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“Sticking to the Shareholding Ratio Restriction” Is Too Old-Fashioned

Date:08-05 10:56 Source:autochina.comnews.cn Authour:Li Anding

With China’s economy joining the global ranks, China is actually making its way into the economic “World Cup”, where all participators are equal before the rules. When the shareholding ratio restriction is loosened, the competition will become fierce, but none of the local brands like Geely, Chery, Brilliance, Great Wall, Roewe, Trumpchi and BYD will be killed off; rather, they will become stronger.

Protection makes idiots and competition makes masters.” The first half of the sentence has become reality while the other half is for the promising Chinese auto makers and the talents working for them.

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In the debate over whether to loosen the restriction on the shareholding ratio of automobile joint ventures, the “conservatives” have always proclaimed the need to safeguard China’s auto industry and protect local brands, and taken a nationalist stance on the moral high ground while labeling the “liberals” as traitors. However, in two particular cases this seems a very odd label to apply. One is Li Shufu, BOD Chairman of Geely Automobile, known as the standard-bearer for privately-owned Chinese automobile manufacturers and one of the most important figures in Chinese local brands; the other is Li Anding, former Senior Reporter of Xinhua News Agency and the first automobile journalist in China. No journalist has done more for the sound development of domestic brands. If you are concerned about the loosening of the shareholding ratio restriction, you really need to listen to what he says.

—— He Lun

Editor-in- Chief, Auto Weekly, International Business Daily

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“Sticking to the Shareholding Ratio Restriction” Is Too Old-Fashioned

We must stick to the 50:50 shareholding ratio in auto joint ventures in China; otherwise automobiles in China will be totally controlled by multinational auto makers and local brands will be stifled. Every three or four years, auto industry organizations and representatives from central enterprises would repeat these terrifying words at meetings – with absolute patriotic sincerity, in an attempt to discourage the government macro-regulatory department from making gradual adjustments to the restriction on the shareholding ratio of automobile joint ventures. To their delight, their words worked every time, dooming any attempt to loosen the ratio restriction again and again.

In 1994, when China was determining the restriction on the JV shareholding ratio, there were fewer than 300,000 cars produced in China. At that time, it did make some sense when people said multinational companies would destroy our Chinese automobile manufacturing. But times have changed. Today there are 20 million vehicles produced every year in China, making this country the largest car producer in the world. But still the “conservatives” employ a theory proposed 20 years ago; not a word has changed. Brothers, though we were once on the same side on some other matters, now I truly feel embarrassed for you.

Several years ago, I participated in this debate as a “liberal”. “Protection makes idiots and competition makes masters”, I said. This time round I didn’t feel like talking about it at first. Loosening the shareholding ratio restriction is no more than an economic and diplomatic initiative adopted by the country to fulfill its obligations in acquiring market economy status; it will have little impact on the capital structures of auto makers in China. However, with nationalism surging today, it seems that this terrifying theory will be passed down from generation to generation. On second thought, I decided to have my say.

The origin of 50:50 shareholding ratio

The 50:50 shareholding ratio adopted in automobile joint ventures was originally a result of negotiation and even collaboration between the Chinese and the foreign sides. In the 1980s, with the future still hanging in the balance, joint ventures were moving forward very cautiously. Both the Chinese and the foreign partners wanted the other side to take more of the responsibilities and risks. When Shanghai Volkswagen was founded, the German partner gave up its right of sales. The 50:50 shareholding ratio was a balance reached between the two sides. Dr. Carl Hahn, then Chairman of Volkswagen Group once told me in an interview that in Volkswagen’s opinion, no matter how many shares it held, the joint venture could not survive without the support of the Chinese partner. Another German executive of the JV also once indicated that when a small number of foreigners were facing thousands of Chinese, the first priority was to avoid being trampled underfoot by this huge group.

The 50:50 shareholding ratio was later fixed in the first version of Policy on Development of Automotive Industry released in 1994 and also became the condition that China insisted on in order to protect the Chinese auto industry during negotiations on accession to the WTO.

Loosening the shareholding ratio restriction is not a policy that could destroy the country

20 years later, with radical changes having taken place in both the Chinese and the global auto industry, loosening the shareholding ratio restriction and even allowing foreign investors to establish wholly foreign-owned companies in China is in no way a policy that could destroy the country. As a matter of fact, ever since 1980, as a keen observer of China’s auto industry, I have seen some people do ignoble things in the name of safeguarding the interests of the Chinese auto industry.

In 2001, before China joined the WTO, representatives from central enterprises and a few industrial organizations - clouded by fears that Chinese automobiles might be completely wiped out after multinational auto makers entered the industry - held discussions and meetings, arguing that “the national team cannot afford to lose” and that “we must defend ourselves against all enemies”. As a result, state-owned and privately-owned auto makers from “outside the industry” like Chery, Geely, Brilliance and Yueda were all kept out of the market. At that time I saw Chery’s factories filled with finished cars, but it just could not get a permit to launch them into the market; Li Shufu from Geely visited the authorities several times only to be faced with complete rejection. Just before China joined the WTO, those independently developed Chinese local brands were at great risk!

In the global financial crisis in 2009, Geely seized the opportunity and acquired 100% of the shares in the luxury brand Volvo, bringing credit to Chinese automobile manufacturers. However, when Li Shufu tried to have Volvo cars produced in China, people argued that according to the shareholding ratio policy, Volvo must establish a joint venture with a 50:50 shareholding ratio in China. With approval procedures being delayed for three years, Geely and the wholly Chinese-owned Volvo missed a lot of precious market opportunities.

In 2014, I said bluntly to Xu Xianping, General Manager of FAW, that the fall of the first local car brand in China – Xiali - was my saddest moment. That could not be blamed on multinational companies and joint ventures.

The shareholding ratio can be adjusted only if agreed upon by all shareholders

An enterprise uses its own logic and makes its own choices in investment and operations. Today there may genuinely be some multinational auto makers who want to break the shareholding ratio limit, but anyone with a little understanding of modern enterprise management will know that the shareholding ratio can be adjusted only if agreed upon by all shareholders. With the Chinese side being so strong in each of the auto joint ventures, even if the restriction on shareholding ratio is finally loosened, the foreign side still cannot increase its shares without the consent of the Chinese side. Volkswagen has constantly called for the original 60:40 Sino-Germany shareholding ratio to be adjusted to 50:50 - which is allowed by the current policy - but the Germany company worked on this for three years without success, until the prime ministers from the two countries held face-to-face talks and Volkswagen agreed to satisfy other conditions. What is more, this move was then postponed due to Volkswagen’s lack of funds.

Speaking of wholly-owned companies, supposing Tesla establishes a wholly-owned factory in China, will it do any harm to local auto parts enterprises and domestic talent development? Can a Tesla car worth hundreds of thousands of Yuan compete with BAIC’s new energy cars and ZD electric cars on cost? I wonder if Donald Trump would ever agree to transfer job opportunities to China?

The local brands will become stronger

Multinational companies have established many wholly foreign-owned factories and companies in China, but look what is happening here - local internet, electronics, mobile phone and furniture companies have not been destroyed at all. On the contrary, they are becoming more competitive. Why is the auto industry still sheltering under this shareholding ratio umbrella? They say it is because we have not yet grasped the core technologies from foreign companies and for that the country is being asked again and again to postpone loosening the shareholding ratio restriction. But the question is … have you not been learning all this time? And will it really take you twenty more years to finally grasp the technologies?

In this globalized market, when Geely acquired 100% shares of Volvo, the Swedish did not call their government a traitor. With China’s economy joining the global ranks, China is actually making its way into the economic “World Cup”, where all participators are equal before the rules. You cannot forbid foreign teams to shoot at the goal while allowing the Chinese team to score goals at the same time. When the shareholding ratio restriction is loosened, the competition will become fierce, but none of the local brands like Geely, Chery, Brilliance, Great Wall, Roewe, Trumpchi and BYD will be killed off; rather, they will become stronger.

“Protection makes idiots and competition makes masters.” The first half of the sentence has become reality while the other half is for the promising Chinese auto makers and the talent that works for them.


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