Current Location:Home > COMMENTARY > LIANDING >

Anding Exclusive - About Shareholding Restriction

Date:08-18 17:39 Source:autochina.comnews.cn Authour:Li Anding

the 50% Shareholding Will Not Help You Get to Grips with the Core Technologies

In my opinion, extending the shareholding protection for another 8-10 years is just a conservative way to keep the barriers between the Chinese and the foreign sides of joint ventures, while lifting the restriction is actually opening a “two-way street”. The Chinese auto industry should dare to move from the defensive to the offensive - just as Li Shufu did when he acquired 100% of the shares in Volvo.

Lifting the restriction is actually opening a “two-way street”.

Anding Exclusive - About Shareholding Restriction

Joint ventures should regard themselves as “mistresses”.

I once attended a launch event held by a joint venture. At the event, I felt very uncomfortable about the opening remark of the general sales manager on the Chinese side. He said, “I have good news for everyone. We have successfully renewed our JV contract with the foreign partner for another 20 years!” Indeed, this was good news for him – He could now rest at ease because with the contract renewed, the shareholdings could be maintained for another 20 years and they could continue to share profits equally with the foreign partner without having to worry about any impact brought by the policy adjustment.

It is understandable that this manager thinks this way, being in his position. But I think joint ventures should regard themselves as “mistresses”. Don’t even think you can grow old with your foreign partner. Only an M&A between perfectly matched multinational companies could be called a “genuine marriage”. So while you will keep such advantages as large market and low labor cost, you might well save some cash for your Chinese parent company. But don’t delude yourself that you can master the core technologies in the next 8-year protection period.

While the conservatives who stick to the shareholding restriction are worried that foreign companies will be greedy once the restriction is lifted, my concern is that when these “mistresses” no longer have advantages in market and cost, multinational companies will withdraw their capital and look for new “lovers” in India, Vietnam and other Southeast Asian countries.

The history of joint ventures has ups and downs all the way

Joint ventures first appeared in China more than 30 years ago when I was just starting my career as a journalist. As a witness of the history of joint ventures, I have seen their ups and downs all the way.

The ten years from 1982 to 1991 was the nurturing and trial period for automobile joint ventures. Due to an extreme shortage of funds and technology, the Chinese auto industry was initially forced to resort to joint ventures. In 1982, Deng Xiaoping instructed on the report of China National Automobile Industry Corp. – “It is acceptable to establish joint ventures for cars.” In 1984, three local joint ventures - Beijing Jeep, SAIC Volkswagen and Guangzhou Peugeot – were established. In 1987 the central government decided to establish pillar auto makers headed by two central enterprises FAW and SAW, which ultimately had to establish joint ventures (FAW-VW and Dongfen-Citroen) with multinational companies.

In the following decade from 1992 to 2001, all joint ventures except SAIC-VW went through a hard time. FAW-VW suffered losses year after year, and as a result, the Chinese side asked Volkswagen not to disclose the operating data of the joint venture in the annual report. Despite years of hard work, Citroen still failed to achieve an annual production capacity of 80,000 vehicles – half of the design capacity. Guangzhou Peugeot even became insolvent, forcing the French partner to sell its shares for a symbolic 1 franc. It was not until the turn of the century that SAIC-VW, FAW-VW and SAIC-GM began to find their feet as the three representatives of the Chinese car industry, under the protection of high tariffs.

In 2001, the 13-year negotiation on accession to WTO finally came to a close, with China still keeping a five-year “buffer period”, and preserving the 50:50 shareholding restriction for an indefinite period in its car industry. After China joined the WTO, its auto market was “half-opened” to the world. Almost all the multinational auto makers around the world started to establish joint ventures in China. With globalization and the explosion in demand for family cars, the Chinese auto market experienced a “ten-year blowout” –annual car production was increased sharply from 700,000 vehicles to nearly 20 million. Thanks to the 50:50 shareholding restriction, both the Chinese and the foreign partners made huge profits.

Around 2005, the central government decided to support local brands and encourage independent innovation. Due to their inhibiting effect on development capability, joint ventures were criticized by the whole of society as the “shame” of the auto industry. The authorities asked joint ventures to develop independent JV brands to meet the mandatory requirement of increasing the percentage of domestic brands raised by the central government. However, this move was strongly criticized by privately-owned enterprises as a measure to help multinational companies kill off independent domestic brands. Fortunately, large automobile groups gradually realized this problem and started to build their own brands with the money earned from and the talent trained in the joint ventures, and in this way fulfilled their obligations as central and state-owned enterprises to make China an automobile superpower.

Lifting the restriction is actually opening a “two-way street”

Today, these joint ventures are actually OEMs. After 30 years of struggle, we have learned how to manufacture and manage. Now factories in China are all prototype plants for various multinational companies around the world. As for R&D and core technologies, a general manager of a joint venture once told me the truth – brands, product planning and R&D facilities are all in the hands of multinational companies and have nothing to do with the Chinese side. You are daydreaming if you think you can systematically get hold of their core technologies with your 50% shareholding.

In my opinion, extending the shareholding protection for another 8-10 years is just a conservative way to keep the barriers between the Chinese and the foreign sides of joint ventures, while lifting the restriction is actually opening a “two-way street”. The Chinese auto industry should dare to move from the defensive to the offensive - just as Li Shufu did when he acquired 100% of the shares in Volvo.

We are very pleased to see that in recent years, SAIC, BAIC and GAGC have put in a lot of effort to build their own brands. They have made R&D in such local brands as Wuling, Roewe, Saab and Trumpchi their top priority, and are gradually transferring the technologies, funds and talent accumulated in the joint ventures to develop products that can rival high-range models of multinational companies. This is just what Xu Heyi, Board Chairman of BAIC, says - “constantly accumulate resources and slowly utilize them”. We need to remind ourselves that when Rao Bin and others first established joint ventures in China, their original intention was to let local auto makers participate in international competition with the help of multinational companies’ brands (for example, Wuling is exported under the brand name of Chevrolet), standards and channels, so as to know everything about the whole value chain.

(Author: independent auto commentator and senior reporter of the Xinhua News Agency)


©copyright 2015 autochina.comnews.cn