Auto joint ventures running on fumes

Source:Reuters Published: 2014-4-15 21:08:03

When the Chinese government allowed foreign carmakers to set up shop in China in early 1980s, it wanted to make sure they didn't kill off the nascent domestic industry. Foreign companies were required to enter into joint ventures with local manufacturers and to share technology with them.

Since then, China has surpassed the US to become the world's biggest car market. Sales of domestically made passenger cars reached 16 million last year, according to Credit Suisse. Over two thirds of these were foreign models manufactured by Chinese joint ventures. Some of the top Chinese automotive companies are almost entirely dependent on selling overseas brands. For Shanghai's Shanghai Automotive Industry Corporation, 89 percent of the passenger cars it sold last year were from joint ventures with General Motors and Volkswagen.

This makes an external push by Chinese regulators likely. Options range from allowing foreign companies to go it alone, to kicking them out of the country.

The most market-friendly scenario would be for authorities to end the joint venture requirement. That would allow foreign companies to buy out their Chinese joint venture partners. Without the steady stream of earnings they receive from the partnerships, many State-owned carmakers would face financial distress. The likely result would be much-needed consolidation among Chinese auto groups, which could then focus on producing cheaper models.

The author is Ethan Bilby, a Reuters columnist.



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