Govt ponders raising cap on foreign stakes in auto JV

An assembly plant of Zhejiang Geely. [Gao Erqiang / China Daily]

Ministry of Commerce still weighing pros and cons

A fierce debate is raging among auto industry insiders over a measure proposed by the Ministry of Commerce last year that would allow foreign partners in a joint venture to hold more than a 50 percent stake.

The ministry announced in November that industries like automotive and steel will be further opened to foreign investors, hinting that it may lift limitations on foreign share holdings in automotive joint ventures in the near future.

The cap on foreign holdings was put in place two decades ago, when the Automotive Industry Development Policy prohibited foreign companies from holding more than half of a joint venture with a Chinese company.

The Automotive Industry Development Policy released in 2004 retained this cap.

Now that China has emerged as the world's largest auto market by sales, more and more foreign automakers are eyeing its potential and seeking a greater piece of the pie.

The limitations were set as a protective measure for the nation's fledgling domestic automotive industry, which at the time was represented by mostly State-owned manufacturers.

As more private capital is flowing into the market and independent domestic automakers are becoming bigger and stronger, many local brands see something to be gained in partnering with foreign companies and require more flexibility in capital markets.

During the ongoing sessions of the National People's Congress and the Chinese People's Political Consultative Congress, this issue was brought into spotlight again.

Representatives from the auto industry and government officials held a meeting on the sidelines of the "Two Sessions" to discuss how to boost the industry.

Miao Wei, minister of industry and information technology, said that the 50 percent limit for foreign partners cannot be lifted at present, but he admitted the possibility for a flexible share structure in the near future.

He urged domestic automakers to grow stronger as fast as possible before time is mature for an ease of the limitation.

"We will try our best to give you time to prepare. The ultimate goal is to support our domestic brands and make them competitive enough on a global scale in the process," Miao said.

At the meeting, executives from the four major State-owned automakers - FAW, Dongfeng, Chang'an and GAC - expressed their objection to the change.

"The limitation should not be eased at the moment, definitely. The measure is still effective to date to help local manufacturers grow both bigger and stronger. The automotive industry is our economic pillar, different from other ordinary manufacturing industries," said Wu Shaoming, deputy general-manager of the FAW Group.

"Self-developed technologies are crucial to the nation's automotive industry. We should not rely too much on foreign companies to support our national industry. We should learn from the lessons of Brazil and Russia," said Liao Zhenbo, director at the strategy plan department of Dongfeng Motor Corp.

Dong Yang, deputy director and secretary-general of the China Association of Automobile Manufacturers, also said that the stock proportion should not be loosened at the time. He proposed that domestic automakers should double their R&D investment to catch up with the levels of companies in developed countries.

Executives from GAC and Chang'an said domestic automotive industry has not got fully prepared for stock proportion ease.

Different opinions

However, delegates from some privately owned automakers have different opinions.

Zhejiang Geely Holding Group Chairman Li Shufu said the current stock limitation only helps State-owned companies monopolize the market with "too many joint venture products".

"Opposing the loosening of the stock proportion is actually a selfish attitude in the name of supporting national industry. Vehicles from joint ventures are sold at higher prices than in Europe, US and Japan, " Li said.

He said the existing share structure ensures that State-owned enterprises can secure handsome profits from joint venture products, therefore they are reluctant to invest in self-developed products and brands.

For private automakers like Geely - which were far weaker than the giant SOEs in their early stage - a 50 percent stock ceiling only left them in the unfavorable position to win foreign partners. So they have to devote more energy in developing their own brands and products without help from foreign manufacturers.

"Growing from difficulties and fierce competition, we are readier for a more open and fairer market than others," Li said.

He said the stock proportion policy should not just protect the interests of several automakers.

"It will harm the entire nation's competitiveness in the long term."