Auto Industry

In the driving seat

BMW to take control of Brilliance China

Brilliance-Auto-w

Chinese carmaker Brilliance Automotive

The opening up of China’s market to foreign investment has always been an intricate journey. Notably Brilliance China has played the role of trailblazer at critical junctures.

In 1991 Yang Rong became the first private sector entrepreneur to take a controlling stake in a state-owned automotive plant. A year later Brilliance China was the first-ever Chinese firm to go public in New York. With production facilities imported from Germany, Brilliance emerged as China’s leading producer of minivans. Yang also played a crucial role in lining up foreign car giants such as BMW to sign partnerships with Liaoning-headquartered Brilliance.

But these same courtships saw Yang crash into a political roadblock raising questions as to whether the likes of BMW had partnered with a private sector firm or one controlled by Liaoning’s local government?

Yang fell out with the provincial authorities (then led by the now disgraced princeling Bo Xilai) and fled to the US in 2002. Inevitably, his stake in Brilliance China was nationalised and Yang filed a lawsuit in the US courts, suing the Chinese government. In response it issued an arrest warrant for the tycoon for “suspected economic crimes”.

These older legal wrangles must have been weighed up in recent weeks as Brilliance has once again found itself at the forefront of China’s opening up to foreign investors.

Now also listed in Hong Kong, Brilliance has announced that it will sell a 25% stake of its joint venture to its partner BMW. Previously foreign carmakers could only take non-controlling stakes in joint ventures with local partners in China. By raising its shareholding in the joint venture with Brilliance China to 75%, the German firm will become the first foreign carmaker to take control of its China business.

Investors have been expecting this to happen since Li Keqiang’s visit to Germany in July, when the Chinese premier signed a raft of deals and commitments to reinforce the country’s relations with Europe’s leading economy in the face of an escalating trade war with the US (see WiC418).

As part of another meeting in Beijing this week Li shook hands with BMW’s chairman Harald Kruger and hailed the German brand’s investment in Brilliance as a shining example for foreign investors. Li also promised more reforms to investment rules will follow. “In the future, these measures will be even stronger, a higher level of opening up will be established, and China will continue to be a hot place for foreign investment in the long run,” he said, adding that BMW’s increased stake in the Brilliance joint venture showed that Beijing’s promises of reform are being translated into “concrete actions”.

BMW has agreed to pay its Chinese partner $4.1 billion for a further 25% stake in the JV, valuing their carmaking operation at $16.4 billion. That was close to the peak valuation that the listed company traded at over the past year.

The deal is scheduled to complete in 2022 but investors in Brilliance were still rattled by news of the selldown of the company’s core asset (it will only hold 25% of the JV after the BMW acquisition). Brilliance shares fell as much as 30% in the trading session after the details of the deal were announced.

As of this week, Brilliance China’s market capitalisation stands at $4.7 billion, or roughly the same as the cash amount it is going to receive from BMW. Such a paltry valuation suggests that investors think its other (non-BMW branded) businesses (including its original operation making minivans) are virtually worthless, the Hong Kong Economic Times claimed.

Another German car giant is also making inroads in China, after Bloomberg reported that Daimler is working with its biggest shareholder Geely to start another joint venture, although this time in ride-hailing and car-sharing.

Geely’s parent company purchased almost 10% of Daimler unexpectedly this year (see WiC399) and now it wants to partner with the German brand to take on market leader Didi Chuxing in China. Late last year Daimler said it was looking for partners to grow its car-sharing business, which it started in Chongqing in 2015. The tie-up with Geely would give the two firms an initial chance to work together, says Bloomberg, although the German media speculates that Daimler is proposing to deploy cars from its electric-vehicle brand Denza, a joint venture with China’s BYD, because it doesn’t want to share its latest know-how with its largest investor.

Meanwhile some American firms are having a tougher time in the world’s biggest car market. SAIC-GM, a joint venture between the Shanghai-based state-owned firm Shanghai Auto and General Motors, said earlier this month that it will recall about 3.3 million vehicles because of defects in their suspension systems.

GM said earlier that the trade conflict between Washington and Beijing had already cost it around $1 billion, mainly due to higher tariffs, and Beijing News said the recall by its key China affiliate will inflict further losses on the American firm.

Tesla, on the other hand, has been looking to side-step the tariffs by speeding up construction of its new plant in China, the Wall Street Journal reports. This week it announced the purchase of a 210-acre site in Shanghai costing $140 million, the newspaper said.

 


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