China's State Car Makers Lack Incentive to Succeed on Their Own

Government May Be Sorry It Required Foreign Auto Companies to Take Local Partners

By Published on .

A former government minister got it right when he likened Chinese state-owned automakers' joint ventures with foreign companies to "opium."

Like the addictive drug that makes its users feel happy for a short time but undermines their health in the long run, joint ventures enable state-owned automakers to generate profits but have made them lazy and reluctant to invest in the resources to make their own brands successful.

The former minister used the opium analogy last month at an automotive forum to highlight the financial dependency of China's state-owned automakers. Perhaps out of discretion, he did not add one unpleasant truth: The state-owned automakers' addiction to this "opium" has become incurable.

Beijing didn't know that it was prescribing something harmful when it enacted its joint-venture requirement in the 1980s. The policy was supposed to help state-owned automakers learn from their foreign partners and improve their competitiveness. But that has turned out to be wishful thinking. State-owned Chinese automakers are entitled to at least half the profits generated by their joint ventures, so why should they bother to learn? You can imagine the result.

The first joint venture, Shanghai Volkswagen Automotive Works Co., was launched in 1983. But nearly three decades later, no state-owned automaker has developed a sustainable automotive business of its own.

Should the government stop approving additional joint ventures? It would like to. When stagnant auto sales raised the specter of surplus production capacity last year, Beijing removed auto manufacturing from its list of sectors that encourage foreign investment.

The idea was to withhold approval for additional joint ventures and the new production capacity they would entail. But Beijing's resolve appears likely to melt away as it confronts two state-owned automakers that seek to revive their troubled assets.

One is Chery Automobile Co., China's largest vehicle exporter. Years of reckless expansion have left Chery drowning in red ink. In March, the company found apparent salvation when it formed a joint venture with Jaguar Land Rover. In China, demand for luxury cars and SUVs remains strong, so the partnership with Jaguar Land Rover could generate nice profits for Chery.

Meanwhile, Dongfeng Motor Corp. has requested permission to form a new joint venture with French automaker Renault SA. Dongfeng is a major state-owned automaker that already has partnerships with Nissan, Honda and PSA Peugeot Citroen. The company hopes to make use of its excess production capacity by letting Renault build cars in its plants.

Chery and Dongfeng have asked the central Chinese government to approve their joint ventures. Last month, Chery leaked the news to the Chinese media that the government has approved its application. And it looks like a sure thing that Dongfeng will win approval for its partnership with Renault.

The new ventures are likely to generate profits for Chery and Dongfeng. But will they help the two companies improve the competiveness of their own products? No. Over the past three decades, no state-owned automaker with an international joint venture has built its own competitive brand. How can we expect a different outcome for Chery and Dongfeng?

--Automotive News China--

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