(Bloomberg) -- The days of free lunch for Chinese carmakers are numbered.
The country lifting the 50 percent cap on the stakes that foreign automakers can own of local joint ventures sends a message to the Chinese partners: take charge of your own future. That means manufacturers like SAIC Motor Corp., China’s largest by sales, Guangzhou Automobile Group Co. and BAIC Motor Corp. can no longer bank on the strong German, U.S. or Japanese partner brands to keep buoying sales indefinitely.
The change is “a good stimulus to urge Chinese companies to strengthen their own brands at a faster pace rather than relying on the joint ventures to feed them,” said Yale Zhang, an analyst with Automotive Foresight Co. in Shanghai. The risk for the Chinese companies is that in a decade’s time, the foreign brands will have become fully independent from them, he said.
The “50:50 rule” has been a cornerstone for China’s auto industry since 1994, designed to buy local auto makers time to gain the technology and build their brands before giving overseas companies unrestricted access to what has become the world’s biggest car market. China began to hint toward easing of the restrictions a few years ago and announced on Tuesday that they will be abolished by 2022.
The removal of the cap signals China now has more confidence in its home-grown contenders. The market share for Chinese-brand cars has edged up gradually in the country, reaching 43.9 percent in 2017 compared with 41 percent a decade ago, according to the state-backed manufacturers’ association.
Still, with more than half of the record 24.8 million cars, sport-utility vehicles and minivans sold in China in 2017 carrying foreign nameplates, it’s those companies that control the market.
Investors are taking the increasing risks into account. Shares of Chinese automakers have dropped in recent months as an opening of the country’s car industry began to look imminent. They extended their declines on Wednesday:
The decline for SAIC, whose partners include Volkswagen AG and General Motors Co., left the stock at its lowest level in six months.
The risk for local manufacturing is that foreign car companies, after several decades in the country, now have enough knowledge about the market to go it alone with electric-vehicle manufacturing. That would allow them to keep more of their profit, rather than splitting it with a local partner. On Wednesday, Credit Suisse lowered its rating on Chinese carmakers, saying their foreign partners are now set to build new facilities with majority or full control.
“The change will have impact over foreign automakers’ mentality and they may start to seek bigger say in the joint ventures,” said Cui Dongshu, secretary general of China Passenger Car Association. “The change may impact the long-term stability of the joint ventures.”
The growth area of electric cars is a market segment where China decided to remove the caps already this year. That potentially means tougher competition for new-energy vehicle makers such as BYD Co., as major U.S. rival Tesla Inc. gets an easier path to start its own Chinese plant without the need to partner with a local rival.
German and U.S. carmakers were quick to reassure that they won’t abandon local partners. Volkswagen said it will analyze if China’s move leads to new options, saying its existing joint ventures won’t be affected. General Motors said its growth in China is a result of working with its partners, and that it would keep doing so. Tesla declined to comment.
To be sure, it’s unlikely that foreign companies will rush to get rid of their partners. The partnerships are typically protected by contracts that can last decades, and buying out an existing partner could turn out to be pricey.
The carmakers will proceed with “caution’’ for reasons including the investments required to replicate the current joint ventures and the ruin it would bring in their relationship with the partner and the regional governments backing them, analysts at Bernstein said in an April 10 note.
“This matters in a market like China, especially given the central role the Chinese public sector plays in buying electric vehicles directly,’’ Bernstein said.
©2018 Bloomberg L.P.
With assistance from Tian Ying, Yan Zhang