Move could start a new period of tension between foreign firms setting up local operations and the Chinese government
Certain suppliers in China are understood to have been told by the Chinese government that they cannot operate their business in the country independently and are required to form partnerships with local companies. Stefan Wolf, CEO of exhaust systems supplier ElringKlinger, told German newspaper Stuttgarter Zeitung in an interview that he is aware of three such Germany-based suppliers that now need to look for a Chinese partner, although he said his company is not affected. "If that were to happen, it would be an attack on intellectual property. 50% of the company is being taken away – this, effectively, is expropriation," Wolf said. "I believe this is an attempt to make up leeway in terms of know-how and innovation," he added.
This could be seen as an aggressive move Chinese government, which has the power to approve foreign investments, reacting to the dominance that foreign firms are starting to take. However officials are more likely to urge foreign component makers to find an appropriate Chinese partner during the approval process, rather than force suppliers into a joint-venture. OEMs must currently form joint-venture partnerships when localising manufacturing facilities in China, but suppliers are currently not subject to any ownership requirements.
The move by China is interesting due to the nature of joint-ventures set up in China. Up to now, Major OEMs and tier-1 suppliers have used joint-ventures with local companies as a way of gaining access to China’s market with assistance from the local partner’s political and business connections. But as these firms have come to dominate the market in the region, at the expense of China’s own brands, the Chinese government is starting to react.
Being forced into joint-ventures would be seen as a backwards step for the industry by European and North American firms. Firstly, control in a Chinese joint-venture is not secured by 51% ownership in the company alone. Power is instead seen in the boardroom and management positions, a lever that foreign investors often trade off in favour of having majority ownership. Having control decided at a management level rather than by ownership creates an extra layer of time-consuming relationship maintenance that suppliers will have to factor in. In addition, as Mr. Wolf has highlighted, joint-ventures would mean opening up important techniques and intellectual property (IP) to local Chinese players in a market that has had issues with protecting against IP theft.
Although China has been a driving force in the global automotive industry over the past few years, Chinese automakers and suppliers have not benefited much from this rapid growth, especially when it comes to technology. The Chinese government has identified key technology areas in which a global supplier will be able to operate in China only through partnerships with local companies. The government hopes this will help to improve technology sharing with local suppliers.
The revelation of the request by the Chinese government follows the news that officials are clamping down on what they view as malpractice in industrials by foreign firms, with a particular focus on the automotive industry. The Chinese government has started releasing the findings of various probes into the auto industry. In August, the Chinese regulatory body, the National Development and Reform Commission (NDRC), imposed fines on several foreign automakers for violating the country's anti-monopoly law. The NDRC also found 12 Japanese suppliers guilty of price fixing and imposed antitrust fines totalling CNY1.24 billion (USD201.6 million).
The European Chamber of Commerce in China expressed concern then about the motives behind those investigations, saying that “in some cases that involve joint ventures, it has only been the foreign partner that has been named as being a party to the investigations”. It also noted that in some industries, domestic companies had apparently been spared official scrutiny.
European car brands including Volkswagen AG's Audi, BMW and Mercedes-Benz are scrambling to lower prices for new cars and spare parts in an effort to appease Chinese regulators who have accused some of them of anti-competitive behaviour. European and U.S. manufacturers are eager to increase their footprint in China, now the world's largest car market, but have been limited to owning 50 percent or less of joint venture companies run together with Chinese state-owned enterprises.
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