Shares of Chinese automakers are tumbling on Wednesday after news on Tuesday that Beijing is proceeding with plans to open up its auto sector to foreign vehicle makers.
China’s regulators said they would remove foreign-ownership limits for manufacturers of alternative- or new-energy vehicles, such as electric or hybrids, this year, and provided a timeline for removing the limits for commercial vehicles in 2020 and the rest of the car market by 2022.
That will remove an irritant in trade relations between China and other countries, including Germany and the U.S. China had prevented foreign companies from owning more than 50 percent of a local venture, essentially forcing them to sign on with a local joint-venture partner.
But the news has also sent shares of mainland automakers tumbling: In Hong Kong trade, BAIC Motor had tumbled 12.77 percent by 11:59 A.M. SGT, BYD lost 4.23 percent, Guangzhou Automobile shed 9.0 percent, Brilliance China fell 8.57 percent, Geely shed 4.24 percent and Great Wall Motor was off by 1.32 percent.
Deutsche Bank said that in theory, that would allow foreign OEMs to set up majority or wholly owned Chinese operations in 2022, even if they have ongoing joint venture operations, or they could take the opportunity to re-negotiate their joint ventures.
Theory vs practice
But that’s only in theory.
“We think that the actual impact to the conventional auto JV status quo will be limited for the next decade,” Deutsche Bank said in a note on Tuesday. “To begin with, most of the existing JV agreements will not end until late next decade or beyond, while the JV agreements probably do not allow change in ownership structure or model line ups without mutual consent from both the Chinese and foreign parties.”
Additionally, Deutsche Bank noted that while foreign carmakers could set up new joint ventures for other models, “most of the popular models from foreign brands are already localized, and bringing less popular models to China for production may not necessarily lead to more profits.”
Then there’s the simple expedient that China won’t allow new internal-combustion-engine manufacturing capacity for passenger vehicles, the bank noted.
Deutsche Bank didn’t think Chinese JV partners would face much pressure to cut their stakes, given the high risk of setting up new production, nor did it expect foreign companies to cut ties with their local JV partners.
“With many years of continuous investment in these existing Chinese JVs, major foreign OEMs have been making decent returns (e.g. higher margins in China vs. rest of the world) via these JVs, and the JVs have been a meaningful part of foreign OEMs’ total earnings,” it said.
Even in new-energy vehicles, Deutsche Bank said while pure NEV players may find the option to enter the market attractive, traditional carmakers may prefer having a Chinese JV partner to share risks of producing NEVs and it pointed to the foreign carmakers’ creation of NEV plans with existing and new JV partners.
That echoed comments from Nomura earlier this month, prior to the announcement on Tuesday.
“Automakers are no longer allowed to establish a new project or JV to manufacture traditional combustion engine cars,” it said. “Hence, it is highly unlikely that a foreign automaker will abandon its existing domestic JV partner and set up a new, majority-owned subsidiary to
replace its existing 50/50 JV.”