Inkstone: China lets foreign automakers off the hook — but who really wins?
The elimination of restrictions on foreign automakers in China may be seen as a major concession in the face of a possible trade war, but it will have little impact on foreign car manufacturers already operating in the country.
Since 1994, foreign automakers have had to form joint ventures with local partners if they want to produce vehicles in China.
After all restrictions are lifted in 2022, foreign automakers will be able to go solo.
Years of protective measures – such as a 25% tariff – have led to a small number of vehicles directly imported from overseas. Foreign automakers opt to cooperate with local partners so that they can sell cars in China without being hit by these measures.
But while ceasing their partnerships with local firms means more profit to bring home, analysts are doubtful whether it will lead to significant changes in how foreign automakers do businesses in China.
“It takes a lot to set up a new network and new plants in China. Why would they do that? They have already set up successful partnerships and joint ventures locally,” said Jacob George, vice president of market research company J.D. Power Asia Pacific.
It takes a lot to set up a new network and new plants in China. They have already set up successful partnerships and joint ventures. ——Jacob George, J.D. Power Asia Pacific
His view is echoed by independent auto analyst Alan Baum, who says foreign automobile manufacturers still need the assistance of local partners for “parts supply, marketing, engineering and more.”
In response to the Chinese government’s latest announcement, some foreign automakers pointed out that local partners are integral to their success in China.
GM says its growth in China is a “result of working with our trusted joint venture partners,” while Japanese brand Infiniti says it values the “long term successful partnership with our JV partners.”
The Trump administration had criticized the joint venture rule for forcing US companies to transfer proprietary knowledge and technology to their Chinese partners. The announcement of the scrapping of the joint venture rule was seen as a victory for the American side in the trade spat between the world’s two largest economies.
The relaxation of foreign ownership rules in China may not help traditional automakers much, but Tesla, which specializes in longer-range and luxury-style electric vehicles, stands to benefit.
Tesla has been negotiating a deal to build an assembly plant in Shanghai for more than a year. The firm and the local government reportedly cannot agree on the factory’s ownership structure.
Do you think the US & China should have equal & fair rules for cars? Meaning, same import duties, ownership constraints & other factors.
Elon Musk seems to be frustrated with the lack of progress with Chinese authorities and sided with Donald Trump on Twitter. “Tesla will benefit in the sense of being able to move forward quickly,” says Baum. Limits to foreign ownership of companies manufacturing electric and hybrid vehicles will be removed this year.
Too little, too late?
The Trump administration, which had been railing against intellectual property transfer, is happy with the move. “Whenever they’re moving in our direction in a conciliatory way, whenever they’re lowering barriers, that’s a good thing,” said Lawrence Kudlow, the head of the National Economic Council.
But for the automobile industry, analysts say intellectual property protections are no longer as important as they once were, because China has largely caught up.
Whenever they’re moving in our direction in a conciliatory way, that’s a good thing. —— Larry Kudlow, National Economic Council
J.D. Power has been tracking quality of Chinese-made vehicles since 2000. The firm conducts surveys of new vehicle owners.
In the beginning, the quality gap between Chinese brands and international brands found 396 more problems per 100 vehicles compared to international brands. But last year the gap shrunk to 13 more problems per 100 vehicles.
“The playing field has become almost even,” George says. “It is a good point for the Chinese government to open the market up. They feel a lot more confident about the quality [of domestic brands].”
Domestic brands captured 41 percent of China’s auto market in 2017, up from 30 percent in 2011.
It seems likely that China is making compromises that suit its own agenda, not bending to pressure from Trump.