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BMW becomes first automaker to apply for majority stake in China JV

BMW all electric i Vision Dynamics concept car displayed at the 2017 Los Angeles Auto Show. Photo: Reuters

German automaker BMW will gain a majority stake in its joint venture in China in a deal making it the first beneficiary of the country's opening up policy which aims to give foreign investors wider access to the market.

Under the agreement which is scheduled to close in 2022, BMW is allowed to pay 3.6 billion euros ($4.2 billion) to increase its stake in BMW Brilliance Automotive to 75 percent from the current 50 percent, a break from a decades-long industrial policy, which puts a cap for foreign ownership in automotive ventures in China at 50 percent with a purpose of protecting the interests of domestic car manufacturers.

The signing of the deal between BMW and China's Brilliance Automotive marks a milestone move that gives the Munich-based carmaker a greater say in the operation of its China joint venture and enables it to keep more of the profits it earns in the world's largest automobile market, in which BMW sold 560,000 vehicles last year.

The agreement is still awaiting approval of China's regulators and shareholders of Brilliance Automotive, the Chinese partner.

Alongside the deal, BMW said that it will spend 3 billion euros for an expansion project of its existing manufacturing facility in Shenyang, the capital city of northeastern China's Liaoning province, with plans to open a third new factory, which will put the production of gasoline-powered cars, plug-in hybrids and pure electric vehicles in the same line.

Thanks to these investments in China, the production capacity of BMW Brilliance Automotive is expected to increase to 650,000 cars a year by the early 2020s from last year's 400,000 vehicles.

During a meeting with Chinese Premier Li Keqiang in Beijing last week, BMW Chief Executive Officer Harald Krueger said that China will not only be the largest market for his company but also an important manufacturing center for exports to other markets, according to the website of China's central government. "BMW's success in China depends on the Chinese government's stable policy support," said Krueger.

In response, Li assured Krueger of a higher degree of openness, which will be of "iconic significance for all cooperation with foreign investors".

Over the recent years, BMW has shifted more production and R&D to China. This year, the German carmaker opened its second research and development center in Beijing to fulfill its blueprint aimed at building a complete R&D system in the country focusing on electric vehicles and digitalization.

The Beijing-based R&D facility is tasked with working out localization strategies, testing the quality of production vehicles and applying for local industrial certificates for new car models.

Less restrictions, more demands

The Chinese government has followed through on its promise of opening more industries to foreign investment in June, when the National Development and Reform Commission, the country's top economic planner, and the Ministry of Commerce rolled out an updated version of the negative list cutting the number of items remaining off-limit to foreign investors to 48 from 63.

As a key part of the negative list, officially named the Special Administrative Measures on Access to Foreign Investment, the restrictions on foreign ownership in joint ventures producing commercial cars and passenger cars will be removed by 2020 and 2022 respectively. The foreign ownership for new energy vehicle manufacturing will be fully lifted, according to the negative list.

Considering new energy cars as an effective way to combat air pollution that has been suffocating many northern Chinese cities, the Chinese government has issued a strict mandate, which requires automakers doing business in the country to enhance the production proportion of pure electric cars and plug-in hybrid vehicles.

The new electric car policy has prompted nearly all big foreign automakers operating in China to seek closer cooperation with local partners. BMW has gone a step further by signing a long-term contract to purchase designated battery cells from Contemporary Amperex Technology, a leading electric car battery maker in China. BMW has also bought an 815 million yuan battery production unit from Contemporary Amperex Technology.

"With continuous investment, as well as the development and production of electric vehicles, we underline China's importance as a dynamic growth market for us," Krueger said in a statement.

A blow to domestic players?

Some experts are worried that BMW's move would spur foreign carmakers including Daimler, Volkswagen and Toyota to seek controlling stakes in their joint ventures in China, raising concerns that Chinese partners would get less earnings from their joint ventures.

Brilliance Automotive, which draws much of its revenue from sales of BMW-branded cars, has seen its shares tumble nearly 50 percent this year due to talks on the carve-outs.

Also, a source close to policymakers said that the biggest resistance against relaxation of foreign ownership restrictions comes from domestic state-owned automobile groups running joint ventures with foreign partners because these Chinese companies earn a large part of their revenues from building foreign-branded cars.

The source went on to say that the two sides had formed a close community of shared interests, which had led to a monopoly on pricing that goes against market rules.

Li Shufu, chairman of Geely Auto, a Chinese privately owned automaker, has publically said that scrapping the 50-50 ownership rule would help create an environment for fair competition between privately owned carmakers and joint ventures and make reasonable pricing possible in the future.

"Being the first company [to agree to raise the stake of foreign partner] means that we have to face a lot of questions. But we would rather do it earlier rather than wait till 2022 to start a negotiation," said Qi Yumin, chairman of Brilliance Automotive, hinting that allowing foreign partners to gain a bigger control of joint ventures is a necessity.

All foreign car manufacturers in China are now in talks with their Chinese partners over ownership of joint ventures, and the move would in turn force local automakers to seek advances in manufacturing capability and technological innovation.

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