Cars and buses for delegates sit parked near the Great Hall of the People in Beijing, China (Photographer: Qilai Shen/Bloomberg)  

China Hands Olive Branch to Tesla as Tie-Up Rules Wind Down

(Bloomberg) -- China will permit foreign carmakers to take full ownership of their local ventures, offering a trade-talk olive branch and a boost to global manufacturing giants hungry for a bigger slice of the world’s largest auto market.

Scrapping the current 50 percent ownership cap will benefit electric-car producers like Tesla Inc. first, with the restriction on such businesses lifting as soon as this year. The cap for commercial vehicles will be eliminated in 2020 and the one for passenger vehicles will end in 2022, the agency that oversees industries said Tuesday.

The move may help diffuse strains between China and the U.S. after President Donald Trump’s intensified rhetoric raised the prospect of an all-out trade war. Companies from Daimler AG and Volkswagen AG to Ford Motor Co. and Toyota Motor Corp. may find it easier to do business in China, while local carmakers will be under increased pressure to speed up building their own brands.

China Hands Olive Branch to Tesla as Tie-Up Rules Wind Down

“In a decade, foreign carmakers will gradually become all independent and Chinese companies will lose the cash flows from the joint ventures,” said Yale Zhang, an analyst with Automotive Foresight Co. in Shanghai. “Foreign carmakers will be happy as they won’t have to share 50 percent of the profits with their Chinese partners.”

The landscape is unlikely to change overnight. Buying out joint-venture partners will prove expensive and going it alone would require billions of dollars in fresh investment. China’s announcement comes on the heels of a similar move for the financial industry last week.

Welcome News

Shares in German and U.S. carmakers gained on the news. China accounts for about half of Volkswagen’s namesake brand sales, and serves as the most significant market for luxury Mercedes, VW’s Audi unit and BMW vehicles. Volkswagen rose 1.2 percent, while Fiat Chrysler Automobiles NV’s U.S. shares were up as much as 3.5 percent in intraday trade.

Global carmakers were quick to welcome the news, while insisting they won’t abandon local partners. Volkswagen said it will analyze whether China’s move leads to new options, saying its existing JVs won’t be affected. General Motors Co. said its growth in China is a result of working with its partners, and that it would keep doing so. BMW, in talks to establish an electric Mini joint venture with Great Wall Motor Co., said it will make any decision through consensus with its partners, adding that it plans to continue and expand its existing venture with Brilliance Auto.

China Hands Olive Branch to Tesla as Tie-Up Rules Wind Down

Elon Musk’s Tesla in particular is in a position to benefit from the relaxed ownership rules. Musk hasn’t been able to secure a deal to open an assembly plant in China, after negotiating with Shanghai’s government for more than a year. The sides disagreed on the ownership structure, people with knowledge of the situation said in February. Tesla declined to comment.

Likely Losers

Those losing out include local new-energy vehicle makers such as BAIC Motor Corp. and BYD Co., with the latter set to face tougher competition from any lower-priced Teslas, said Dan Zhuang, an analyst at Rhb Osk Securities Hong Kong Ltd.

“The pace of the open-up is much faster than the market had thought,” Zhuang said. “If Tesla produces from China, BYD may face the pressure to lower prices and thus a weaker margin.”

The decision to eliminate the caps isn’t a complete surprise. Bloomberg News reported in 2016 that the government was considering the move, and China last year promised their eventual removal. China has required foreign automakers to enter into ventures with domestic partners to operate in the country since 1994, with the overseas company holding no more than 50 percent.

For years, the so-called “50:50 rule” was a sacred cow for the auto industry, seen as necessary to give local carmakers time to improve their technology and build their brands before giving international rivals unfettered access to the market. The removal of the cap signals Chinese officials have more confidence in their home-grown contenders.

Going Solo

The move 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,” Automotive Foresight’s Zhang said. Foreign car brands, for their part, now have years of experience operating in China and believe they can go solo, without a local partner guiding them, the analyst said.

Michael Dunne, president of consulting firm Dunne Automotive Ltd. in Hong Kong, warned the lifted caps won’t necessarily mean smooth sailing ahead for global carmakers.

“China feels its automakers are already close enough to parity with global rivals that they can let go of the ownership caps,” Dunne said in an email. “But this does not mean an end to China’s market access fences -- look for new ones to surface with different shapes and guises.”

©2018 Bloomberg L.P.