China’s liberalisation of equity limit for foreign capitals in Sino-foreign joint ventures: market plays a conclusive role

2018-04-13  |  By Faye  |  In knowledge

On April 10, President Xi Jinping delivered an important keynote speech at the opening ceremony of the 2018 annual meeting of the Boao Forum for Asia. There are two references to the automotive industry in his speech: “China will greatly ease market access for foreign enterprises.  Manufacturing industry in China has basically opened to foreign enterprises except industries of automobile, ship, and aircraft, but these industries are ready for loosen foreign equity loosening now, especially automotive industry”; “This year, we will considerably reduce import tariffs on automobiles and some other products thus to meet people's needs for quality foreign products and to accelerates the process of joining the WTO Agreement on Government Procurement.


Xi’s words indicate that Chinese automakers become more competitive now. Not only will Chinese government gradually reduce tariffs of automobiles, but also will relax limits on equity ratio in automotive industry. Later on, automakers in China will have more opportunities and face greater challenges in the future.


Executives of automotive industry in China hold different opinions on the equity ratio loosening.


Shen Hui, the founder of Weltmeister Automobile, and He Xiaopeng, the founder of Xiaopeng Automobile, support the policy of loosening equity ratio. They believe that an open automotive market is beneficial to competitive enterprises and Chinese consumers. The government will certainly encourage domestic start-ups to compete with foreign automakers, which will be a key turning point for Chinese automotive industry.


Moreover, as early as 2014, Li Shufu, Chairman of Geely Automobile, had already considered equity ratio loosening for its benefits to automotive consumers in a fair competition environment of automotive industry.


Opinions of proponents show:

First of all, companies supporting equity ratio loosening have their strength on vehicle production. Acting as the best among China's new vehicle manufacturers, Weltmeister Automobile and Xiaopeng Automobile are preparing finishing their mass production plan, and the first vehicle will be delivered in the second half of the year; Xiaopeng Automobile G3 will officially start its booking at the end of this month, and will achieve a public delivery at the end of the year. Geely Automobile sold 1.247 million vehicles in 2017, being the top one selling own-brand passenger car. In addition, Geely totally sold 386,000 vehicles in the first quarter of 2018, which grew 39% from a year earlier and completed 25% of its annual sales target.


Secondly, supporters believe that previous policies on joint ventures did not achieve core technology breakthroughs for the automotive industry in China. Hence, loosening equity ratio will eliminate some automakers leaving behind the technology upgrading process, thus to refresh automobile industry in China.


At last, proponents consider that equity ratio loosening will benefit consumers in the end. They hold the idea that equity ratio loosening will lead to a greater introduction of foreign capital, which will inevitably reduce the cost of automobiles under a fierce competition market. In the long run, it pushes automobile industry in China moving forward and ultimately will benefit Chinese consumers.


Different views were hold by opponents. 
It is impressive that on the meeting in July 2016 convened by the China Auto Association, FAW, Dongfeng, Changan and BAIC jointly expressed their opposition to the liberalisation on the foreign share ratio while SAIC and GAC were absent.


Opponents argue:

First, China's loosening restriction on foreign equity ratio could leave foreign investors with a monopoly on the market, and Chinese auto-parts companies will face even greater challenges. China has not previously restricted the foreign ownership ratio in auto-parts joint ventures, which has resulted in that foreign capitals occupied more than 75% shares of China’s core auto-part market through single-proprietorship or joint venture. If the restriction is loosened, international automakers can speak louder over Chinese enterprises and supply chain system will be changed, which is not a good thing for Chinese auto-parts companies.


However, it is also difficult for overseas investors to corner the market since there are many complex factors involved in raising the foreign equity limit in joint ventures and Chinese enterprises will not make concession easily as well. At the same time, foreign capitals need to bear greater risks for larger equity, even with which they may not succeed in entering Chinese market.


Second, Chinese state-owned automakers that have previously cooperated with foreign automakers may face challenges. Opponents argue that most Chinese vehicle companies cooperated with foreign investors are state-owned and they rely more on overseas advanced technology. In this context, overseas investors will inevitably scramble for the discursive power by increasing the proportion of shares when the foreign equity limit is loosened, putting China's state-owned vehicle companies on the back foot.


In any case, the speech of Chairman Xi further prove that it is a trend for liberalisation of foreign equity in joint venture. It also gives Chinese automakers a warning that the future competition in Chinese vehicle market will be brutal, and those weak at technology innovation will be hard to get a foothold. It is time, therefore, for state-owned vehicle companies that have relied on foreign technology to shift their focus to technological innovation.


In addition, some media have reported that China’s liberalisation on foreign investment in new energy vehicles at free trade zone will be faster. In November 2017, the Chinese and US heads of state agreed on a "gradual and appropriate reduction in vehicle tariffs and pilot work liberalizing foreign investment in special vehicles and new energy vehicles in the FTZ by June 2018.


Although sino-us trade relations have been strained recently, a speech by Chairman Xi Jinping at a Bo'ao Forum seems to indicate that tensions between China and the United States will not affect China's determination to gradually reduce tariffs on vehicles and to relax foreign ownership restriction. In short, China will be a more liberalised nation in the future.


At present, the vehicle industrial innovation is booming, the laggard still has a chance to breathe under competition, but once the policy is implemented, a bloody storm will be set off in the Chinese vehicle market.