China Thinks Aloud About Dropping The Joint Venture Requirement

I came to China first in 2004 on a job for Volkswagen. Back when, and years thereafter, the foreigners at the joint ventures agreed (latest after the third beer at Paulaner) that eventually, their days will be numbered. “Once the Chinese have learned enough, they’ll kick us out,” was the lament. That was six years ago, and no sign of an expulsion from the Chinese paradise yet. On the contrary: The Chinese might invite the foreigners in for good. They are thinking about dropping the 50:50 joint venture requirement that forces foreign automakers to team up with local manufacturers.

Liu Shijin, Deputy Director of the State Council Development Research Center, said at the “Sino-German automobile industry forum” that getting rid of the 50:50 joint venture requirement would enhance market competition. Forming a joint venture by a new entrant is already quite hard, simply due to the fact that all the attractive Chinese brides are married.

A Deputy Director of a Chinese State Council Development Research Center usually doesn’t make off-the-cuff remarks. Gregoire Olivier, President of PSA Asia-Pacific Operations, immediately signaled that he would be very pleased if that would happen. And he’s not alone.

The 50:50 rule had been in place since 1994. “An expert with the State Council making such remarks in public possibly indicates that senior government officials have changed their attitude toward the rule,” muses Gasgoo, and they are right.

According to Gasgoo “foreign vehicle manufacturers all start to criticize the policy, saying that the 50:50 equity proportion is another protective behavior in international trade.” I haven’t heard them openly criticizing the rule, but if a Chinese news outlet says so …

Executives of foreign vehicle manufacturers often said the policy has decreased the efficiency of joint venture investment. The complex, and often byzantine decision-making process in a JV is not conducive to making quick decisions necessary to seize market opportunities.

Large domestic manufacturers, of course are against it. They are worried that foreign manufacturers will be able to control the Chinese market more easily.

The thinking is that in the long run, efficiency and expediency will win, and that the 50:50 rule will fall. This would open the door to more innovation (the juicy parts of technology are often kept from JV partners) and it would also open the gates to Chinese exports of cars with foreign brand cachet. Making cars is one of the few areas where a joint venture is required. You can make parts all by yourself, for instance. The Chinese are first and foremost business people, “and if it works, we’ll call it socialism,” or so the saying goes. And of course, this being China, no favor granted goes without another favor expected. What will be the price for such a decision?