Daily Management Review

Some Rules In Foreign Ownership Manufacturing In Auto Sector Relaxed By China


Some Rules In Foreign Ownership Manufacturing In Auto Sector Relaxed By China
The new regulations in the auto segment announced by China is likely to benefit automakers like Elon Musk but at least one investment by Warren Buffett – the American business magnate, would be hurt.
China has announced the abolition on the caps for foreign ownership for manufacture of cars, ships, and aircraft in the country in the next five years, said that country’s state planner recently.
Foreign car makers are only allowed a maximum ownership of 50 per cent for nay venture in China since 1994.
However, all caps would be lifted starting the end of the current year for foreign companies interested in setting up manufacturing units in China for electric and hybrid vehicles, the Chinese government has said. Curbs on ownership in commercial vehicles would be lifted by 2020 and the passenger vehicle segment will see 100 per cent foreign ownership allowable from 2022.
Tesla’s plans of construction of a plant in Shanghai would be boosted by the announcement. it was being believed that that Tesla project was in some form of danger because the U.S. car manufacturer does not to partner with a local company.
At present there is an import duty of 25 per cent on U.S. made cars and musk complained to U.S. president Donald Trump about the issue in March over a tweet reply of the president.
He had said "I am against import duties in general, but the current rules make things very difficult. It's like competing in an Olympic race wearing lead shoes," he said.
Strong enforcement of legal intellectual property of foreign firms was promised last week by China's President Xi Jinping along with a promise to lowering of import duties on foreign autos.
However domestic car makers in China could suffer even as the new regulations on tariff and ownership would benefit the foreign auto manufacturers.
One such Chinese company is the BYD Company which makes automobiles, buses, forklifts, rechargeable batteries and trucks presently is in a joint venture with German auto firm Daimler for the production of luxury electric cars.
A 10 percent stake in BYD was bought for about $230 million in 2008 by MidAmerican Energy Holdings which is a subsidiary firm of Warren Buffett's Berkshire Hathaway. This also means that there can be a potential negative impact on the investment of Berkshire Hathaway because of the new regulations.
The announcement of the new regulations and tariffs is believed to be at least partially responsible for a drop of 2.4 per cent in the share prices of BYD listed at the Shenzhen exchange.
There are established production systems in China for larger auto firms such as Ford or Toyota through joint ventures, George Galliers, an autos analyst at Evercore IS told the media. The new announcements could potentially open up avenues like starting new independent production company, increasing of ownership in joint ventures of buying out partners for large foreign auto makers already active in China, he said.
There would be some risks for any foreign manufacturer in going alone in China, Galliers also said.
"For Tesla and others, who do not have local production or who have limited JV (joint venture) production today, then the route of wholly-owned operations probably does make sense on the surface at least," he said.
"However, there may remain advantages to having local partners and JV's which I am sure that anyone looking to establish facilities in China will continue to consider," Galliers added.