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Three Questions about the Volkswagen-Jianghuai Partnership

Date:09-18 10:26 Source:autochina.comnews.cn Authour:Zhu Shiyun

According to Volkswagen’s press release, Mr. An Jin, Chairman of JAC, calls the intended cooperation between these two companies a “Creating Together” model. It is generally believed in the industry that this model will break the limit on the number of local partners a foreign auto company is allowed to have in China imposed by the Chinese auto industrial policy. But at the same time, will Volkswagen’s two existing joint ventures face a new rival? Is “JAC-Volkswagen” going to be another ordinary joint venture or does it have any surprises in reserve for us?

This partnership between Volkswagen and Jianghuai will concentrate on new energy vehicles.

Three Questions about the Volkswagen-Jianghuai Partnership

On September 7th, Volkswagen Group and Anhui Jianghuai Automobile (JAC) signed a Memorandum of Understanding (MOU) to define the next phase of negotiations between the two companies in order to achieve long-term cooperation in the joint development of all-electric vehicles in China. On October 30th last year, while accompanying German Chancellor Angela Merkel to visit the JAC passenger vehicle production base, Premier Li Keqiang said, “Just now one of you told me that you wanted to cooperate with Volkswagen. I will send your message to their Chairman by tomorrow noon.” Almost one year has passed and this alliance proposed by Premier Li has finally accomplished the first step. The announcement made by JAC later revealed more details – the two companies expect to sign a formal agreement within five months of signing the MOU, and according to the equal cooperation principle, they will each contribute 50% of the initial registered capital in cash and/or other tangible or intangible assets to establish a joint venture focusing on new energy vehicles (NEV), and carry out broad-based cooperation in areas including research and development, manufacture, sales and mobility services in the field of NEV and parts.

According to Volkswagen’s press release, Mr. An Jin, Chairman of JAC, calls the intended cooperation between these two companies a “Creating Together” model. It is generally believed in the industry that this model will break the limit on the number of local partners a foreign auto company is allowed to have in China imposed by the Chinese auto industrial policy. But at the same time, will Volkswagen’s two existing joint ventures face a new rival? Is “JAC-Volkswagen” going to be another ordinary joint venture or does it have any surprises in reserve for us?

No more “bigamy”?

“The fact that Volkswagen can establish a third JV with JAC means the Automotive Industry Development Policy is beginning to change. This industrial policy, in place for more than 20 years, is no longer adapted to the new market environment,” said one industry insider to International Business Daily. It is provided in Article 48 of the Automotive Industry Development Policy (revised in 2009) that “the same foreign investor may establish no more than (including two) two joint venture enterprises in China that undertake the production of the same kinds (passenger cars, commercial cars and motorcycles) of whole automobile products. If the foreign investor merges other automobile production enterprises in China together with the Chinese joint venture partner, it may not be restricted by the said two joint ventures. If any legal entity overseas holds relative controlling interest in another enterprise, the two shall be deemed as one foreign investor.”

This is the “bigamy” policy for auto JVs in China. This partnership between Volkswagen and JAC will concentrate on NEVs. According to Mr. An Jin, the two automakers will carry out broad-based cooperation “to provide Chinese consumers with highly cost-effective battery-powered electric vehicles.” Considering that JAC also produces Ankai buses, it is possible that the JV’s output may include commercial vehicles other than BEVs. The insider also said, “If commercial vehicles are also included, they will definitely emphasize this to deter people from believing that they are going beyond the policy limits.”

So do NEV provide this “immunity”? It is stated in the Administrative Provisions on Newly-established Pure Electric Passenger Vehicle Enterprises issued last year, “any newly established (pure electric passenger vehicle) enterprise shall invest projects in accordance with Circular of the State Council on Releasing the Catalogue of Investment Projects Verified and Approved by the Government (2014) (State Council [2014] No.53) and Automotive Industry Development Policy.” From this we can see that Volkswagen and JAC’s intention to establish an NEV joint venture focusing on BEVs will definitely overstep the “red line” set in the Automotive Industry Development Policy. Nevertheless, they will still be subject to the 50:50 shareholding restriction. The insider does not think “JAC-Volkswagen” is another joint venture used by a multinational corporation to make more money in China. “A multinational corporation is now allowed to establish partnerships with more enterprises, which means they will input more of their resources together with those of Chinese companies. The more a foreign company invests, the closer it will be bound to its Chinese partners and the harder it will become to go independent, which is good for China,” Mr. Anjin said. “I hope this ‘Creating Together’ model will open a new path to foreign cooperation in the Chinese auto industry.”

A new rival to FAW-VW and SAIC-VW?

Facing the potential of another Volkswagen JV, will its two existing JVs – FAW-VW and SAIC-VW feel the pressure? The insider does not believe that there will be any conflict between the “JAC-VW” products and those of the two existing JVs. “Large joint ventures like FAW-VW and SAIC-VW will usually have a 10-year product plan in place, so this new joint venture with JAC will not result in any change in their product strategies.” And in the meantime, “JAC-VW” does not need to pull products out of the two existing JVs because this partnership will be under a complete new model.” According to the MOU, the cooperation between JAC and Volkswagen will involve product research and development, manufacture, sales and mobility services. Therefore, the “JAV-VW” products will be developed to meet the complete demands of the Chinese market. Of course, some technologies may still be introduced from Volkswagen, but this time it will not be a simple import of Volkswagen’s original models.

It is also mentioned in the MOU that “the Group will be launching a broad-based initiative for electro-mobility and intends to develop more than 30 new, purely battery-powered electric vehicles over the next ten years.” However, for FAW and SAIC, JAC’s presence will certainly add to Volkswagen’s bargaining chips in doing business with the Chinese side - “but so what?”

The insider also added, “The international market has always been about gaming and competition. Chinese enterprises have to get used to it; otherwise any benefit will be just temporary and not sustainable in the long run. If we continue to use policies to control the game, Chinese companies will never be able to grow up. We have to recognize that it is always the fierce competition and games that make companies grow and want to pursue maximum benefits and win-win results.”

JAC-Volkswagen or X brand?

So will the future products carry the Volkswagen logo under the “JAC-VW” background or be positioned under a totally new brand? The insider thinks that since the cooperation between these two companies is called a “Creating Together” model, they are very likely to build a new brand, just like Denza. In 2010, Daimler AG and BYD Auto founded Shenzhen BYD Daimler New Technology Co., Ltd., which later developed and launched the mass-produced car – Denza. However, unlike Denza, which was built on Mercedes’ current B-class car platform, the X brand of “JAC-VW” may be a totally new one, and more importantly, the joint venture will extend its industrial chain even to innovations in mobility services. In recent years, with the continuous development of connected vehicles and intelligent driving, new mobility solutions are attracting ever greater public attention. This year, Volkswagen invested 300 million USD in Gett, an Israeli cab-hailing startup, to form a “strategic partnership” to share data. Toyota and GM also invested in ride-hailing apps or car sharing companies like Uber, Lyft and Sidecar. The insider believes that the X-brand products will probably have something to do with Volkswagen’s future involvement in mobility services. “The products will mainly target the car sharing and renting markets, and thus there will be no conflict with Volkswagen’s two existing JVs.” “The Chinese partners of FAW-VW and SAIC-VW are both super-large state-owned enterprises and have strong profitability, but due to the constraints of regulations and policies, they have to make long-term investments in the NEV field and they also have a lot of concerns as there are so many uncertainties in this area,” the insider said. “But as a multinational giant, Volkswagen has to focus on the long-term strategy. Under the new future environment, the sales of traditional cars may no longer increase. Therefore if Volkswagen still wants to hold its market shares it must have an enterprise to ride the future trend and not be held back by the existing JVs.” “Though JAC is a local state-owned enterprise, it is young and does not carry any historical burden, and what is more, it has great passion and ambitions for the future. I trust that it will put its heart and soul into this partnership with Volkswagen.

On September 8th, the stock price of JAC closed up by 4.92%.


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