y produced at the plant surpassed the Fremont plant in the United States for the first time in the third quarter of 2021, improving Tesla's global delivery speed.

In addition, in terms of the original joint venture brand, BMW was the first company to sell after learning that the restrictions on the share ratio were relaxed. The BMW Group acquired a 25% stake in the BMW Brilliance joint venture for 3.6 billion euros, which means that bmw's stake in the BMW Brilliance joint venture has changed from 50:50 to 75:25, and the transaction will be completed in 2022, making BMW Brilliance the first joint venture company controlled by a foreign party.

To some extent, the adjustment of the share ratio also means the redistribution of operating profits. Take BAIC Group as an example, in 2020, the group's net profit is nearly 13 billion yuan, and the profit of Beijing Benz accounts for about 90%, that is to say, the net profit contributed by Beijing Benz is more than 10 billion, if similar to BMW Brilliance, the equity of Mercedes-Benz will increase by 25%, then the profit of BAIC Group will be reduced by 5 billion yuan, which is visible to the naked eye.

Another one that has to be mentioned is Dongfeng Yueda Kia, whose shareholding structure is: Kia Co., Ltd., Dongfeng Motor Group Co., Ltd., and Yueda Investment have been established as a three-party joint venture, holding 50%, 25% and 25% each. On December 21, 2021, Jiangsu Yueda Automobile Group Co., Ltd. announced that Dongfeng Motor Group Co., Ltd. publicly listed its 25% equity interest in Dongfeng Yueda Kia Automobile Co., Ltd. through the Shanghai United Equity Exchange at a listing price of 29,701.468662 million yuan, and Jiangsu Yueda Automobile Group Co., Ltd. was the sole bidder. That is to say, after the completion of this equity transfer, the equity structure of Dongfeng Yueda Kia is: Kia Co., Ltd., Yueda Automobile Group, and Yueda Investment each hold 50%, 25% and 25%, and Dongfeng Motor Group completely withdraws.

In fact, Dongfeng Motor made this choice on the one hand, based on the imminent expiration of the joint venture period, and on the other hand, because of the poor performance of Korean cars in China. Dongfeng Yueda Kia sales began to decline sharply in 2017, with a maximum annual sales of 645,000 units, falling to 249,000 units in 2020, and sales in the first 11 months of this year bottomed out with only 137,900 units. According to the information disclosed by the Shanghai United Equity Exchange, in 2020, Dongfeng Yueda Kia achieved revenue of 21.940 billion yuan and a net loss of 4.750 billion yuan.

Written in the end: Although the policy allows the adjustment of the share ratio, the core of the joint venture relationship is whether the two sides have a complementary relationship. In addition to the above-mentioned Tesla, BMW Brilliance, Dongfeng Yueda Kia, for example, BYD and Daimler have also adjusted the shareholding structure of the joint venture company Denza, and the holding ratio of each has reached 90:10.

In addition, there are such as the beam car project jointly established by Great Wall and BMW, the smart motor automobile co., LTD. jointly established by Geely and Daimler to promote the transformation of smart to a high-end electric vehicle brand; and bydd and Toyota to establish a pure electric vehicle research and development company, and Toyota plans to use BYD's electric vehicle platform technology to create mass production products. The liberalization of the stock ratio may be seen as a new round of reshuffling of China's automotive industry, providing a better environment for those car companies that develop healthily, and of course, it will also allow those car companies that have developed "malnutrition" to eventually withdraw from the historical stage.