A spate of new foreign joint ventures in China’s car industry has revived debate of an often criticised three-decade-old policy of trading market access for technology.
This week, the Renault-Nissan alliance became the latest car group to sign a joint venture to produce electric vehicles with longtime partner Dongfeng Motor Corporation, based in Wuhan, following an announcement by Ford in August that it plans to partner with little-known Zotye Auto to make EVs.
Volkswagen in May received permission for a venture dedicated to producing an electric vehicle together with Chinese partner JAC Anhui, its third such JV in China. GM said in August it would start producing the Baojun, an EV priced at just $5,300 with its longtime partner SAIC Motor.
The Renault-Nissan Dongfeng partnership is significant as it goes further than other JVs because the groups have agreed to share a common technological platform. It is not clear whether other overseas car groups will follow this course because of issues over trust on the sharing of technology.
The new EV joint ventures are part of a Chinese effort to master the technology for electric vehicles — and rely on a tried and tested model of working with the global car industry since the 1980s. In a nutshell, joint ventures are the only way for foreign groups to access the world’s largest and most lucrative market. China gives the overseas companies the right to sell cars in exchange for their technology, management expertise and a share of their profits.
“China’s central planners said ‘how can we basically force global automakers to participate and bring their very best electric vehicle technology to China?’” says Michael Dunne, president of Dunne Automotive, a Hong Kong-based car consultancy.
Since 1984, starting with Jeeps, foreign carmakers have been allowed to produce cars in China — but only in concert with a local partner holding at least 50 per cent of the venture. In practice, this is almost always one of six anointed state companies.
While widely criticised as a trade barrier, the JV law managed to survive China’s entry into the World Trade Organisation in 2001 — testament to Beijing’s bargaining power. Now China is using an updated version of the JV law to once again dangle access to its car market in exchange for technology — this time for new electric vehicles.
The results of the three-decade-old policy have been mixed. Rather than transforming Chinese car companies into technology giants, the joint venture companies have arguably made Chinese carmakers complacent, according to Chinese policymakers. He Guangyang, a former minister of industry, controversially described the JVs as “like opium” in an interview five years ago.
Foreign brands still account for a majority of sales in Chinese passenger cars — and the country’s carmakers have failed to export more than a handful of passenger cars under their own brands.
Bart Demandt of carsalesbase.com says this is a legacy of the joint ventures. “The state-owned companies, especially those which have 50/50 joint ventures with foreign automakers, have had little incentive to invest in their domestic brands as the profits have been pouring in from producing import-brand cars for their partners.”
However, the Chinese government is still relying on this model, and recently set its sights on the nascent battery powered car industry. Last year it included EVs as one of 10 sectors that it wants to be internationally competitive by 2025 as part of a new industrial policy “Made in China 2025”.
First, a carbon trading scheme set to be implemented next year in China will require all carmakers to produce a quota of EVs or buy carbon credits to compensate. Draft rules, part of an effort to jump-start the local production of EVs, have been circulating but have yet to become law.
Foreign carmakers are wary of the new requirements and have pressed on China to delay the EV quotas by at least a year. But they have few alternatives. “The global automakers say ‘wow, this really has teeth, because if we want to grow in this market we don’t have a choice. There is no work around’,” says Mr Dunne.
The second prong of the policy is to pressure foreign carmakers to “localise” their electric vehicle technology, meaning in practice to share it with their joint venture partners.
Bill Russo, head of Gao Feng Advisory in Shanghai, calls this “a real game-changer for the multinational carmakers”.
“They must comply with a new set of regulations for both component localisation and credits for EV sales in order to be in the game. As carmakers will be required to pay fines if they are not selling EVs, they will be required to add EV production in order to sustain their existing business in China.”
Meanwhile, the security of the carmakers’ proprietary technology is the subject of controversy.
Western car executives in China point to a new law published late last year that requires all ventures producing EVs in China to demonstrate that they own the technology to produce the entire vehicle. At the same time, foreign-owned technology does not appear to count, according to industry lawyers.
Thus, to receive a licence to produce EVs in China, foreign companies would potentially have to transfer their foreign technology to the JV for it to count towards this requirement of demonstrating expertise in EV manufacturing.
This has created fears that their proprietary technology could be stolen. Over the past two decades, foreign makers of everything from high-speed trains to fighter planes have licensed the technology to local Chinese partners only to find a few years later that their partner is a major international competitor.
In order to keep this from happening, foreign carmakers are trying to give away as little as possible — and keep sensitive items, such as software codes, outside of China. In the past, foreign companies have managed to evade similar requirements simply by bringing in outdated technology, which has angered Chinese policymakers.
With one eye on protecting their technology, global carmakers have also been careful to choose new Chinese joint venture partners that are not potential rivals in EVs.
Renault Nissan chose longtime partner Dongfeng because of what one executive described as the group’s longtime association making combustion engine cars together.
Elsewhere, multinationals have been quietly fighting back. The EU Chamber of Commerce in Beijing said in a March report that forced transfer of technology in exchange for market access was something explicitly prohibited by the WTO.
Weeks later Miao Wei, minister of industry and information technology, told a press conference that the notion foreign companies would have to transfer technology to Chinese companies was a “misunderstanding”.
In public, foreign carmakers say they are satisfied with government reassurances, but privately, says Mr Dunne, they “are very concerned” about the technology transfer issue. The uneasy alliances between the world’s biggest carmakers and their Chinese rivals could become increasingly strained.
Additional reporting by Sherry Fei Ju
Technology and profits for free — or addiction
It is still unclear whether China’s JV policy has been a success or not. Some Chinese policymakers and car manufacturers harshly criticise the joint venture requirement saying it makes their own industry complacent, writes Charles Clover.
Victor Young, director of public relations for Geely, told a recent car conference: “Joint ventures can absolutely help to promote us [the industry], but we cannot get addicted and completely rely on joint venture brands because Chinese brands will never really grow up from this.”
Geely, for example, is a private company and has had no access to JVs. Instead, it has had an infusion of foreign technology and know-how through its purchase of Volvo in 2010.
But the appeal of the JV arrangements to the local car industry is obvious: free technology and free share of the profits.
Foreign carmakers have also found ways to make fat profits even while splitting them 50-50 with local partners. Multinationals make money in China in other ways, such as selling parts and charging licensing fees to the JVs.
Few believed it when, in April, Chinese regulators said they were looking into repealing the joint venture law, but declined to give a timeframe.
Xing Lei, editor of China Automotive Review, said the end of JVs was unlikely to be soon and was “completely up to the decision made by Chinese and foreign partners instead of the policymakers”.
“For them to completely turn into wholly-owned corporations the moment the rule gets lifted is simply not possible,” he said.