Foreign Carmakers Won''t Give up China JVs on Rule Change

Proshare

Friday, April 20, 2018 /02:10 PM / Fitch Ratings 

The Chinese authorities' decision to phase out the 50% foreign ownership limit on car manufacturers is unlikely to result in a significant change in joint-venture (JV) arrangements, which typically work well for both foreign brands and local partners, says Fitch Ratings. Any impact is most likely to be felt in niche sectors where foreign companies could see opportunities for entry and growth.
 

The ownership limit had been in place for over 20 years, but will now be gradually removed by 2022 for most automotive sectors and by the end of 2018 for electric vehicles. Some commentators have suggested that the new rules could lead foreign brands to set up their own operations that would be favoured with the best car models and technology - to the detriment of their JVs. The sell-off in JV share prices since the decision was announced on Tuesday is likely to reflect these concerns.
 

However, we do not believe JVs will face significant challenges from fully foreign-owned ventures over the medium term. Foreign companies have generally provided the technology, expertise and brand reputation in JVs, but they have also benefitted from the ability of local partners to address regulatory hurdles, deal with local issues and manage distribution. Disrupting those relationships would create complications.
 

Moreover, the Chinese market might not necessarily justify the investment and risks for foreign manufacturers considering setting up their own operations. Capacity utilisation rates have fallen in recent years, with pockets of excess capacity emerging. Meanwhile, the potential for sales growth has weakened as the market has matured. Passenger vehicle wholesale deliveries rose by just 1.4% in 2017, the slowest rate since 2008. This was partly due to a purchase tax hike and a high base of comparison in 2016, but growth is likely to remain in the single-digits over the coming years. The market will have matured even further by 2022, when ownership limits for passenger cars are due to be removed.
 

Segments where sales growth remains strong and capacity utilisation rates are still high, such as the high-end market, are more likely to attract foreign ventures. The electric-vehicle market could also draw entry by companies like Tesla. Electric vehicles account for only a tiny share of Chinese auto sales - less than 2.5% in 2017 - and a lack of charging facilities currently creates an obstacle to expansion, although China is already the world's biggest new-energy vehicle market and there is large potential for long-term growth.
 

Nevertheless, Tesla would find it difficult to set up production on its own, and might not have the capital or management resources to attempt it in the near term. Partnership with a large local enterprise - able to provide investment and government relationships - could still be an option.
 

Proshare Nigeria Pvt. Ltd.

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