The future of vehicle manufacturing could be about to take a radical turn. Manufacturers of hybrid vehicles are waiting to see whether China in the next few months follows through on what has been hailed as a “smash and grab” assault on ownership of hybrid component production. In April, China’s National Development and Reform Commission (NDRC) proposed new rules which would mean that any foreign entity engaged in the manufacturing of “key components for new energy vehicles” in China may not hold more than a 50% equity interest in the enterprise. Similar restrictions have already been applied in China to key sectors like steel, aviation, broadcasting and film. According to a Mergermarket report, the move could be enough for Delphi, which has plans to manufacture products in China, to consider shifting to Singapore if it had to move its operations at all.
Meanwhile, the US-China Business Council, which represents more than 220 US companies with significant investment and operations in China, has requested drafters of the new catalogue to change the proposed stance on new energy vehicle (NEV) components and allow foreign companies to establish majority-owned JVs and wholly-owned foreign enterprises in this space. The stage seems set for the long-awaited showdown between the traditional OEMS from the old worlds of Europe, North America and Japan and a nascent China seeking to corner the clean vehicle market.
The stage seems set for the long-awaited showdown between the traditional OEMS from the old worlds of Europe, North America and Japan and a nascent China seeking to corner the clean vehicle market.
But in a sense we have been here before. While China has been a member of the WTO since 2001, there have been few signs that a country which is rapidly replacing the US as the world’s powerhouse is keen to slow the breakneck growth of domestic industries in the name of equitable free market capitalism. And to be fair, China’s interest in the hybrid automotive sector has not exactly been clandestine. The country last year trumpeted plans to invest US$15bn in expanding NEV use, and the World Electric Vehicle Association has predicted that China will become the leader of the NEV sector with a 15% market share by 2020. China has been preparing to eat more traditional vehicle manufacturers’ NEV lunch for some time.
The truth is, though, that foreign automotive companies may not be as exposed to China and the protectionist whims of the Chinese authorities as one might think. While Mergermarket figures show that having fallen back heavily from a peak of US$754m in 2008, foreign buyer investment in Chinese automotive and component companies has already reached more than 70% of this in the first half of 2011 alone, total foreign investment in the country’s automotive sector still accounts for a mere 3.4% of all foreign buyer acquisitions in China over the last five years. And the number of deals which foreign vehicle manufacturers are doing with Chinese targets is small; 136 deals out of a total 3,479 over the same period. Vehicle manufacturers, it would seem, just aren’t that in to China.
The World Electric Vehicle Association has predicted that China will become the leader of the NEV sector with a 15% market share by 2020.
The reasons for this are legion; deal-making in China for western corporations keen for a quick close is notoriously difficult, and a less robust accounting and corporate governance environment governed by a radically different culture in which the Chinese state has more than a passing influence don’t help. But it does at least mean that when and if Chinese regulators tighten their grip on the hybrid industry, it will be only the most foolhardy foreign automotive firms which take the hit. If there is a battle for control of China’s hybrid industry, then China has already won.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Thomas Williams is assistant editor and head of German coverage for Mergermarket EMEA. He is also Mergermarket’s European automotive and industrials correspondent, and writes for the group’s live deals product, Dealreporter. www.ft.com/mergermarket
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