Auto Industry

Changing lanes

More foreign carmakers are taking control of their Chinese JVs

Hyundai-w

Hyundai has lost ground in China and wants more control over its JV

“Who’ll be the first to eat crabs?” rhetorically asks one of China’s many treasured ancient idioms. That particular saying harks back to the first century, according to legends, when a general from the Han Dynasty more than 2,000 years ago swallowed a freshwater crab to show local farmers how to deal with a plague of crustaceans that were eating their rice crop.

Since then it’s been used to describe the kind of person who dares to go first. Most recently, Chinese media deployed the saying in reference to BMW’s decision to take majority ownership of its joint venture with Brilliance China Automotive.  The German group now owns 75% of the combination, after having received its new business licence in mid-February.

Since the start of this year, foreign automakers have been able to take full control of their Chinese joint ventures for the first time. That has prompted a round of speculation about which of the JVs will be reshaped over the coming months and what that could mean for the foreign and state-owned groups that set them up.

“Many of the joint ventures are encountering challenges. They need to pursue changes to their equity structures to break through their current difficulties,” explained Cui Dongshu, Secretary General of the National Passenger Car Association, to Daily Economic News recently.

As we reported in WiC572, Stellantis (the new name for the merger of Fiat Chrysler and Peugeot) has already announced plans to lift its shareholding in its China venture to 75%. This did not come as welcome news to local partner GAC Group (Guangzhou Auto), which says that it deeply regrets the move.

This month the focus has turned to South Korean carmakers Hyundai Motor and Kia. Both brands have lost market share since the middle of the last decade, when they enjoyed a combined 7.4% of the Chinese market. At the end of 2021, this had slid to 2.4%.

Hyundai has a joint venture with BAIC Motor, while Kia had previously been in a three-way tie-up with Yueda and Dongfeng. According to local media, Dongfeng is transferring its 25% stake to Kia, which is now in the process of setting up a new joint venture with Yueda. Local journalists speculate that BAIC won’t be willing to give up its own share in Beijing Hyundai, however, because of its own lowly position in the sales rankings. It was 41st in 2021 with a 0.5% market share by sales.

Hyundai ranked 21st, but it has lost a lot of ground in its brand image with Chinese consumers. Both Hyundai and Kia have also suffered from the sharp end of South Korea’s and China’s complicated relationship, including a consumer boycott in 2017 after Seoul agreed to install THAAD, an American anti-missile system.

But industry experts say that Hyundai also made a strategic error in cutting its car prices because it brought its brand image to a similar level to cheaper Chinese manufacturers whose popularity has been rising in tandem with a growing reputation for quality.

For instance Chinese consumers have been avid buyers of SUVs. Analysts believe the vehicle type could become the most popular in 2022, after sales experienced another strong year in 2021. SUVs and crossover vehicles accounted for 46.4% of domestic sales at the end of the year, just below sedans on 48.1%.

Unused production capacity has also become a very public symbol of Hyundai’s struggle to stay in the market. Its relatively new Chongqing factory has been sitting idle since December, for example, and is rumoured to be up for sale to Li Auto, which has already acquired a Hyundai car plant in Beijing.

In a statement to South Korean news agency Yonhap, the group said that it had halted production in Chongqing because the factory was making smaller models and Hyundai is in the process of upgrading its brand portfolio.

It has been estimated that even after the sale of one Beijing plant, Hyundai is still running at just 30% capacity utilisation, based on its 350,277 of unit sales last year. There’s also speculation that another Hyundai factory in Beijing  may be sold to Xiaomi Auto, one of a clutch of tech companies with plans to break into the car business.

Fitch Ratings predicts that companies like Xiaomi Auto and Baidu Auto will be at the vanguard of a new wave of entrants into the electric vehicles (EV) sector. But can they give the more established start-ups a run for their money?

At the end of 2021, Li Auto, NIO and XPENG ranked as the three most successful entrants from the previous wave of newcomers. The troika ended the year at 37th, 38th and 39th in the overall sales rankings. Each had a 0.4% market share, up from 0.2% in 2020.

Right at the top of the rankings is Volkswagen (VW), with a 10.3% market share, down from 13.1% the year before. A few years ago, the German group started to become more vocal about wanting to increase its shareholding ratio in its own joint ventures with SAIC and FAW. But so far there have been no concrete moves in that direction.

VW will have to tread carefully, given that China is its single largest market, accounting for about 40% of its global sales. Its new China head told Nikkei Asia recently that the group also plans to boost localisation efforts, installing more of its R&D capacity in China. And the contours of how this might play out are starting to become clearer. At the end of 2020, VW gained majority control of its EV joint venture with JAC, owning 75% of the shares. At the time, it reassured its existing JV partners SAIC and FAW, saying that the combination with JAC would complement its business operations with them.

However, the ongoing transition to bigger sales of electric vehicles in China suggests that VW must be thinking about how to give more priority to the JAC joint venture, which is based in Hefei. These plans also seem to have gained momentum over the first two months of the year, with VW’s China CEO, Stephan Wöllenstein, confirming in January that the group was also in discussions with Huawei about the formation of another joint venture. Germany’s Manager Magazine says that VW will buy the Huawei unit that has focused on self-driving technology as part of push into  “unconventional solutions” for the Chinese market. Jiemian.com reports that the sale has an Rmb10 billion ($1.58 billion) price tag attached to it.

China’s second largest auto brand by sales appears to be adopting a similar strategy. Toyota has long-established joint ventures with FAW and GAC but like VW it has also established a separate JV for electric vehicles. In this case, the partner is BYD, with both sides holding a 50% stake.

SAIC’s other major foreign JV partner is General Motors. That relationship appears to be thriving and the US giant has made no mention of a desire to increase its shareholding ratio. GM and SAIC are responsible for China’s best-selling EV, the Wuling Hongguang Mini. Last September GM also launched its Ultium EV platform through the SAIC-GM joint venture. The first model from the platform, the Cadillac LYRIQ, began pre-sales in November.


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