By on April 18, 2010

End of last year, we reported that the Chinese government was publicly thinking about new regulations to shift a large chunk of cars bought by the government to home-grown brands. We are talking about a serious amount of money here. The government is the biggest customer of cars in China, with an annual budget of around $15b. Government purchases influence the whole market. To buy Chinese.

The way laws are written in China is a bit byzantine, but sometimes more democratic than one might imagine. An idea is floated in the media. Discussions ensue. The temperature is taken. If people salute when the flag goes up the pole, a law becomes reality. If there is opposition from all corners, the law quietly goes away and isn’t heard of any longer. Which happens with regularity.

The “buy domestic” law was dormant until a few days ago. “Chinese officials will never give up their Audi or Mercedes” was the popular wisdom amongst foreign car executives. Until last Friday, that is. Then, an article appeared in China Daily, which is pretty much the voice of the government. According to this article, the authorities are no longer “mulling new regulations” as the code for testing the waters goes. Now, the government “prepares revisions to regulations on official car procurement.”

Uh, oh. There will be a lot of hectic meetings at foreign joint ventures on Monday.

When the Chinese government is beyond the “mulling” stage, it’s pretty much a done deal. And when China Daily says “the new regulation is slated to be launched in June,” then you can be 90 percent sure that it will happen in June.

The new regulation will mandate that government offices “purchase more than 50 percent domestically branded cars for their fleets in the future.” Sounds benign so far. But there is some fine print, dictating what kind of cars government offices may or may not buy.

Those guidelines, says China Daily, “basically exclude most brands made by joint ventures.”

Ooops.

For instance, current regulations, issued in 2004, require ministerial level cars to have an engine displacement of not more than 3.0 liter and a price lower than 450,000 yuan ($66,000) per unit. A vice-ministerial level car can also have 3 liters of displacement, but should cost less than 350,000 yuan ($51,000).

The new rules would degrade the engine of a ministerial-level official cars to 2.5 liters max. The price must be below 350,000 yuan ($51,000) per unit. A vice-ministerial level official may only be driven around in a 2.5 liter car that costs not more than 300,000 yuan ($44,000).

Lower ranking officials must economize down from currently 250,000 yuan ($37,000) to 160,000 yuan ($23,000) and must make do with an engine no larger than 1.8 liter. We are talking serious volume here. This will hurt.

With those new regulations in place, foreign producers will lose interest in bidding,” said Xue Xu, professor at the school of economics of Peking University.

“The new regulation will provide domestic brands a golden opportunity to expand and compete with foreign rivals in the world’s biggest auto market,” said Dong Yang, secretary-general of the China Association of Automobile Manufacturers.

Discrimination of foreigners? The interesting part of this is that the government hurts itself. Nearly all of the major joint ventures with foreign brands are in the hands of state owned companies. The home-grown brands are to a large degree in private hands.

Take the Audi’s A6. It pretty much turned into the official car of China. As Business Week writes: “Spend any time in Beijing, and you will doubtless see Communist Party bigwigs getting chauffeured around in black Audi A6 sedans. A big government and consumer following for the A6 has turned Volkwagen’s high-end brand into the luxury market leader.”

The Audis are made locally in a joint venture with FAW, a state owned company. Audi said that China would be its biggest market at the end of this year. Next year will be different, if the new law goes into effect.

The proposed law also sheds new light on the Volvo purchase by Geely. When the deal was announced, we commented that “a Volvo owned by Geely may profit big from a possible edict by the Chinese government.” A Volvo owned by a Chinese company is a Chinese company.

After the deal was signed, Li Shufu, chairman of Zhejiang Geely, said that he would use Audi’s business model in China to foster Volvo’s future development here. China Daily interprets this as “a new focus on the world’s biggest government procurement cake.” Statistics from China Machinery Industry Federation show that in 2008, cars accounted for 20 percent of the government’s shopping list.

Government purchases not only account for 8 percent of the Chinese car market. The is a huge knock-on effect. A car driven by high ranking officials gives face to other customers. “Rich Chinese prefer the officials’ car models which indicate car owners’ prestige and provide them with more psychological satisfaction, and demonstrate the difference between them and ordinary people on the street,” said Xiang Hansong, an auto industry watcher cited in China Daily.

Domestic brands like Chery, Geely, Chang’an, Great Wall and BYD are jockeying for slices of the government pie. The edict-in-the-making also explains why government owned auto makers, which so far mostly relied on joint ventures, suddenly display a great interest in developing their own brands. The law also will prod carmakers to go on an acquisition tour in the West, to buy brands that have high prestige and can be made locally without half of the profits going to the joint venture partner.

The law can mean two things: It can move joint ventures to giving the government a better deal, good old Chinese bargaining. Or it could be the first step towards slowly freezing the joint venture partners out of the country.

When I came here 6 years ago, high ranking executives in foreign joint ventures declared after the 5th beer: “In eight years, the Chinese government will want us out.” Well, we have two more years to go on this prediction, inebriated or not.

Get the latest TTAC e-Newsletter!

26 Comments on “The Beginning Of The End Of Foreign Car Joint Ventures In China?...”


  • avatar
    VLAD

    The displacement reductions should freeze GM/Buick out much more then the Euro joint ventures.

  • avatar
    dwford

    I can see a huge ugly trade war breaking out when the Chinese finally kick out the foreign automakers.

    • 0 avatar

      There are joint venture contracts. They have to honor them. If they don’t, big trouble and forget any dreams of exports. So they will be honored. When they expire – who knows.

      Again, it is interesting to note that it is the large state-owned companies like FAW (Audi, VW) or SAIC ( Buick, VW ) who will suffer most.

    • 0 avatar

      I think most of the contracts still have about 10 years to go. I don’t see them “kicking them out,” but it could see them become increasingly less profitable.

    • 0 avatar
      Disaster

      They can honor the joint ventures…but not buy the cars. I agree on the trade front. The world is already teetering on another great depression. A new trade war could push it over the edge.

  • avatar
    NulloModo

    The whole JV idea seemed like a bad deal for non-Chinese automakers from the beginning. No matter how well you do in China, a Chinese company is going to do at least as well, so there is no way to take over the Chinese market.

  • avatar
    Dimwit

    Bertel, what is the difference between a FAW Audi and a VAG Audi? Much of anything? Could you tell the difference if you parked their respective A6’s side by side?

    If not, I can’t see that trading down from an A6 to a Geely or BYD is going to win too many favours and anyone who has a choice might not be in too much of a hurry to follow the official line. The next few years are going to be extremely interesting in China as the prosperity grows. The whole point of money is having choices and Command economies are the antithesis of that.

    • 0 avatar

      There is no more VAG. As chronicled by yours truly a while ago. VAG long gone. If you are referencing the German made v.v. the Chinese made Audis: Practically identical. They have long versions in China that do not exist elsewhere.

  • avatar
    mpresley

    The way laws are written in China is a bit byzantine, but sometimes more democratic than one might imagine. An idea is floated in the media. Discussions ensue.

    This is a very perceptive point and one that’s often lost on Westerners. There is a long (relatively) history of this sort of thing, and one must always be on the lookout. For instance, the Cultural Revolution began with Jaing Qing criticizing in print an obscure play Hai Rui Dismissed From Office. From there, things broke down completely.

    I’m interested in the idea that government officials will no longer be able to drive Audis. There has lately been important “discussion” surrounding mid level government corruption and how to stop it. Sun Liping of Tsinghua University (who just happened to be the doctorate advisor to Xi Jinping, 1st Secretariat of the CCP) recently published a scathing article about mid-level government officials and their “vested interests.” It was on his university blog, and he specifically asked for “interested friends to participate in constructive discussion.” Sun all but calls for a purge of mid-level officials guilty of capitalist cronyism. I know where this is going. If I were a provincial governor, I’d be looking into a nice, new (or even used) Geely about now.

  • avatar
    blowfish

    One possible unintended consequences ” is going to hurt more of the JV companies, local Govt money being invested, local workers.
    So suddenly the big JV factories will meet the similar fate as factories here in the Rust belt of North America.”
    Curbing bribery can be done on many different ways.
    Pullng such a stunt looks like another Pyrrhic battle.

    Mind u the commie govt doesnt have much of rhyme & reason to do crazy things. They’re also known of using Elephant guns to kill ducks.
    64 was another sad example.

    Another reason of why Vancouver’s real estates can be so red hot?
    We need to thank those funny money from China. To most of the locals is not exactly doing us a favour, as the hose price reach stratosphere, how else any local young kids can afford any house?

  • avatar
    porschespeed

    Everyday this more resembles the US bubble – corruption and the transfer of wealth to the few. Shocking that the party is moving to eliminate the JVs. Simply shocking.

    Regardless of the purported motivations, it was inevitable that the ChiCom Party would suck the foreigner’s IP dry, then kick them out. Any pundit with a knowledge of Chinese SOP saw this coming the day they set up the JV system.

    • 0 avatar

      Nobody forced them to set up shop in China.

    • 0 avatar
      porschespeed

      Agreed.

      My point was that there were voices that warned it to be a very bad idea, from jump street.

      I believe it was not simply raw greed, but the naive notion that somehow China would somehow evolve over a 10 year stretch, and become some sort of free open market. That somehow the tiger would change its spots, or, at least, let the foreigners hang out till the next generation gets into power.

      That was never any more likely than democracy spontaneously springing up and flourishing. It may happen in the long-term, but it doesn’t just “pop-up” in totalitarian states. When it does it’s by revolution, and the people generally are somewhat ready for it.

      Too much money sloshing around China right now for any kind of revolution. Things change when times are bad, not when they are good.

    • 0 avatar
      wsn

      Shocking that the party is moving to eliminate the JVs. Simply shocking.

      Did you even read the article? The Chinese isn’t going to eliminate the JVs. They are simply reducing government fleet purchase from the JVs.

      Just FYI, the American government always purchased American branded cars. Does that mean that the American government is worse than the Chinese government?

    • 0 avatar
      porschespeed

      I read the article. Did you?

      What the article says verbatim is only the surface. Look for the context, look at the long-term implications, put it in its sociopolitical reality. Look for the greater truth.

      You’re likely too young to remember Enron, but do a little research. All you had to do was look at the reports and listen to their execs do interviews to know it was a fraud.

      If the camel smells food when it gets it’s nose under the tent, the only way it doesn’t come in is to move the food, or kill the camel.

    • 0 avatar
      wsn

      I lived in China, did you?

      Contrary to popular belief, China isn’t a communist state. Not since 1976. Of course, it isn’t a true democracy either. It’s somewhat like Mexico, extremely corrupted. But the government doesn’t seize properties the communist way. They do it the mafia way, like holding on to monopolies and taking bribes.

      The Chinese government isn’t a single minded body. It’s not that much different from the US. Powerful politicians have their own backyard to take care of.

      The JVs are the backyards of some of most powerful politicians. It’s a bribery for political green light sort of structure. Both parties have no reason to break that relationship when it is going well.

      The non-JVs had no political support in the beginning. So, naturally they try to bribe their ways into the political echelon as well. Now they are somewhat successful in doing that.

      It’s not Chi-com vs. JV. It’s more like Bush/Texas/Toyota vs. Obama/Michigan/GM sort of thing. There will be a balance of powers. That’s all.

    • 0 avatar
      porschespeed

      @wsn,

      Nope. Never lived there. Don’t have to, to see the writing on the wall. Tulip bulbs to Beanie Babies, it never changes.

      Have more than a few buddies who have done biz there. Biz is biz.

      While the self-interested would like to pretend that outsiders “can’t understand”, the fact remains that we are the only ones who can.

      Sorry old chap, I’ll be vindicated in the end. You know it. What bugs you is that I do.

  • avatar
    John Horner

    Hmmm, remember the uproar in certain corners when weak Buy American provisions were added to the US economic stimulus bill?

    Speaking of which, why doesn’t this article have a “Trade War Watch ….” headline?

  • avatar
    RGS920

    If anyone has ever read The Choice: A Fable of Free Trade and Protection this sounds eerily similar. If chinese automakers can’t compete in china without government intervention then they are going to have a hell of a time competing anywhere else. Which isn’t a bad thing for our domestic automakers in the long run.

    • 0 avatar
      gimmeamanual

      Best-selling car in China is Chinese – the BYD F3.

    • 0 avatar

      The Japanese and Korean automakers had a lot of help from their governments (and still do) to become competitive.

      And I don’t know; I don’t recall a Chinese automaker having to get multi-billion bailouts from their government…

    • 0 avatar
      Disaster

      The Chinese automakers can’t compete with the status of owning a foreign luxury plate like an Audi, or BMW…at least not from state officials who spend their countries money on them. But, when prices drop, it could take the more expensive cars out of the equation entirely. So much for the luxury brands latest revival.

  • avatar
    Mr Carpenter

    I suspect strongly that in the short-term, Volvo will supplant both Audi and Buick as the near-luxury (or luxury) vehicle ‘of choice’ in the PRC.

    Long term, I suspect that it will lead to the demise of GM. Thinking out the inevitable long-term impact of this, that is the conclusion I reach. After all, as of now, where are most of GM’s profits apparently coming from? China. What is the most coveted by Chinese GM car brand from their JV? Buick.

    Looking further long-term, this will probably result in a huge trade war with America potentially having a change of administration and limiting the imports of Chinese goods (which supposedly might result in an increase of employment in the United States, except that I suspect by then, nobody in their right minds would want to invest in the US any more post-dollar-hyperinflation).

    “Interesting times”

  • avatar

    It must be fun trying to do business in a country where most of your competitors, customers, partners, and the judges who enforce contracts work for the government. In such a situation, contracts are worthless.

    Who says that contracts matter in China? The Chinese gov’t will arbitrarily ignore contracts if it feels the need to do so and all the foreign companies will meekly comply if they want continued access to the large and growing Chinese market. If the foreign companies complain, other companies will rush in to take their place.

    Everyone thinks that if they feed the crocodile they’ll survive while it eats everyone else.

    The foreign companies doing business in China are in a bind. Chinese gov’t regulations prohibit wholly owned local subsidiaries of foreign companies. Foreign companies are forced to take JV partners.

    The cynic in me says that these new regulations will only stand if the private enterprises have more power through bribery than the managers of state owned enterprises have though corruption.

    And that’s why I like America.

    • 0 avatar

      My fellow China expert: Contracts mean so much in this country, that under true experts, “PRC” stands for “Price, Relationship, Contract” – the three tenets of doing business in China. If you don’t understand them, go elsewhere. If you don’t trust Chinese courts, request binding arbitration in Hong Kong, Singapore, or Switzerland if you are absolutely paranoid. This is where the contract becomes extra important. The arbitration panel will go by the word of the contract.

      I’m glad you like America including the American legal system. I have been exposed to the German, American, and Chinese systems, for many years each. With a carefully written contract, I put my fate into the hands of an arbitration panel in Hong Kong any day.


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Contributing Writers

  • Jack Baruth, United States
  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Vojta Dobes, Czech Republic
  • Matthias Gasnier, Australia
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Cameron Aubernon, United States
  • J Emerson, United States