On April 17th, in the wake of the dawning US-China Trade War, President Xi Jinping announced the lifting of the “50:50 Rule” which had been in place since 1994. Per the rule, no foreign automotive company could enter the Chinese market without a Joint Venture partner. To date, any vehicle on the road in China sports dual-brands: Yiqi Volkswagen, Chang’an Ford, to name a few. While traditionally auto manufacturers have entered other foreign markets as wholly-owned foreign entities (WOFE), most were not willing to forsake the large Chinese market, which registers almost 50% more cars than second-place market, US.
The ban is to be lifted in three stages: (1) with electric and plug-in hybrids ban lifting in 2018; (2) commercial vehicles in 2020; and (3) others in 2022. For obvious reasons, Tesla seemed the bigger winner. Just weeks earlier, things were looking down for Tesla as negotiations with Shanghai government for a future factory hit a stall on ownership structure. To add fuel to the fire, China had announced as part of the Trade War, that it would increase tariffs, already set at 25%, on imported vehicles, including electric cars (as a reference point, US sets a 2.5% tariff on incoming Chinese vehicles).
The automotive industry celebrated with BMW announcing, “We believe a more free and flexible business environment will benefit both Chinese and foreign companies in China and the Chinese economy.”
Local companies feared this could place market pressure on domestic manufacturers, however, once the dust settled, most foreign manufacturers stated that they still planned to continue with their JV structure. Many are still contractually obligated to remain in their joint venture partnerships, some for as long as 40 years. In addition, the risk and expense tied to decoupling the structure could be cost-prohibitive.
Another key factor was government subsidies. Electric vehicles today receive ~$8000 discount through government subsidies. It is unclear whether these same benefits would be extended to WOFE players.
Meanwhile, Chinese auto manufacturers have gaining traction in the global market, most recently with Geely’s acquisition of Volvo. In fact, some had questioned whether Geely’s stake would make Volvo exempt to the “50:50 Rule”. Geely itself was also concerned that the positioning of Volvo side-by-side with Geely could impact Volvo’s premium brand value in China, and presumably the rest of the world.
Much of the press has been around passenger vehicles and it is not yet clear how this will impact commercial vehicles. Foreign commercial vehicle manufacturers have not had as much grip in the local market as their passenger counterparts. Aside from Foton-Daimler, the other big 5 manufacturers are domestic players.
Tariffs have played a big role in limiting the market to global exposure. While the number of imported trucks has climbed year-on-year, the price differential has all but ensured ongoing limited market share.
There are a few potential outcomes. One scenario is that foreign trucks enter the Chinese market and manufacture locally. This is quite likely, as trucks manufactured in China could not only be sold in China, the world’s largest commercial vehicle market, but also across the region and possibly world. While this would benefit China as a manufacturing base, it could still pose negative impact on domestic players. To offset this, similar to the situation of passenger vehicles, the government could use a subsidy structure to enhance the competitiveness of Chinese truck companies.
Assuming that to happen, the second likely scenario would be for foreign players to enter the market through partnership, not necessarily 50:50, but with sufficient incentive for the local partner to spearhead marketing, sales, service, and government relations.
No matter what happens in the manufacturing front, it is highly unlikely that there will be any relaxation of regulation on the technology/internet front. And as technology is becoming more and more integral to the transportation and logistics space, it seems that government controls will continue to limit the extent to which foreign vehicle manufacturers can truly act independently in the Chinese market.
To that end, as the technology systems in China remain disparate and independent from foreign technology systems, foreign commercial vehicle companies may find themselves at a disadvantage should they not be able to integrate smoothly with, for instance, local map providers, Beidou/GPS providers, and other services.
The most likely scenario for these commercial OEMs is that companies will continue partnerships, possibly at equal or even minority stakes, however, there will be increased flexibility on both sides. Local partners, in turn, will be forced to be more value generating and not be dependent on an overseas branding machine. In addition, they will become more specific at recognizing local business nuances and, in particular, navigating technical aspects unique to the Chinese market. Finally, through improved business relationships, Chinese businesses/joint ventures will be more competitive in overseas markets, through mutually beneficial partnerships that demonstrate true innovation.