China Considers Removing Investment Cap - Automakers Could Benefit Hugely

While all eyes are on Brexit and its consequences for the global auto industry, a potentially huge story is developing in China: Bloomberg reported that the Chinese government is considering to remove the 50% cap of foreign ownership in Chinese JVs for the auto industry. The chairman of the National Reform and Development Commission, Xu Shaoshi, said that the government was looking into lifting the 50% cap.  
When China imposed the 50:50 rule in 1994, the idea was that Chinese auto manufacturers would benefit from foreign expertise and know-how, while at the same time receiving half of the JV’s profits. Although the knowledge and technology transfer has not led to the rise of a globally competitive Chinese auto industry, Chinese automakers have become more assertive in recent years and have managed to increase their market share in China last year (after years of declines, rising from 38.4% in 2014 to 41.3% in 2015). 
We see one main reason why the Chinese are currently considering a market liberalisation: The central government in Beijing has been pushing for a consolidation of the auto industry for a while, but found resistance among state governments, which try to protect their own local auto groups. As a consequence, there are too many assemblers, there is oversupply and there are inefficiencies. Breaking up the JV rules could speed up the consolidation process. While this means that many Chinese assemblers might not survive, it would also force the remaining Chinese automakers would to become more efficient. This should pave the way for an increase in exports, since Chinese automakers have not yet been able to establish themselves in overseas markets.  
Also, privately owned Chinese manufacturers, such as Geely, BYD and Great Wall Motors are advocates for opening up markets and removing ownership limits. These companies do not benefit from foreign input and have to compete against large state-backed auto groups, which benefit from state resources. Geely’s founder, Li Shufu, said that Chinese companies need to stop relying on foreign assembler’s technology transfer and focus on their own R&D. 
In this report we discuss the implications for the Japanese assemblers and highlight one specific key beneficiary.