Door opens for removal of stake caps for carmakers

Workers decorate the Dongfeng Hongda exhibiting area at an auto show in Fuzhou, Fujian province. [Photo/China Daily]

China is allowing foreign auto-parts makers to conduct research and production in the country without partnering with local companies in a trial move experts believe may signal the imminent removal of investment restrictions on international carmakers.

The nation promulgated an industrial policy in 1994 that demands foreign automakers and spare-parts producers who want to localize production in China must establish joint ventures, in which their stake must not exceed 50 percent.

The State Council said on July 19 that makers of auto electronic systems and batteries for new-energy vehicles in the free trade zones of Shanghai, Tianjin, Guangdong and Fujian are exempt from the policy, and revisions will be made based on this latest move.

Its statement came within a month of Xu Shaoshi, minister of the National Development and Reform Commission, admitting at the Summer Davos meeting in Tianjin that the Chinese government is considering lifting the current 50 percent cap, which protects domestic automakers.

Zhang Zhiyong, an independent auto analyst in Beijing, said the move can be seen as an experiment to see what results the removal of the cap will produce and whether such results will remain under control.

He said a combination of factors were prompting the government to lift the cap, including the lackluster performance of State-owned carmakers and China's investment negotiations with the United States and European countries.

Miao Wei, minister of industry and information technology, said in April that the US had voiced strong dissatisfaction with the stake cap in business discussions.

"So it is inevitable that China will lift the cap sooner or later, and now it is simply a matter of time," Zhang said.

However, he warned that the cap removal will hurt the auto industry, especially the big State-owned companies, such as FAW and Dongfeng, which have been dependent on foreign brands for years.

Statistics from the China Association of Automobile Manufacturers show that eight of the top 10 makers of passenger cars by sales last year were joint ventures, and the two Chinese brands that made it into the top 10 occupied seventh and ninth positions.

Whether China should remove the cap has been a heated topic in its auto industry.

Li Shufu, chairman of Zhejiang Geely Holding Group Co, has advocated the removal of the cap for many years.

"The policy is like parents giving excessive protection to their children," said Li. "Unfortunately such protection will not ensure their prosperous development and will, instead, weaken their ability to innovate and compete."

One of the most adamant defenders of the protection policy is Dong Yang, executive vice-president of the China Association of Automobile Manufacturers.

He warned in 2014 that Chinese brands would be "killed in the cradle" if foreign automakers were allowed to become more independent from their domestic partners, saying whoever supports removing the cap is "a traitor to the country".

Zhang said State-owned automakers would be forced to reform themselves if they have to face even fiercer competition from international rivals.

However, he added that an effective solution would be for the government to develop strategies about how to build competitive brands in a comprehensive and systematic way, "instead of coming up with plans for one or two specific automakers".