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Time for Chinese Brands to Go on Their Own

Date:05-08 16:55 Source:autochina.comnews.cn Authour:He Lun

Time for Chinese Brands to Go on Their Own

 

——Auto Market Hotspots Q&A (124)

Recently, the Ministry of Industry and Information Technology (MIIT), National Development and Reform Commission (NDRC) and Ministry of Science and Technology jointly issued the Medium and Long-term Development Plan for the Automotive Industry. This lengthy document mainly focuses on how to make Chinese-brand vehicles better and stronger, but one sentence seems to have caught the media’s attention and become the headline– “…the restrictions on the joint venture equity ratio should be loosened in an orderly manner.” Judging from the context, this is actually the second half of a sentence, which the document does not intend to stress, but it has triggered a heated debate in the media.

Q: What do you think about loosening the restriction on the JV equity ratio?

A: First of all, it is inevitable. We cannot, on one hand, promote economic globalization, but on the other hand, still impose the equity ratio restriction on foreign investors, because that would make us dissemblers. Secondly, Chinese car brands are now on the rise and no longer need that protection. Thirdly, all international car giants have already established joint ventures in China. Once the restriction is lifted, even if these international giants want to gain control of their existing JVs or establish other new JVs, they will still be constrained by other factors. Moreover, in order to survive and compete in China’s special environment, they have to rely on their Chinese partners’ strengths in domestic resources. I have talked about this issue many times (please refer to the articles “Why Isn’t Geely Afraid of the Shareholding Ratio Restriction Being Loosened?”, “Multinational Companies Are Struggling Most with the Removal of the Shareholding Restriction”, “Germany Cannot Handle the Auto Business Alone in China”, “Does Dongfeng Buying Shares of PSA Have Anything to Do with the Loosening of the Restriction on Shareholding Ratio?”, “Debate over Loosening of the Restriction on Shareholding Ratio Has Nothing to Do With Consumers” and “Can the Foreign Equity Cap in OEMs be lifted?”)

Q: Are Chinese brands really not afraid of the shareholding restriction being loosened?

A: We cannot make such a sweeping statement. Those who are the least afraid are private carmakers like Geely, Great Wall and BYD. They have never benefited at all from this shareholding restriction, and in some ways, they are actually the victims, because multinational companies can gain the advantage over these “unarmed” private carmakers by relying on the special resources of their Chinese JV partners. Li Shufu, Chairman of Geely, once spoke the truth – “Without the help of our Chinese partners, foreign carmakers will not win the government’s support and thus they will struggle very hard in the Chinese market.”

However, it is these “wild” and “unloved” private carmakers that have built the most competitive Chinese car brands. How embarrassing for the authorities who formulated the protective policy.

Q: So you are saying state-owned enterprises are afraid of loosening the restriction?

A: Again, we should not generalize in this way. In terms of who is most concerned, you can take a look back at the hot topic last July – “CAAM and large auto groups released a joint statement against rashly loosening the restriction on the shareholding ratio of joint ventures.” All the state-owned enterprises with fears are in there – FAW, Dongfeng, Changan and BAIC.

The Chinese brands run by these four groups are either suffering substantial losses or making very small profits and relying on financial support from their JV partners to survive.

The interesting thing is that SAIC and GAC did not join that group. The reasons are simple: SAIC’s Chinese brands achieved sales of only 320,000 vehicles last year, but they were already starting to make profits and maintained a strong upward momentum, while GAC Trumpchi did even better – it achieved sales of only 370,000 vehicles in 2016, but it made more profit than GAC did from its two JVs – GAC Toyota and Guangqi Honda. In contrast, Changan’s Chinese brands did not make any profit until it sold 1 million vehicles in 2015. According to Industrial Securities, in 2016, Changan’s own Chinese brands sold 1.28 million vehicles, but their net profit was only RMB 660 million Yuan. The product design, quality, technology and configuration of SAIC and GAC even surpassed some mainstream brands. The average price of their products is the highest among Chinese brands, though 40% lower than that of JV-brand models, but they have a powerful organizational capability. That’s why they are not afraid of the restriction being loosened; on the contrary, they can share synergies with JVs. So naturally they don’t want to join the opposition.  

Q: Just now, you said that even if the restriction was loosened, it would still not be so easy for multinational companies to gain control of their JVs. In other words, Chinese brands still have a lot of time to grow before being cut off from the financial support from JVs. So are these four auto groups overreacting a little bit to the loosening of the restriction?

A: Not exactly. They do have reasons for concern. Firstly, they probably have realized that Chinese brands are starting to polarize and that their own brands may end up on the losing side. So they must tie themselves fast to the JVs and prevent the multinational companies from extricating themselves. Secondly, even although the multinational car giants cannot gain control in the short term, with competition getting fierce, their profits will also fall, and may one day no longer be enough to support the Chinese brands. In that case, the Chinese partners will have even less say in the JVs.

For example, last year the Chinese brands of BAIC lost RMB 270 million, and Beijing Hyundai, the cash cow, also experienced falling profits though sales increased by 7.5% on a year-on-year basis (See the article “’Entrance Examination Year’ for Chinese Brands”). It appears that sales were maintained at the cost of profits. In the first quarter of this year, the auto market grew even more slowly. Under a double-pronged attack from mainstream Chinese brands and Japanese and American brands, Beijing Hyundai can no longer withstand the pressure – sales fell by 23.4% (See the article “Is It Necessary for Volkswagen to Roll out a Low-price Car Brand?”), not to mention the impact on profits. If things continue this way, how much ‘milk’ can this cash cow still produce for BAIC’s Chinese brands?

So overall, whether the restriction on JV equity ratio is loosened or not, time is running out for those Chinese brands that still feed off their JVs.

As for the reason for the polarization of Chinese brands, that will be my next topic. 


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