Auto Industry

Make or brake?

Volkswagen in public spat with its joint venture partner

Make or brake?

Vorsrpung durch technicality: VW in patent dispute with China partner

Famously, Detroit’s car bosses were skewered in 2008 for flying to a Washington bailout hearing in corporate jets. The perks for those working in Chinese car companies don’t quite approach those levels, although reports of hefty pay is pushing some firms further into the spotlight. Last year, workers employed at the joint venture between First Automobile Works and Volkswagen received bonuses worth 27 months of basic salary, reports CBN. And this year hopes are even higher for year-end, with rumours that there could be a 55-month multiple.

Wisely enough, a FAW-Volkswagen spokesman quickly denied that this was going to be the case, while admitting that the company was giving attractive monthly bonuses on the basis of productivity gains.

The payouts might seem generous, but they are also a reflection of FAW-Volkswagen’s status as one of China’s most successful car manufacturers. In fact, after trailing General Motors in China for eight years, Volkswagen took pole position last month, selling 705,000 vehicles in the most recent quarter.

But could the much-vaunted collaboration be under pressure, after a public spat over patent infringement? In July, German newspaper Handelsblatt printed a story saying that FAW had been copying the technology of its foreign partner. The article said that the Chinese partner intended to duplicate transmission parts for installation in its models (set for export to Russia), which will then compete with Volkswagen cars.

Shortly afterwards, VW chief executive Martin Winterkorn admitted to Handelsblatt that the company was concerned over the possible use of its patents.

“If there are open questions on patents, then we will discuss those with our partner and certainly not accept this,” Winterkorn told the newspaper, reports Reuters.

The dispute comes only shortly after the two companies signed an agreement to explore how to extend their current joint venture (which expires in 2016) for another 25 years. Both companies have said that they want to tighten their relationship, including deeper cooperation in research and development.

In order to manufacture cars in China, foreign firms must have a local partner. Similarly, the commercial imperative of access to the Chinese market has often required a more flexible response to cases of the borrowing or re-engineering of proprietary technology by Chinese partners (or at least that the subsequent rows are more normally resolved behind closed doors).

There are a couple of reasons why Volkswagen might have chosen to be more outspoken in this particular case. When it started its relationship with FAW in 1991, it was willing to accept a 40% stake in the joint venture, in part because it wanted to limit its investment outlay in what then seemed like a much riskier market. But in more recent JVs, the foreign partner has often negotiated a larger stake, sometimes 49% of the company. A few percentage points might not seem like a lot but the discrepancy costs Volkswagen around Rmb2.2 billion ($352 million) per year, reports Southern Metropolis Weekly.

The newspaper also points out that Volkswagen has been pushing to recover wider rights to sell more of its top range Audis as imports in China (see WiC141 for more on Audi’s popularity). Currently these are sold through the JV, so VW must give up a share of profit to the Chinese partner.

So pressure over intellectual property could be a bargaining chip in the forthcoming negotiations, where Volkswagen will try to improve its position.

The risk is that FAW reacts badly to this kind of bargaining. A lot has changed since 1991. Nowadays China’s car market is so large that it has become essential to the foreign carmakers. That also gives FAW some leverage. The days of the foreign party being able to drive a hard bargain could be over.

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