3 May, 2018
On 17 April 2018, as previously signalled by the government and anticipated by the market for some time, an official of the National Development and Reform Commission (“NDRC”) announced the following reforms to liberalise foreign ownership restrictions in China’s automotive industry:
- removal of foreign ownership restrictions in the special vehicles and new energy car sectors in 2018;
- removal of foreign ownership restrictions in the commercial vehicles sector in 2020; and
- removal of foreign ownership restrictions in the passenger vehicles sector and the limit of two joint venture investments per foreign investor in 2022.
The benefit of the reforms is likely to be greatest for new entrants to the relevant market sectors. These players will be able to structure their own ventures without the need to renegotiate an exit for the Chinese partners, and their flexibility will not be affected by the need to generate synergies with, or returns from, their existing investments in China.
On the other hand, overseas automakers with existing joint ventures in China will need to evaluate whether the benefits of switching to a wholly-owned operation outweigh the costs (for example, the loss of royalty fees which they receive from the joint ventures, and the need to rebuild dealership, aftermarket and supply networks for any new operation).
The new investment flowing from the market liberalisation is likely to be seen in the sectors and segments of the market where foreign vehicle manufacturers have the greatest competitive edge over their domestic counterparts. This includes electric cars (see further below).
Another segment of interest may be in high-end passenger cars (i.e. Class C and Class D cars), where there is less indigenous competition than in the mid-market segment (i.e. Class A and Class B cars). Customs duties for imported
passenger cars are expected to be reduced in 2018. Market participants in this segment that already export cars to China will need to weigh the marginal benefit of establishing a new manufacturing operation in China against the additional cost.
New wave of restructurings?
If an automaker seeks to establish a wholly-owned operation, a key point to contend with will be the government’s ban on the establishment of new internal combustion fuel-powered vehicle manufacturers, which has been in place since June 2017 and places a severe limit on the flexibility afforded to a greenfield operation.
Any new greenfield investment into the market will, therefore, likely be in the clean energy vehicle (i.e. electric car) sector. This sector, which is not subject to the ban on new vehicle manufacturers, has been a key area of interest in China’s eleven free trade zones.
The inability to establish new internal combustion fuel-powered vehicle manufacturers may trigger more interest in a buyout of the Chinese partner’s stake in the existing Sino-foreign automotive joint ventures in the market after the relevant foreign ownership restrictions are lifted.
In many cases, however, negotiating an exit for the Chinese partner will not be easy, given the profitability of some of these joint ventures. The Chinese joint venture partner may demand an exit at a high price and on its own terms, leading to protracted negotiations. The difficulty of negotiating a smooth exit with the Chinese partner may, in turn, lead overseas automakers to evaluate potential new investments as a result of the market liberalisation independently of any potential restructuring of their existing joint ventures.
- NDRC Answers Questions from Reporters on the New Foreign Investment Negative list and Opening-up of the Manufacturing Sector (国家发展改革委就制定新的外商投资负面清单及制造业开放问题答记者问), NDRC, 17 April 2018
- Opinions on Improving Management of Automotive Sector Investment Projects （关于完善汽车投资项目管理的意见）NDRC and Ministry of Information Industry, 13 June 2017
For further information, please contact:
Richard Gu, Linklaters