An auto plant of FAW-Volkswagen in Foshan, South China's Guangdong Province Photo: IC

Chinese Premier Li Keqiang brought a present for German carmaker Volkswagen Group (VW) during his visit to Germany - VW's long-expected share increase in its joint venture established with China FAW Group Corp.

Experts believe that FAW made a sacrifice for strengthening economic cooperation between the two countries, but there is still a chance for the company to bargain for compensation in the share ratio change process.

More opening up

On October 8, one day before Li's arrival in Berlin, German newspaper Die Welt published Li's signed article titled "Let opening up and innovation lead cooperation between China and Germany."

The article said that with an eye on the future, the two countries should explore the potential for bilateral opening up, official news portal people.com.cn reported on October 10.

"China will favorably consider VW's request for increasing its stake in joint venture FAW-VW Automotive Co, and China also expects that Germany will allow qualified Chinese enterprises to bid for high-speed railway projects in Germany," Li said.

FAW and VW currently have 60 percent and 40 percent stakes of their joint venture FAW-VW respectively, and stakes held by the German auto group will increase to 49 percent, media reports said Monday.

"FAW and VW agree in principle to adjust share ratio according to Chinese law and regulation, but currently there are no more available details," FAW-VW told the Global Times via e-mail on Tuesday.

"I was kind of surprised to learn Li mentioned specific enterprises in his article, because usually the Premier only talks about macro strategies," Wu Shuocheng, an auto industry consultant at Shanghai-based Menutor Consulting, told the Global Times on Tuesday.

Allowing VW to have a bigger stake in the joint venture is more akin to a market exchange strategy: China's auto market for the German high-speed rail market, Wu noted.

Li has been nicknamed by Chinese Internet citizens as "China's top high-speed railway salesman" as he has been deploying "high-speed railway diplomacy" through the promotion of China's high-speed railway technology in almost all of his overseas trips since he took office.

In addition to seeking German market access for domestic high-speed railway technology, China also needs to show it is open to foreign capital, a Beijing-based independent auto industry analyst Zhang Zhiyong told the Global Times on Tuesday.

China hopes for an open and favorable environment for its outbound investment, so it has to make some move as an exchange, according to Zhang.

FAW's concession

The joint venture was founded in 1991 jointly by FAW, VW and VW's subsidiary Audi AG, with a stake ratio of 60:30:10, newspaper Beijing Business Today reported on Monday.

Although Audi only has a small share in the joint venture, official data showed that it contributed to half of the joint venture's profit in 2013. As a result, Audi has made requests several times for a higher stake in FAW-VW, the report said.

According to a stake adjustment plan, Audi will have an additional 9 percent stake, which translates into 2 billion yuan ($330 million) in profits per year, according to the report.

In addition to a drop in profits, the share cut also indicates a reduction in the FAW's control of the joint venture, Wu said.

China has given itself the goal of becoming an auto powerhouse in recent years, but the stake cut in the joint venture seems counter to this strategy, he noted.

FAW has no need to change the stake ratio for itself but "It should make some sacrifice for the country's benefit," Dong Yang, the secretary general of China Association of Automobile Manufacturers (CAAM), said at a press conference on Monday, implying that FAW's giving up on its 9 percent stake is a compromise on the national level.

Even after the stake adjustment is accomplished, FAW still has a 51 percent stake of the joint venture, in accordance with current Chinese regulation on foreign investment in the automobile industry.

China forbids foreign auto companies from having a stake exceeding 50 percent in joint ventures. 

There have been discussions for several years calling for this "red line" of 50 percent to be removed, but Dong and CAAM have been firmly against lifting the share limit, as Chinese automakers are still not strong enough to face full competition.

The share limit will not be removed at once but it is an inevitable trend, Zhang said, noting that the German group's share increase in the joint venture also meets this trend.

VW's hopes realized

VW has called for a share increase for a long time without getting any feedback from FAW until Premier Li took a stand, media reports said. VW's CEO Martin Winterkorn said in September 2013 that the company was considering increasing its stake in the joint venture, according to a Reuters' early report.

VW, which has two joint ventures in China, FAW-VW and Shanghai VW, established with China's SAIC Motor Corp, sold about 3.3 million cars in China in 2013, which has been its biggest market and contributed more than 40 percent of profits in the year, according to official data.

FAW and VW extended the joint venture by 25 years, and will expand production capacity to meet demand in the Chinese market, according to a press release by FAW-VW released on October 10.

A share increase at this moment indicates a long-term profit addition for VW and bigger say in the next cooperation stage, media reports said.

FAW-VW has produced and sold 9.6 million vehicles as of the end of September and is expected to reach 10 million vehicles in 2014, according to the joint venture's press release.

Winterkorn said the two sides will deepen the cooperation and work on new-energy vehicles for the Chinese market, according to the press release.

VW is extremely dependent on the Chinese market, and now with the coming share increase, there is no doubt that VW will invest more in the world's largest auto market, Zhang said.

With eight auto manufacturing factories and nine component plants in China, the German group plans to build two more assembly plants in the country with FAW.

However, more investment in the joint venture or Chinese market does not mean the German automaker will transfer more technology to its Chinese partner, Wu said.

The share ratio adjustment process may involve some bargaining and FAW should take the opportunity to get some compensation, he noted.