These Chinese Clunkers Aren't Scrapyard Material Yet
(Bloomberg Gadfly) -- There's a long-standing rule in China regarding foreign investment: Permit it only once your domestic industry is strong enough to win on its own terms.
Many of the local operations have grown so big -- and will be so much bigger still in 2022, when the deregulation will extend to passenger cars -- that foreign partners already dedicating billions of dollars in capital to developing electric and automated vehicles would struggle to digest them.
The price put on the listed shares of the holding companies that control the joint ventures could be taken as a baseline for any change-of-control discussions, and illustrates how expensive such a move would be.
The enterprise value of Dongfeng Motor Group Co. is now higher than that of Ferrari NV, relative to its forecast blended forward 12-month Ebitda. Chongqing Changan Automobile Co., Guangzhou Automobile Group Co., SAIC Motor Corp. and FAW Car Co. are all more richly valued than BMW AG, Mazda Motor Corp. and Subaru Corp. on the same measure, although all five Chinese partners trail the foreigners in terms of returns on invested capital.
That's before you get into the way that stalemate has been written into the structures of most of the major joint ventures out there. SAIC, the biggest of the group, is only marginally more entangled with Volkswagen AG than General Motors Co. in terms of production volumes, revenue and capital invested.
BAIC Motor Corp. is in a similar relationship with Hyundai Motor Co. and Daimler AG, with Hyundai in front in volume terms but Daimler leading in profits. Dongfeng counts Nissan Motor Co. as its largest partner, but Honda Motor Co., Kia Motors Corp. and PSA Group are all significant players.
That set-up presents international firms with something of a prisoner's dilemma. To buy out your share of a joint venture, you have to hand money to the holding company. If it doesn't then pass that cash back to shareholders, it's going to wind up re-invested in the business, which in practice risks ending up with a rival.
One of the key advantages of having a Chinese base is also diminishing. Once upon a time, foreign companies might have hoped to use factories in the country as export bases for the world, in the way that Apple Inc. did with smartphones. But that ship has sailed: Chinese car exports still amount to no more than 500,000 units or so a year, and rising costs mean that large swathes of the nation's manufacturing sector are moving to cheaper locations elsewhere in Asia and in Africa.
What's more, there are advantages to the status quo. Most are reasonably profitable for their foreign partners. VW has received about 20 billion euros ($25 billion) from its China joint ventures, as Gadfly's Chris Bryant wrote Tuesday. Similarly, about half of operating costs before depreciation at BMW's venture with Brilliance China Automotive Holdings Ltd. are direct supplier payments to BMW itself.
Finally, there's the benefit of on-the-ground knowledge. The regulatory landscape for automakers in China is dizzingly complex, especially given the country's rush to electrify its vehicle fleet and rising trade tensions that risk wrong-footing foreigners -- BMW and Daimler, for instance, could get caught in the crossfire between Beijing and Washington. Local experience in negotiating subsidies and regulations with central and provincial governments is probably as much at a premium now as it's ever been.
That's reason to think that, even as the 2022 start date approaches, not much is likely to change for China's automotive joint ventures. These cars aren't flashy, but they're workhorses that do the job and don't cost too much to run. If it ain't broke, don't fix it.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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