The automotive supply industry has been one of the most unregulated industries in China, with the industry becoming progressively less regulated over the past 20 years. While there are increasing regulations regarding emissions, safety, warranties and other areas that impact suppliers, ownership and other corporate governance rules have been among the most liberal in the country. For example, a broad auto policy implemented in 1994 made the auto components industry the first in China in which a foreign company could own a majority of a joint venture with a Chinese partner. As wholly foreign-owned enterprises, or so-called “WOFEs,” came into vogue in the late 1990s, many international auto supply companies chose to go it alone rather than establish joint ventures.
When I first arrived in Beijing in 1992, the country was only producing 500,000 vehicles (mostly trucks) per year, a far cry from the over 22 million cars, trucks and buses that are produced annually now. Despite the modest size of the industry, however, many companies and individuals saw the potential for the market and believed that, one day, China would be among the world’s largest auto markets. After all, the country’s rapid economic growth, coupled with its large physical size, mandated that China develop an extensive highway system and a robust auto industry that could produce the vehicles needed to move a growing number of people and goods around such a big country.
The potential for the China market excited companies like Volkswagen, which had established assembly joint ventures in both Shanghai and Changchun by 1992, and was on record as saying that China was the company’s single biggest market opportunity. It also excited the Chinese government, which named the auto industry as one of its seven “pillar industries” due to the economic growth, employment, technology and transportation capabilities its development could bring. Both Volkswagen and the Chinese government were frustrated, though, by the slow pace at which traditional suppliers were coming to China. Both knew that China’s auto industry could not develop without a solid supply base. In order to encourage international auto suppliers to come to China, the government said that foreign companies could control their joint ventures in the country.
By all measures, that policy worked, as one major supplier after another made China its number-one priority. The ability to control their Chinese operations through majority ownership gave international suppliers the ability to establish world-class greenfield plants, implement modern management systems, improve transparency and protect their intellectual property. As a result, international suppliers began bringing their latest and greatest, not their outdated, technologies to China.
In this context, an offhand remark in recent weeks by the CEO of a relatively small German auto supplier sent CFOs and government affairs officers at international auto suppliers scurrying to determine whether 20 years of ownership policy in China was about to change.
In an interview with StuttgarterZeitung, a German newspaper, Stefan Wolf, the chief executive of ElringKlinger (ZILGn.DE), was quoted as saying that: “The Chinese state has told several (German car) suppliers that they are no longer allowed to operate their Chinese subsidiaries on their own but only as part of a joint venture in the future.” Although his company was not among the three companies that had been given this notice, Mr. Wolf considered this an “attack” on intellectual property by the Chinese government, where 50 percent of a company was effectively being taken away and “expropriated.”
China is a big country, and often a simple comment made by a low-level government official can be blown out of proportion and extrapolated to indicate a new direction in national policy. On the face of it, Mr. Wolf’s comment made no sense, because it ran counter to 20 years of industrial auto policy in the country. Checks with our industry sources indicated that this was the case, and in fact, the European trade body in China released a statement last week, dismissing the rumor, saying that Beijing is not planning to force foreign auto parts suppliers operating in the country to form local joint ventures. The European Union Chamber of Commerce in China explained that the JV rumors could be the result of a misunderstanding stemming from existing restrictions dating from 2011 for suppliers in the e-vehicle segment.
This rumor could also have emanated from the Chinese government’s tough anti-monopoly campaign and its battle against the “over-charging” for parts by foreign auto components makers. In particular, Xinhua News Agency reported in mid-August that
Similarly, China’s National Development and Reform Commission (NDRC) announced last month that 12 Japanese auto parts and bearing suppliers will be fined nearly 1.24 billion yuan ($201 million) for monopolistic conduct related to pricing. The fine is the largest ever handed out by Chinese antitrust regulators.
China’s markets and regulatory environment are in a constant state of development and can be expected to change going forward. Companies doing business in the country must be sensitive to these changes and react accordingly. With the stakes as large as they are now in China, it is easy to understand how an offhand remark can cause a short-term panic, as Mr. Wolf’s did. In all things China, however, it is important to bear in mind that common sense rules, and that companies must keep their perspective and rely on the facts at hand when analyzing China’s changing landscape.
