China's decision to remove limits on foreign ownership of automotive ventures is a significant policy shift that could open new opportunities for overseas companies, perhaps including acquisitions in China, according to industry analysts.
China said on Tuesday that in five years it will end a two-decade restriction that requires global automakers to work with State-owned companies. Foreign companies complied with the requirement to gain access to the Chinese car market, which is the world's largest, even if the arrangement forced them to share technology with potential competitors.
While announcing the easing of rules on foreign automakers, China also said it will charge importers a temporary fee of about 179 percent on US sorghum after an investigation found the shipments were unfairly subsidized and damaging Chinese producers. China is the largest buyer of American sorghum, a grain used to feed livestock and make distilled spirits.
Removing the ownership cap for automakers "represents a significant policy shift for both Chinese and international automakers," said Shanjun Li, a professor at Cornell University.
David Zoia, editorial director of WardsAuto.com, said the move will open additional possibilities for overseas companies, perhaps including acquisitions in China.
"It certainly opens up more possibilities for foreign companies, which now will be able to consider strategic acquisitions that were not available to them before," he wrote in an email.
Until now, global auto companies such as General Motors Co (GM) and Volkswagen AG have been allowed to own no more than 50 percent of a joint venture with a Chinese partner and could invest in no more than two joint ventures (JVs).
Stephanie Brinley, auto analyst with IHS Markit, doesn't expect immediate changes in many of the JVs. "Initially, we expect existing partnerships would continue as they are, particularly the established and successful ones like GM's relationship with SAIC (Motor). To change the structures immediately has potential to create more disruption than benefit," she said in an email.
Zoia also doesn't anticipate a surge in changes to joint ventures right away. "(I) doubt that would happen immediately or across the board, as some partnerships have worked better than others. However, the change certainly shifts power in the direction of the multinationals, which now will be able to negotiate better terms or go it alone if they wish," he said.
Cornell's Li said Chinese consumers will probably benefit from the change. "In the end, allowing foreign ownership benefits domestic consumers who can enjoy better-quality, more variety and lower prices," said Li.
China has been easing ownership requirements as limits on foreign ownership of electric vehicle (EV) producers will be eliminated this year followed by a similar repeal for makers of commercial vehicles in 2020 and passenger vehicles in 2022.
Brinley said the most likely beneficiary of the EV change is Tesla "as it has already been in talks regarding developing a plant in the country". The Chinese government still controls permission for building new plants. The removal of the ownership requirement does not necessarily mean that it's open season for permission to add production. However, with one obstacle removed, opportunity is increased, she said.
In addition to easing rules on foreign automakers, the National Development and Reform Commission also said that it would eliminate foreign ownership restrictions this year on its ship and aircraft manufacturing industries, including jetliners, helicopters and drones.
