By Trefor Moss
SHANGHAI -- BMW AG will assume majority control of its Chinese
joint venture, becoming the first foreign auto maker to take
advantage of Beijing's easing of long criticized rules that limit
foreign ownership in the sector.
The German auto maker will pay EUR3.6 billion (about $4 billion)
to increase its stake in its partnership with Brilliance China
Automotive Holdings Ltd. to 75% from 50%. The new joint-venture
agreement lasts through 2040, extended from 2028.
As part of the deal, the joint venture will significantly expand
its manufacturing base in Shenyang in northeast China, BMW said in
a statement Thursday.
"BMW will gain a competitive edge in the China market," said
Yale Zhang, managing director of Shanghai consultancy Automotive
Foresight.
In April, China announced an overhaul of regulations governing
its auto industry. Foreign auto makers had previously been required
to build vehicles in China through joint ventures in which they
could hold a 50% stake at most. The new rules allow them to own all
of their Chinese operations.
Beijing announced the changes weeks after U.S. Trade
Representative Robert Lighthizer published the findings of his
investigation into Chinese trade practices. In it, he criticized
joint-venture requirements as "a cornerstone of China's technology
transfer regime."
At the time, the lifting of foreign-ownership limits was seen as
an important concession on China's part, though it failed to
prevent an escalation in Washington and Beijing's trade
dispute.
Amid Washington's trade tensions with China--and to a lesser
degree, with Europe--the BMW deal represents a significant
strengthening of commercial ties between Germany and China.
Washington has threatened to inflict punitive tariffs on European
Union imports, singling out car makers--Germany's flagship export
industry--as a possible target. That has weighed on German auto
companies' shares and alarmed politicians in Berlin. Senior German
government officials have warned in recent months that U.S.'s
aggressive trade posture was forcing Germany into a rapprochement
with other leading powers, including China, India and Russia.
While the new ownership rules apply equally to all foreign auto
makers, BMW was able to move early because its partnership with
Brilliance is particularly unequal, Mr. Zhang said. "In this JV,
the foreign partner is superstrong and the local partner is
superweak. Brilliance doesn't contribute much," he said.
State-run Brilliance isn't regarded as a significant player in
China. It sold about 102,000 vehicles under its own brand in 2017,
compared with 387,000 locally built BMWs, and is heavily dependent
on revenues from its joint venture with BMW.
Most foreign auto makers, including Ford Motor Co., General
Motors Co. and Volkswagen AG, have said they don't plan to adjust
or dissolve their Chinese joint ventures, most of which have been
operating for more than two decades. They say breaking away from
the partnerships would be too complex, even though as sole
operators they would be able to retain all the profits from Chinese
sales and have a free hand to manage their local interests.
China is phasing in the new rules over several years. Foreigners
can wholly own companies that build electric cars starting this
year, while restrictions on commercial-vehicle makers will be
lifted in 2020 and limits on all remaining auto makers will be
removed in 2022. BMW said the changes to its joint venture would
come into effect in 2022, in line with the new regulations.
Auto analysts say the reforms have huge implications for the
Chinese auto industry but note that it will be years before the
full impact becomes apparent. Foreign auto makers locked into
long-term joint-venture contracts, often with more influential
partners than Brilliance, must weigh the opportunities and risks of
taking majority stakes or striking out on their own in China.
BMW's commitment to invest and create jobs, and its interest in
turning the Shenyang plant into an export base should be sufficient
to persuade the government of Liaoning province to back the deal.
The province, home to Shenyang, controls Brilliance, and the deal
requires regulatory and shareholder approval.
Freedom to control strategy in China will give BMW an advantage
over rivals that need to agree to decisions with powerful local
partners.
BMW-Brilliance is the test case for China's new regulations, and
Premier Li Keqiang has taken a close interest. Mr. Li first raised
the idea of BMW increasing its stake during a trip to Germany in
July, and he met with BMW Chairman Harald Krüger in Beijing on
Wednesday before the announcement. Mr. Li said the changes to the
BMW-Brilliance partnership showed that China was fulfilling its
promise to open its markets to more foreign competition, according
to state media reports.
In July, BMW announced a second joint venture with a Chinese
auto maker, Great Wall Motor Co., to build an electric version of
the Mini at a new plant in eastern China. That joint venture will
be a 50-50 partnership.
The chance to take a bigger slice of the profits from its
China-built cars is especially important for BMW, which has taken a
hit from the U.S.-China trade spat. Though China cut import tariffs
on cars from 25% to 15% in July, it imposed an additional 25%
tariff on U.S.-built cars in retaliation for new U.S. auto tariffs.
BMW imported more than 187,000 vehicles into China last year, more
than any other auto maker, with many of those cars built in the
U.S.
The premium auto segment, in which BMW is a leading player,
remains a bright spot amid slowing vehicle sales in China: Premium
sales will grow by about 10% this year, according to DBS Bank,
while mass-market auto sales are set to register little or no
growth.
Write to Trefor Moss at Trefor.Moss@wsj.com
(END) Dow Jones Newswires
October 11, 2018 10:41 ET (14:41 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.