CHINA intends to rebalance the economy from an investment-driven to a more consumer-driven one. The decisions of central leaders last November changed the role of the market from basic to decisive in terms of asset allocation. What would it mean for the auto industry if China really follows the roadmap laid out for the rebalancing?
The joint venture rule for automakers is a central issue standing in the way of a more market-oriented industry. Abolishing the rule would have major implications for both Chinese and global automakers.
Of course, the end of the joint venture rule could happen in many ways. We believe that the global original equipment manufacturers (OEMs) could be allowed to buy out their Chinese partners over several years. Furthermore, there would be no more pressure on global carmakers for a transfer of know-how to Chinese partners. Currently, joint ventures are allowed only to produce cars as long as the Chinese partner also makes cars on its own. For this reason, most Chinese OEMs get ample support from their international partners for their own activities. Many of them just use older platforms of the partners to develop their own cars. With the end of the joint venture rule, this kind of support would also end and Chinese manufacturers would be forced to develop their own platforms if they want to become competitive players.
Some Chinese manufacturers might choose to sell their shares rapidly; others might linger on for a while. For the laggards, time would not be on their side because their global partners might choose to slowly ramp down activities on the joint venture and ramp up their own activities. This option would be easier for global carmakers with a smaller existing footprint. It would certainly be much harder, for example, for Volkswagen, with so much cost sunk into so many manufacturing plants. Toyota, on the other hand, has sunk much less cost into plants in China.
Naturally, global OEMs would prefer to buy out the Chinese partners and gradually turn the operations into their own starting with sourcing parts. Later, they could establish significant research and development operations in China and could also start exporting from China.
Rebalancing the economy could also mean less or no import duties on cars. In that case, the global automakers would probably decide to cap their production capacity in China at some point and expand capacity in other Asian countries. It would be more profitable to use underutilized plants in regions that go through a crisis, like Europe currently.
Several options
Chinese partners selling their shares in joint ventures would have several options. They could try to buy shares in a global carmaker, as it already happened with BAIC and Daimler, and with Dongfeng and PSA. They could also use the proceeds from selling the joint venture shares to ramp up their own operations. Another option is to exit the car industry and use the proceeds to invest in other ventures. Local governments as owners of the carmakers could also use the proceeds for improving public transport and creating smarter urban centers.
For private Chinese carmakers, rebalancing would also be positive. The competition with state-owned enterprises (SOEs) would be on a more level playing field. Some of the SOEs would just squander the money from selling their shares in joint ventures, while others would exit the market. Those left would have to turn into market-focused companies because local governments would not be able or willing to support them at any cost anymore in the world of rebalancing. They would have to become private carmakers over time. With many years of learning how to survive with fairly little money, companies like Great Wall, Geely and BYD would probably have an advantage and could probably convince some international investors to back plans for global expansion.
Rebalancing would not only change the rules for players in the car market but also lead to very different segmentation. It means a transfer of money from the producers to the consumers. The majority of the households would see significant improvement in their financial situations, while richer households would see a decrease in their assets. This would lead to a fairer income distribution and would result in a car market more centered on compact and medium-size cars.
The share for large and expensive cars would decrease and only rise again when China becomes a rich economy. That could happen in about 20 years. While this seems to be a problem for the premium carmakers at first, it might actually be the opposite. The emergence of China as the world’s biggest consumer market would lead to rising incomes around the world and to a global increase in demand for premium cars. Premium carmakers prefer a more even global spread of their risk than is currently the case.
Rebalancing would lead to a more efficient and healthy automotive industry in China and would make it an integral part of the global network, bringing many high-level and well-paid jobs to China. The real intention for any government is to have stable industries that provide long-term and well-paid options for its citizens.
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