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SAIC & GAGC Keep Silent: Opinion Polarizes on Shareholding Restrictions

Date:08-15 13:17 Source:zgqcssrzk Authour:Linglin

Many senior managers in front-line businesses are unworried by the possible removal of shareholding restrictions, especially senior leaders of joint ventures. Most believe that the contribution made by the Chinese party to multinational companies should not be underestimated, and that it would not be so easy for the foreign party to expand in the Chinese market if it broke away from the Chinese party.

Many senior managers in front-line businesses are unworried by the possible removal of shareholding restrictions.

SAIC & GAGC Keep Silent: Opinion Polarizes on Shareholding Restrictions

Many senior managers in front-line businesses are unworried by the possible removal of shareholding restrictions, especially senior leaders in joint ventures. Most believe that the contribution made by the Chinese party to multinational companies should not be underestimated, and that it would not be so easy for the foreign party to expand in the Chinese market if it broke away from the Chinese party.

"SAIC has conducted a number of studies and concluded that opening up is unavoidable, and what is crucial to Chinese auto manufacturers is how they should react to the post-opening up era,” a SAIC insider recently observed when giving an interview to 21st Century Business Herald.

On July 22, the China Association of Automobile Manufacturers (CAAM) held a meeting in Beijing, during which four major automotive groups- FAW, Dongfeng Group, Chang'an Group, and Beijing Automotive Group - made a joint declaration opposed to lifting the control over shareholdings. Dong Yang, Secretary-General of CAAM, proposed that the policy of opening up be postponed for about 8 years to protect the development of domestic automobile enterprises. However, the meeting was not attended by SAIC and GAIG, whose joint ventures account for the main business of the companies.

One argument goes that after lifting the shareholding restriction, the foreign parties to the joint ventures are likely to demand an increase in their equity. If the Chinese party does not agree the foreign party will go it alone. No longer having to share profits with their joint venture partners, they will either take higher profits out of the Chinese market, or subsidize their sales and distribution networks to increase competitiveness and take a greater share of the market. In the former case, existing joint ventures will be reduced to the status of processing plants, and in the latter, competition in the Chinese market will be disrupted to the detriment of China's domestic brands.

However, many senior managers in front-line businesses are unworried by the possible removal of shareholding restrictions, especially senior leaders of joint ventures. Most believe that the contribution made by the Chinese party to multinational companies should not be underestimated, and that it would not be so easy for the foreign party to expand in the Chinese market if it broke away from the Chinese party.

SAIC's evaluation: lifting the control will have little impact

"SAIC is not worried about the reduction of its shareholding in the joint venture after the restriction is lifted," a senior manager of SAIC observed. In fact, SAIC have been studying this issue for some time, and their conclusion is that the pace of opening up is unstoppable and the key lies in its ability to compete with the foreign parties.

"While the foreign parties could expand their investment to increase their shareholding, we have the ability to invest, too," an insider observed. This suggests that among the existing joint ventures, SAIC will not easily give up its shares.

Another view is that once the shareholding restriction is lifted, if a foreign party is not allowed to increase its equity in the original joint venture, it might fall into open dispute with the Chinese party, and respond by no longer introducing products and technology and by threatening to weaken the functions of the joint venture. [l1]

The quoted senior manager from SAIC believes that it would be almost impossible for this to happen in SAIC. SAIC mainly consists of three passenger vehicle finished automobile joint ventures, GM Shanghai, Volkswagen Shanghai, and SAIC-GM-Wuling Automobile, along with three commercial vehicle joint ventures, Nanjing Iveco, Iveco Hongyan SAIC, and Sunwin SAIC. The six joint ventures have a total of four joint venture partners, GM, Volkswagen, Iveco, and Volvo Commercial Vehicle.

Volkswagen Shanghai was the first auto joint venture company in China. Its senior managers have made the company’s attitude clear. Jochem Heizmann, board director of Volkswagen Group and president of Volkswagen China, has emphasized that without the Chinese partners Volkswagen would not have been as successful as it is today, and that any change in shareholding will follow consultations between both parties to the joint venture. Matthew Tsien, global executive vice-president of GM and president of GM China, also responded in a timely manner and provided a similar view.

SAIC-GM-Wuling Automobile originally consisted of two domestic brands: Wuling and Baojun, and its holding is presently controlled by SAIC. GM has a relatively weak voice in SAIC-GM-Wuling Automobile. In the two Iveco companies, the main profit generator of Nanjing Iveco is Yuejin, a domestic brand, and Iveco Hongyan is still in the red. Meanwhile, the development of Sunwin relies mainly on government procurement and on subsidies for new energy vehicles.

Joint ventures go beyond the capital bond

"The two parties to a joint venture who have come together for their respective interests would definitely think very carefully about their own interests before breaking up," an insider from GAGC commented. "Although Toyota has done a very effective job in globalization, that does not mean it can abandon its joint venture partners in China."

A senior manager of an auto company explains matters in detail: "First, for a foreign partner, increasing the shareholding means incurring costs, while viewed from the time perspective, any negotiations on increasing equity are not going to be easy or quick. Over the negotiation period staff morale might be affected and that could impact on the performance of the enterprise. Second, over the course of ten or even twenty years, a joint venture's assets might have seen a significant appreciation in value[l2] , and this could lead to even higher costs for a foreign partner increasing its shareholding. Third, although raising the equity share or becoming the sole proprietor will give the owner one voice and access to all the profits, the potential risks are also increased. Against a background of slowing growth, excess capacity, and fierce competition in the Chinese market, the time is shrinking for automobile enterprises to bask in easy profits. When everyone involved is fighting for future market share and striving for a greater profit space, how is a foreign party that does not know the market well going to muscle in?"

"China is now a fully competitive market, and destroying the current balance is also very risky," said an insider from Shanghai Volkswagen. A joint venture can share the risks as well as the benefits.

While Toyota has been successful in the US, it achieved its success as a joint venture with GM - the leader in that market. In 1984, Toyota and GM established a joint venture NUMMI factory, with the two parties each holding 50% of the shares. Although Toyota established another 13 joint venture factories in Japan afterwards, NUMMI remained active until 2009, when GM entered bankruptcy and had to disinvest from the joint venture.

Toyota originally entered the US market with the aim of securing a firm footholding, while GM was looking for access to small-vehicle technology from Toyota. In China, the course that a joint venture will follow after the shareholding restriction is lifted will depend on the capital required, the desire for sole ownership, or a wish to maintain the original commitments, which the foreign parties will also take into consideration.

One of the key reasons for Volkswagen's success in China is that it managed to access the government procurement market. This was achieved through the efforts of the Chinese party. In another example, GM was supported by its Chinese joint venture partners during its emergence from bankruptcy; SAIC bought 1% of GM equity at a crucial moment and together the companies expanded the market for small engines in India.

With the exception of their own domestic markets, GM and Volkswagen have not achieved any results comparable to their success in China anywhere else around the globe, and this is largely due to their Chinese joint venture partners.

In fact, the international giants are continuing to invest in joint ventures, to the benefit of all parties. In July last year Toyota announced the establishment of a joint venture with Peugeot Citroen, which is an attempt to introduce the Chinese experience into Europe.

Who might suffer if the control is lifted?

"As long as the joint venture is good for both sides, neither party will want to break the current balance," said a senior manager of an auto enterprise. A cohesive enterprise means a competitive enterprise, and in a market where competition is already very fierce, the investment risk is increasing.

With competition intensifying and investment costs increasing, and the added burden of the examination and approval system, wholly foreign-owned or sole-proprietor enterprises may not be in an advantageous position. In fact, after the control on equity ratio was lifted for components and parts enterprises in China, there was no major increase in the number of wholly foreign-owned enterprises or sole-proprietorships.

Of course, some foreign partners might ask for an increase in their equity, and even threaten to stop the introduction of products and technologies if the Chinese parties do not agree. "Such cases might exist, but they are likely to be few. It will only happen when the foreign party is particularly strong in product or market," said the above-mentioned senior manager. As an example, the foreign partner of a brake-manufacturing company in SAIC’s components and parts subsidiaries did indeed established its own wholly-owned business.

In some domestic joint ventures, the Chinese and foreign partners have fundamentally different ideas; if the foreign partners want to increase their equity and the Chinese partners are not able to make further investment, they might also become wholly foreign-owned or sole-proprietorships.

However, such enterprises do not seem to feed their additional profit back into the market through their customers even when they have full control. The senior manager does not think that the price of foreign-invested products will fall, to the detriment of domestic brands, after an enterprise becomes wholly foreign-owned: "When the equity is increased and the invested capital is increased too, the shareholders expect higher earnings."

At the same time, after the shareholding restriction is lifted, foreign parties will be free to invest in China as they wish. We still need some policy barriers," the senior manager said. This will not violate international practice, because when our automobiles enter international markets, they will certainly face the same kind of policy barriers set up by other countries too.


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