VW to Tesla set to win from China move

China’s cap for commercial vehicles will be eliminated in 2020 and that for passenger vehicles in 2022

by BLOOMBERG

BEIJINGChina will let foreign automakers from Volkswagen AG (VW) to Ford Motor Co own more than 50% of local ventures, removing a two-decade restriction and giving a boost to global companies seeking to capture a greater share of the world’s largest car market.

Electric-car makers such as Tesla Inc will see the swiftest benefit, with ownership limitation for such businesses lifting as soon as this year. The cap for commercial vehicles will be eliminated in 2020 and that for passenger vehicles in 2022, the agency that oversees industries said yesterday.

The move may help diffuse tensions between China and the US after President Donald Trump’s intensified rhetoric risked an all-out trade war. Companies from Daimler AG and BMW AG to General Motors Co and Toyota Motor

Corp are set to find it easier to manufacture and do business inChina,whilelocalmakers will be under increased pressure to speed up the building of their own brands.

China’s announcement comes on the heels of a similar move for the financial industry last week.

“In a decade, foreign carmakers will gradually become all independent and Chinese companies will lose the cash

flows from the joint ventures (JVs),” said Yale Zhang, an analyst with Automotive Foresight Co in Shanghai. “Foreign carmakers will be happy as they won’t have to share 50% of the profits with their Chinese partners.”

Shares in German carmakers all gained on the news, reversing earlier losses. China accounts for about half of VW’s namesake brand sales, while the world’s biggest car market is also the most significant buyer of luxury Mercedes, VW’s Audi unit and BMW vehicles.

VW rose as much as 0.9% to €173.48 (RM867.40). Both BMW and Mercedes-maker Daimler rose about 0.5%.

Tesla Boon

Elon Musk’s Tesla in particular is in a position to benefit from the relaxed ownership rules. Musk hasn’t been able to secure

a deal to open an assembly plant in China, after negotiating with Shanghai’s government for more than a year. The sides disagreed on the ownership structure, people with knowledge of the situation said in February.

The risk of higher import taxes spurred by Chinese trade friction with the US would be allayed if Tesla were able to secure a production.

Those losing out include local new-energy vehicle makers such as BAIC Motor Corp and BYD Co, with BYD in particular set to face tougher competition from any lower-priced Teslas, said Dan Zhuang, an analyst at RHB OSK Securities Hong Kong Ltd.

“The pace of the open-up is much faster than the market hadthought,”Zhuangsaid.“If Tesla produces from China, BYD may face the pressure to lower price and thus a weaker margin.”

China has moved toward eliminating the caps in recent years with promises of their eventual removal, with Bloomberg News reporting in 2016 that the government was considering the move.

The world second-biggest economy has required foreign automakers to enter into ventures with domestic partners to operate in the country since 1994, with the overseas company holding no more than 50%.

For years, the so-called “50:50 rule” was a sacred cow for the auto industry, seen as necessary to buy local carmakers time to gain the technology and build their brands before giving overseas carmakers unfettered access to the market.

The removal of the cap signals Chinese officials now have more confidence in their home-grown contenders.

The move is “a good stimulus to urge Chinese companies to strengthen their own brands at a faster pace rather than relying on the JVs to feed them”,AutomotiveForesight’s Zhang said.

Foreign car brands, meanwhile, now have years of experience from operating in China and believe they can go solo without a local partner guiding them, the analyst said. “In their eyes, Chinese have little contribution to the brands and products,” Zhang said.