China's State-Owned Automakers May Be Too Weak to Compete

Government Ponders Easing Rules Requiring Global Car Companies to Have Local Partner

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Every year, China's big state-owned automakers celebrate their inclusion on the list of Fortune 500 companies -- the ultimate status symbol for up-and-coming companies.

Dongfeng Aeolus
Dongfeng Aeolus

So the last thing these automakers want you to know is how very weak they really are. But that's changing. Last week, some of the companies finally admitted that they can't survive without the partnerships they've formed with foreign automakers. And they did so by warning Beijing not to allow foreign automakers to gain majority shares of their Chinese joint ventures.

Under current policy, foreign automakers that want to produce vehicles in China must form joint ventures with Chinese companies. The rules also limit foreign ownership in these partnerships to 50 %. China enacted the policy in the 1980s when it opened its auto industry to the outside world.

Now, after three decades, some officials believe it's time to annul the policy. One of these reformers is Xu Shaoshi, director of the National Development and Reform Commission, China's central economic planning agency. At a media briefing last month, he said the government may eliminate its limit on foreign ownership of joint ventures. Global automakers would be allowed to convert their joint ventures into wholly-owned subsidies. Then they could run their Chinese operations as they see fit.

As you might expect, the state-owned automakers didn't like the sound of this. Last week, the China Association of Automobile Manufacturers convened four members -- Changan Automobile Co., China FAW Group, Dongfeng Motor Corp. and BAIC Motor Group Co. -- in Beijing to voice strong opposition. According to Auto Review, CAAM's publication, they argued they could not survive if they lost control of their joint ventures.

Take Changan. Last year, the company produced 1 million vehicles for its domestic brands -- more than any other Chinese automaker. Despite its sizable sales, Changan earned a negligible profit. Instead, the company relies on its lucrative joint venture with Ford Motor Co. Without those profits, Changan would not have sufficient funds to bankroll R&D for its own brands, said Auto Review, citing a company executive. Officials from FAW and BAIC issued similar statements, the publication noted.

Dongfeng derives nearly all of its profits from its partnerships with Nissan and Honda. FAW, whose own brands are hopeless money-losers, is completely dependent on Volkswagen and Toyota. BAIC, whose own brands lost $485 million last year, leans heavily on Mercedes and Hyundai for survival.

It's hard to extract a shred of good news from this bunch. Wang Xiaoqiu, chief of SAIC's domestic passenger-car brands, told reporters last week that the unit finally will turn a profit this year.

These state-owned companies simply can't compete, and Beijing is starting to lose patience. Mr. Xu is the third senior official to call for deregulation. And he has the power to do something about it, since his agency sets industrial policy. But any attempt to deregulate will meet stiff resistance from state-owned automakers, who will fight for the status quo.

The industry is watching closely to see how this tug-of-war plays out.

Yang Jian is managing editor of Automotive News China