Ashvin Chotai
Senior Advisor Research
Tel.: +44 7740 823049
Email: ashvin.chotai@stonemountain-capital.com
Senior Advisor Research
Tel.: +44 7740 823049
Email: ashvin.chotai@stonemountain-capital.com
STONE MOUNTAIN CAPITAL RESEARCH PERSPECTIVE VOL. 1
Joint Ventures will continue to shape industry structure in the world largest car auto market
China’s auto market and industry structure is renowned for its complexity and especially the existence of a large number of joint ventures between global automakers and China’s State Owned Enterprises (SOEs). Under the current regulations, foreign automakers’ maximum stake is restricted to 50% and foreign assemblers can have a maximum of two joint ventures per vehicle category.
The original objective of this policy was to allow controlled entry of foreign automakers into China, with the aim of enabling and encouraging transfer of technology and management know-how to Chinese partners, which are all SOEs.
It is now over 12 years since China entered the WTO and it is surprising that China still manages to retain such restrictions on foreign ownership of vehicle assembly operations. There has been little international pressure on this issue, largely because most of the major global automakers have already entered into very long-term joint venture agreements with their partners in China and now appear to be comfortable with the status quo.
Joint Ventures will continue to shape industry structure in the world largest car auto market
China’s auto market and industry structure is renowned for its complexity and especially the existence of a large number of joint ventures between global automakers and China’s State Owned Enterprises (SOEs). Under the current regulations, foreign automakers’ maximum stake is restricted to 50% and foreign assemblers can have a maximum of two joint ventures per vehicle category.
The original objective of this policy was to allow controlled entry of foreign automakers into China, with the aim of enabling and encouraging transfer of technology and management know-how to Chinese partners, which are all SOEs.
It is now over 12 years since China entered the WTO and it is surprising that China still manages to retain such restrictions on foreign ownership of vehicle assembly operations. There has been little international pressure on this issue, largely because most of the major global automakers have already entered into very long-term joint venture agreements with their partners in China and now appear to be comfortable with the status quo.
Even if and when China does finally begin to relax these rules, it is most likely that the current JV structure will continue to remain dominant. Exiting or restructuring current JV agreements would still be very complicated and most foreign assemblers may not even be able to afford to buy out the Chinese partner’s stake, even if this became possible in law.
The evolution of joint venture dynamics will continue to have significant implications for investors, both from China and global perspectives. As usual the devil often lies in the details. In this article, we briefly explore one interesting aspect of joint venture dynamics—the requirement to develop joint venture brands —and some of the unintended consequences of this policy initiative.
Policy measures will continue to aim to reduce dependence on foreign technology
The Chinese government and SOEs have been able to maintain tight control over its auto industry and reap significant financial benefits from the current rules on ownership and the resulting industry structure. However, progress in the area of technology transfer has been disappointing. Bumper profits from joint ventures have made many Chinese SOEs rich and complacent, with few incentives to develop independent product development and engineering capabilities and it is also interesting to note that independent Chinese automakers such as Geely, Great Wall and Chery, who have all operated without foreign JV partners have made much more progress in terms of developing their brands, independent engineering and product development capabilities.
China’s policy watchdog — the National Development and Reform Commission (NDRC) —has taken numerous measures to encourage domestic automakers to innovate and the industry to become less dependent on foreign players and technology. In one of its the more recent initiatives to accelerate technology transfer, the NDRC has been putting pressure on all joint ventures to create joint venture brands. These “Joint venture brands” would be developed in China and owned by the joint venture. The new brands, having dedicated distribution channels and their own identities would include new models with their own styling and incorporate more local engineering and technology. There would be little or royalty payments to the foreign partner. The ultimate aim is to develop and strengthen local capabilities and reduce technological dependence on foreign automakers.
There appears to be no precise policy document on this issue but there is little doubt that the NDRC is putting pressure on all foreign OEMs and Chinese SOEs to go down this route. The underlying assumption is that joint ventures are still the best mechanism to transfer technology to Chinese SOEs but more was needed to accelerate this technology transfer. NDRC argues that 50:50 joint ventures should be developing, manufacturing and selling joint venture branded products, not just foreign developed models with foreign brand names.
“Joint venture brands” would be developed in China and owned by the joint venture. The new brands, having dedicated distribution channels and their own identities would include new models with their own styling and incorporate more local engineering and technology. There would be little or royalty payments to the foreign partner. The ultimate aim is to develop and strengthen local capabilities and reduce technological dependence on foreign automakers.
Are such measures going to accelerate technology transfer and help make Chinese automakers more competitive in China and eventually overseas?
The jury is certainly out on the issue but the there is a lot of evidence that this policy is not producing the desired outcome.
Creating JV brands is a major distraction for both the foreign and the Chinese partner. For foreign brands this means more product development and capital expenditure on lower margin products together with the risk of cannibalization plus more confusion in their product strategies and brand image. For Chinese SOEs, this is an added distraction at a time they are struggling to develop their engineering and product development capabilities independently of their joint ventures. Neither side seems to keen on the idea but have to comply to keep on the right side of policy makers.
At least initially, the bulk of the responsibility for developing a JV brand appears to be falling on the shoulders of the foreign partner. In the past two years, these automakers have introduced a raft of joint venture brands. Some joint ventures are embracing the idea with enthusiasm but many are moving very reluctantly.
Two Strategies
Clearly, designing a complete vehicle from the ground up is not only costly but also takes time. So foreign automakers are adopting two major strategies.
The first approach is for foreign automakers to contribute an older, often recently discontinued vehicle platform to the enterprise. The joint ventures use local engineering and components to convert these platforms into new models, which are positioned below the foreign automakers own models. These new brands typically form an intermediate layer between the foreign automaker’s models and those produced independently by their Chinese partners.
Leading joint ventures brands such as the Baojun from Shanghai-GM-Wuling, the Venucia (Qi Chen) from Dongfeng-Nissan, the Everus (also called Li Nian) from Guangzhou-Honda and the CIIMO from Dongfeng-Honda are all using this type of approach. The Horqi brand from Dongfeng-Kia is also expected to use this type of strategy.
The second approach is to “kill two birds with one stone” by creating a joint venture brand to develop electric vehicles, the other area being promoted by policymakers. This type of strategy is being adopted by BMW-Brilliance with the Zinoro JV brand, by Shanghai-VW with the Tantus (or the Tianyue) brand, by FAW-VW with the Kaili brand and by Beijing-Hyundai with the Shouwang brand. For example, the VW Lavida platform is expected to form the basis for EVs developed under the Tantus (Tianyue) brand while Kaili EV models will be based on the VW Bora platform. FAW-Toyota has announced the Ranz JV brand with the view to using the Corolla platform to develop an electric vehicle for China. Toyota’s other JV in China, Guangzhou-Toyota is also expected to adopt a similar approach but has yet to announce a name for the JV brand. Progress by companies using this approach (adapting an old platform to an electric vehicle for China) has been minimal.
Gasoline-powered vehicles have accounted for nearly all sales by these new joint venture brands. Last year, the new joint venture brands sold 161,000 units, or 1.3% of China’s total sales of passenger cars and SUVs.
These volumes will increase as product portfolios expand, but they are unlikely to take significant market share. China’s market will remain dominated by foreign brands produced by the joint ventures.
Unintended consequences
It is highly doubtful whether the development and reform commission will achieve its goal of accelerating technology transfer. Moreover, this policy has had a number of unintended consequences:
· Instead of consolidating the complex industry structure, this policy measure is creating even more fragmentation through the creation of a raft of new brands, models and distribution channels.
· Instead of improving the competitive position and market presence of Chinese brands, many of these new joint venture brands are competing head on with independent Chinese brands such as Chery, Geely, Great Wall and models developed independently by SOEs. The role of foreign players is certainly not declining after this policy initiative.
· For Chinese SOEs, the JV brand initiative is an added distraction at a time they are all struggling to develop their engineering and product development capabilities independently of their joint ventures.
· Managed properly, joint venture brands can provide foreign automakers with an additional avenue to compete head on with Chinese brands in the budget segments, without negative impact on the image of their core brands. The use of outgoing platforms and fully amortized capital equipment can often mean only modest new investment in relation to the incremental boost to unit sales.
Naturally, China’s independent automakers are opposed to this policy initiative and the way in which is being implemented; they see few benefits and some significant threats. What is even more interesting is that at recent industry forums, some very senior executives from large SOEs have also been very critical of this policy initiative.
Clearly, the intention of central authorities was not to encourage JV companies to launch new vehicle brands from outdated platforms of foreign partners. The government wants to see JV companies invest in developing brand new vehicles whose intellectual property rights belong to both partners. In this respect only the Denza brand from the Daimler-BYD joint venture can be regarded as meeting this objective but this is a unique joint venture company, dedicated from the outset to the development of an electric car and initiated without pressure from NDRC to develop a JV brand. It is also unique in that the Chinese partner is a private company and not a SOE. However, the commercial viability of such a project is questionable and it is highly doubtful whether such a blueprint can be applied across the industry.
It will be very interesting to see if and how NDRC responds with the next iteration of the policy to accelerate technology transfer.
Ashvin Chotai has been covering developments in Chinese and Asian auto industry for over 15 years. He is Managing Director at Intelligence Automotive Asia and was previously the Head of Asian Auto Research at Global Insight, now known as “IHS Automotive”.
For further information around our research and advisory services please contact Ashvin Chotai or Oliver Fochler under Tel.: +44 7922 436360 and email: oliver.fochler@stonemountain-capital.com.
The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.
The evolution of joint venture dynamics will continue to have significant implications for investors, both from China and global perspectives. As usual the devil often lies in the details. In this article, we briefly explore one interesting aspect of joint venture dynamics—the requirement to develop joint venture brands —and some of the unintended consequences of this policy initiative.
Policy measures will continue to aim to reduce dependence on foreign technology
The Chinese government and SOEs have been able to maintain tight control over its auto industry and reap significant financial benefits from the current rules on ownership and the resulting industry structure. However, progress in the area of technology transfer has been disappointing. Bumper profits from joint ventures have made many Chinese SOEs rich and complacent, with few incentives to develop independent product development and engineering capabilities and it is also interesting to note that independent Chinese automakers such as Geely, Great Wall and Chery, who have all operated without foreign JV partners have made much more progress in terms of developing their brands, independent engineering and product development capabilities.
China’s policy watchdog — the National Development and Reform Commission (NDRC) —has taken numerous measures to encourage domestic automakers to innovate and the industry to become less dependent on foreign players and technology. In one of its the more recent initiatives to accelerate technology transfer, the NDRC has been putting pressure on all joint ventures to create joint venture brands. These “Joint venture brands” would be developed in China and owned by the joint venture. The new brands, having dedicated distribution channels and their own identities would include new models with their own styling and incorporate more local engineering and technology. There would be little or royalty payments to the foreign partner. The ultimate aim is to develop and strengthen local capabilities and reduce technological dependence on foreign automakers.
There appears to be no precise policy document on this issue but there is little doubt that the NDRC is putting pressure on all foreign OEMs and Chinese SOEs to go down this route. The underlying assumption is that joint ventures are still the best mechanism to transfer technology to Chinese SOEs but more was needed to accelerate this technology transfer. NDRC argues that 50:50 joint ventures should be developing, manufacturing and selling joint venture branded products, not just foreign developed models with foreign brand names.
“Joint venture brands” would be developed in China and owned by the joint venture. The new brands, having dedicated distribution channels and their own identities would include new models with their own styling and incorporate more local engineering and technology. There would be little or royalty payments to the foreign partner. The ultimate aim is to develop and strengthen local capabilities and reduce technological dependence on foreign automakers.
Are such measures going to accelerate technology transfer and help make Chinese automakers more competitive in China and eventually overseas?
The jury is certainly out on the issue but the there is a lot of evidence that this policy is not producing the desired outcome.
Creating JV brands is a major distraction for both the foreign and the Chinese partner. For foreign brands this means more product development and capital expenditure on lower margin products together with the risk of cannibalization plus more confusion in their product strategies and brand image. For Chinese SOEs, this is an added distraction at a time they are struggling to develop their engineering and product development capabilities independently of their joint ventures. Neither side seems to keen on the idea but have to comply to keep on the right side of policy makers.
At least initially, the bulk of the responsibility for developing a JV brand appears to be falling on the shoulders of the foreign partner. In the past two years, these automakers have introduced a raft of joint venture brands. Some joint ventures are embracing the idea with enthusiasm but many are moving very reluctantly.
Two Strategies
Clearly, designing a complete vehicle from the ground up is not only costly but also takes time. So foreign automakers are adopting two major strategies.
The first approach is for foreign automakers to contribute an older, often recently discontinued vehicle platform to the enterprise. The joint ventures use local engineering and components to convert these platforms into new models, which are positioned below the foreign automakers own models. These new brands typically form an intermediate layer between the foreign automaker’s models and those produced independently by their Chinese partners.
Leading joint ventures brands such as the Baojun from Shanghai-GM-Wuling, the Venucia (Qi Chen) from Dongfeng-Nissan, the Everus (also called Li Nian) from Guangzhou-Honda and the CIIMO from Dongfeng-Honda are all using this type of approach. The Horqi brand from Dongfeng-Kia is also expected to use this type of strategy.
The second approach is to “kill two birds with one stone” by creating a joint venture brand to develop electric vehicles, the other area being promoted by policymakers. This type of strategy is being adopted by BMW-Brilliance with the Zinoro JV brand, by Shanghai-VW with the Tantus (or the Tianyue) brand, by FAW-VW with the Kaili brand and by Beijing-Hyundai with the Shouwang brand. For example, the VW Lavida platform is expected to form the basis for EVs developed under the Tantus (Tianyue) brand while Kaili EV models will be based on the VW Bora platform. FAW-Toyota has announced the Ranz JV brand with the view to using the Corolla platform to develop an electric vehicle for China. Toyota’s other JV in China, Guangzhou-Toyota is also expected to adopt a similar approach but has yet to announce a name for the JV brand. Progress by companies using this approach (adapting an old platform to an electric vehicle for China) has been minimal.
Gasoline-powered vehicles have accounted for nearly all sales by these new joint venture brands. Last year, the new joint venture brands sold 161,000 units, or 1.3% of China’s total sales of passenger cars and SUVs.
These volumes will increase as product portfolios expand, but they are unlikely to take significant market share. China’s market will remain dominated by foreign brands produced by the joint ventures.
Unintended consequences
It is highly doubtful whether the development and reform commission will achieve its goal of accelerating technology transfer. Moreover, this policy has had a number of unintended consequences:
· Instead of consolidating the complex industry structure, this policy measure is creating even more fragmentation through the creation of a raft of new brands, models and distribution channels.
· Instead of improving the competitive position and market presence of Chinese brands, many of these new joint venture brands are competing head on with independent Chinese brands such as Chery, Geely, Great Wall and models developed independently by SOEs. The role of foreign players is certainly not declining after this policy initiative.
· For Chinese SOEs, the JV brand initiative is an added distraction at a time they are all struggling to develop their engineering and product development capabilities independently of their joint ventures.
· Managed properly, joint venture brands can provide foreign automakers with an additional avenue to compete head on with Chinese brands in the budget segments, without negative impact on the image of their core brands. The use of outgoing platforms and fully amortized capital equipment can often mean only modest new investment in relation to the incremental boost to unit sales.
Naturally, China’s independent automakers are opposed to this policy initiative and the way in which is being implemented; they see few benefits and some significant threats. What is even more interesting is that at recent industry forums, some very senior executives from large SOEs have also been very critical of this policy initiative.
Clearly, the intention of central authorities was not to encourage JV companies to launch new vehicle brands from outdated platforms of foreign partners. The government wants to see JV companies invest in developing brand new vehicles whose intellectual property rights belong to both partners. In this respect only the Denza brand from the Daimler-BYD joint venture can be regarded as meeting this objective but this is a unique joint venture company, dedicated from the outset to the development of an electric car and initiated without pressure from NDRC to develop a JV brand. It is also unique in that the Chinese partner is a private company and not a SOE. However, the commercial viability of such a project is questionable and it is highly doubtful whether such a blueprint can be applied across the industry.
It will be very interesting to see if and how NDRC responds with the next iteration of the policy to accelerate technology transfer.
Ashvin Chotai has been covering developments in Chinese and Asian auto industry for over 15 years. He is Managing Director at Intelligence Automotive Asia and was previously the Head of Asian Auto Research at Global Insight, now known as “IHS Automotive”.
For further information around our research and advisory services please contact Ashvin Chotai or Oliver Fochler under Tel.: +44 7922 436360 and email: oliver.fochler@stonemountain-capital.com.
The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer.
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