Current Location:Home > COMMENTARY > LIANDING >

Still Sticking to the “Shareholding Ratio Restriction”? Let’s Hear What the Imaginary Enemy Says

Date:08-08 10:49 Source:autochina.comnews.cn Authour:Li Anding

From what I understand, in today’s China, if the restriction on shareholding ratio is ever loosened, it will be nothing but an economic and diplomatic initiative adopted by the country to fulfill its obligations in acquiring market economy status, and whether there will be any change in the capital structure in the Chinese auto industry will be subject to discussions and negotiations between specific JV partners.

Lossening the restriction on shareholding ratio will be favorable for the country to fulfill its obligations in acquiring market economy status.

Still Sticking to the “Shareholding Ratio Restriction”? Let’s Hear What the Imaginary Enemy Says

Among the conservatives who still support the “shareholding ratio restriction” are some well-known figures in the auto industry. I have known and supported them for years. They are knowledgeable, experienced and sentimental. They firmly insist on keeping the restriction on shareholding ratio because they believe it is not only in the best interests of the auto industry, but also in China’s national fundamental interests.

What are the national fundamental interests? President Xi Jinping recently pointed out at a meeting with European Commission President Jean-Claude Juncker that the key lies in acknowledging the inevitable trend of world multi-polarization and economic globalization, in realizing the common appeals for peace and development of all peoples, and in adhering to the path of win-win cooperation. Both sides should uphold the principles of mutual respect and equal treatment to manage, control and reduce differences in a constructive way. Therefore, I believe participating in setting and complying with globalized and market-oriented rules is what China should do as a country of growing international influence.

This gloomy prediction is illusory

Now let’s take a look at the industry interests. In the past, the Chinese auto industry was sheltered under the umbrella of protective policies as it was still an infant industry. But now that China has been in the WTO for 15 years and has become the world’s largest auto production and sales power, does this industry still need to beg the country to feed it “infant milk”? Watching local state-owned enterprises founded in the 1980s like SAIC, GAGC, Chery and Brilliance, privately-owned auto makers founded in the 1990s like Geely, Great Wall, BYD and Trumpchi, and local independent brands built in the 2000s born and growing as “first-born children” in the fiercest of competition, don’t we ever feel embarrassed at those still crying for another 8-year probation before the restriction on shareholding ratio is loosened?

This gloomy prediction is built on an illusion: once China releases the regulation that loosens the restriction on the shareholding ratio of automobile joint ventures, multinational companies - the “imaginary enemy” – will immediately jump for joy, tear up JV contracts, buy part or most of the shares from the Chinese side and dominate the joint ventures. The Chinese side, on the other hand, will be at their mercy. So in the eyes of these conservatives, after the restriction on the shareholding ratio is loosened, foreign companies will absolutely further inhibit the development of local auto makers and also take such extreme measures as promoting sales by lowering prices, cutting off supply chains, and acquiring brands at high prices – all of which will result in total catastrophe for local brands. This is totally alarmist. As an old saying in Beijing goes: you whistle in the dark only to scare yourself.

The reason why the restriction on shareholding ratio is loosened

From what I understand, in today’s China, if the restriction on shareholding ratio is ever loosened, it will be nothing but an economic and diplomatic initiative adopted by the country to fulfill its obligations in acquiring market economy status, and whether there will be any change in the capital structure in the Chinese auto industry will be subject to discussions and negotiations between specific JV partners.

First of all, Chinese partners of JVs are entitled to keep the shareholding ratio unchanged. Even if a foreign partner has a wish to increase its shares, it must get full approval from its Chinese partner. This is a rule of and a constraint to JV operations. If the Chinese partner sees the JV as a cash cow and rejects any change to the shareholding ratio, then both partners will have to keep the existing ratio for the duration of the contract.

Second, foreign partners do not are neither inclined nor entitled to change the shareholding ratio. With a 50:50 capital contribution ratio, JV partners basically share equally in investment and return. Having the dominant right in brand and product launch, foreign partners will also enjoy return spillover in the longer industry chain. What is more, they can benefit from Chinese partners’ resources in government, market, manpower and even in new internet technologies. So sticking to the original shareholding ratio and making some “safe money” in this stable environment is no bad choice.

Prof.Dr. Jochem Heizmann’s view on lossening the restriction on shareholding ratio

There is an old Chinese saying: listen to both sides and you will be enlightened. People with a discerning eye can easily see that in this heated debate, the “other parties” involved - the foreign partners - are keeping their own counsel. What they think and what they say is being intentionally or unintentionally ignored, or even distorted. So suddenly it hit me that, instead of analyzing the messages that the conservatives are trying to send, we might more usefully hear directly what the senior executives of multinational companies have to say.

Volkswagen and GM are both leading companies in the global auto industry, and they were also among the earliest US and European auto makers to enter China, despite the uncertainties in the Chinese market at that time. Their joint ventures in China have achieved remarkable results and their products have been widely welcomed by Chinese consumers.

I raised two blunt questions to Prof. Dr. Jochem Heizmann, Director of Volkswagen Group and President of Volkswagen Group China: first, if the Chinese government loosens the restriction on shareholding ratio, will Volkswagen immediately ask to increase its share to more than 50%, so as to become the majority shareholder, as some have feared? Second, as a powerful multinational company, does Volkswagen have any plan to utilize its strengths in technology and capital to the detriment of local brands?

Heizmann replied: “We embrace any rule as long as it facilitates fair and equal competition, and especially each of the steps the Chinese government is taking towards integration with the world. To date, we have worked very well with the Chinese partners in our joint ventures in China and achieved satisfactory results. Volkswagen would not be so successful if it wasn’t for the Chinese partners. So I agree with you - any change in the shareholding ratio should be discussed and agreed on by both JV partners. For both of them, the ultimate goal is to achieve a win-win situation.

He continued: “Whether the restriction on shareholding ratio will be loosened is more of a concern to joint ventures that will be founded in the future, but for FAW-VW and SAIC-VW - two joint ventures that have been running successful operations in China - any proposed adjustment to the shareholding ratio will not have much direct impact on Volkswagen. As for the concern you just mentioned about whether Volkswagen will smother Chinese local brands, my answer is NO! NO! NO! Volkswagen has no such intention in China, nor does it have the power.

Qian Huikang’s view on lossening the restriction on shareholding ratio

I asked a very similar question to Qian Huikang, Executive Vice President of GM Global and President of GM China: If the Chinese government loosens the restriction on shareholding ratio, will GM immediately ask its Chinese partner for an increase in its share? Qian too answered NO. He said GM’s success in the past twenty years in China was the result of hard work by both GM and its partner and that the shareholding ratio must always be a joint decision made by both sides or multiple parties. He also added that no matter how the Chinese shareholding ratio policy was going to change, GM and its partner would carry on offering high-quality products and putting consumers first.

As to the question whether GM will utilize its advantages in technology and capital to smother local Chinese brands, Qian answered: We are very pleased to see the rapid development of local Chinese brands in recent years. The Chinese market has very diverse demands for automobiles, providing development opportunities in every market segment, and the competitive mechanism is also quite mature. Competition is good for the Chinese auto industry and of course can facilitate the sound development of local brands. Finally, Chinese auto consumers will be left with more choices. This situation was totally impossible 20 years ago.

The “imaginary enemy” gave a formal and frank answer, which is in sharp contrast to the conservatives’ concerns. Multinational companies are not Lei Feng or Norman Bethune, but once you know what they have done and gained in China, you can reasonably predict what they are likely to do in the future. There is no doubt that competition will get even fiercer. In such a close fight, some local brands may rise, and some JV brands may fall. In the end, only those with the best products will survive. This might sound a little sad, but that is what Chinese consumers would want to see.


©copyright 2015 autochina.comnews.cn