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Chinese Auto Makers: Joint-Venture Junkies?

Chinese auto regulators find themselves in a tight spot: Their 30-year quest to build an industry dominated by Chinese car brands has backfired, leaving them mostly with a collection of lethargic old lions.

The problem: Joint ventures with foreign carmakers that have proven just a tad too comfortable.

How comfortable? Enough for He Guangyan, a former machinery industry minister, to describe the joint-venture set up in an interview last week as being “like opium.”

“Once you’ve had it, you will get addicted forever,” he said.

It’s a loaded thing for a Chinese government official, even a retired one, to evoke opium in the context of commerce with foreigners. But given the state of China’s auto industry, the metaphor is apt.

Since the 1980s China has made no secret of its ambition to build an auto industry championed by its own brands. Early on in the country’s embrace of the market, Beijing officials directed massive state-owned enterprises (SOEs) like Shanghai Auto and First Auto Works to form joint ventures with foreign carmakers to absorb the technology and eventually build cars on their own.

That strategy is in tatters today because managers at the SOEs were, very quickly, co-opted by global car companies.

Chinese executives understand that they can generate jobs, profits and secure their own promotions simply by making and selling foreign cars through the joint ventures. At the same time, executives have found comfort in the fact that — thanks to auto industry ownership rules — the Chinese side keeps half ownership of the joint venture and a corresponding share of profits.

Who cares about building one’s own brand, when one can make billions in profits by selling foreign cars? Chinese managers enjoy enough clout within the joint ventures to give them a sense of purpose and accomplishment. Why risk all that in an effort to build a brand new Chinese car?

Result: The six leading SOEs anointed by Beijing to lead in cars today account for a pitifully low 2% of China’s car market, when not counting sales by their foreign joint venture subsidiaries.

This embarrassing result has been masked in recent years by the unexpected rise of independent Chinese carmakers like Geely, Chery, Great Wall and BYD.

Never part of Beijing policy makers official plans for the industry, these smaller companies surfaced one after the other over the past twelve years, incarnations of grit and initiative by bold entrepreneurs working in concert with provincial governments. By the end of 2011, Chery, BYD, Great Wall and Geely had become China’s top car brands, dwarfing the output at the SOEs.

Officials in Beijing have grudgingly tolerated the independents because they put pressure on the larger state enterprises to get a little more serious about building Chinese brand cars. But now China’s top independent car companies find themselves in serious trouble, overwhelmed by competition and paralyzed by their own mistakes.

In the first six months of 2012 Chinese independents have surrendered 3% of market share to joint ventures like Shanghai GM, Beijing Hyundai and Dongfeng Nissan. Foreign joint ventures now capture three out of every four new car sales, the highest level in six years, according to figures from LMC Automotive, a forecasting company.

Once high-flying BYD saw profits drop 94% in the first half to a meager $2.6 million. Demand for Geely cars is flat at home. Its Swedish subsidiary, Volvo, saw profits dive in the first half of 2012. Great Wall and Chery were busted last month for asbestos in the engine gaskets of their cars shipped to Australia.

It is the independents that produce China’s most competitive cars. Should the BYDs and Geelys go out of business, China would essentially be forfeiting the market to foreign brands and their Chinese abettors.

That result has never been politically acceptable.

So what will Beijing do? Look for China car brands to get some form of life support: more targeted tax breaks, special loans or even government purchase mandates. Export subsidies are already in play – Chinese car shipments to overseas markets are up 28% in the first six months of 2012, according to the state-run Xinhua News Agency.

All of these measures –- tools to buy time — could prove expensive. But for policymakers in Beijing haunted by the unsuccessful joint venture strategy, letting the independent Chinese carmakers go looks even less palatable than the hefty costs of keeping them alive.

If auto industry officials could wipe the slate clean and start all over again, they would think twice about relying on joint ventures as a path to Chinese automotive bliss. To borrow a Chinese adage, Beijing has caught a fly in the mouth and it does know whether to swallow it or spit it out


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