BMW makes $4.1 bil. push for control in China car market

BloombergBEIJING (Bloomberg) — BMW AG will spend €3.6 billion ($4.1 billion) to secure control of its Chinese joint venture, a deal that will give the German automaker more power over its business in the world’s biggest car market.

The agreement with Brilliance China Automotive Holding Ltd. makes BMW the first automaker to take advantage of China’s policy to let foreign companies take majority control of their local partnerships. The luxury-car maker said Thursday it is increasing its stake in the venture with Brilliance to 75 percent from the current 50 percent.

The agreement gives BMW a bigger say over its business in China, and allows it to retain a larger proportion of the earnings it generates in the massive market. China is a key focus for all major car companies, but sales of luxury vehicles have been coming off as the trade war with the United States damps consumer demand. The deal will help BMW lessen the impact of higher tariffs imposed in the trade fight, as it now plans to boost manufacturing capacity in China and expand local production of models including electric cars.

“We are now embarking on a new era,” BMW Chief Executive Officer Harald Krueger said in a speech at the companies’ event in Shenyang, China. “China is quickly becoming an important development and production base for BMW new energy vehicles.”

Removing restrictions

The pact shows China’s government is following through on its pledge to open up the economy to foreign ownership after the 50:50 joint-venture rule that has restricted global brands’ access to the market for decades. The policy change also gives carmakers such as Daimler AG, Volkswagen AG and General Motors Co. a chance to obtain a bigger control over their businesses in China.

“BMW’s move is a signal that China may be giving a green light for foreign carmakers to lift their stakes in local joint ventures ahead of the original timeline,” said Tian Yang, an analyst with China Securities International in Hong Kong.

Until now, foreign carmakers’ ownership in Chinese joint ventures has been capped at 50 percent. China said in April it is scrapping the limit for electric-car ventures as soon as this year. For commercial vehicles, the cap will be eliminated in 2020 and the one for passenger vehicles will end in 2022, the government said at the time. BMW said Thursday its deal will be completed in 2022.

China partners

The agreement, first reported by Bloomberg News in July, has been a drag on the shares of Brilliance. Other Chinese car stocks have also slumped amid investor concerns that the companies will be left with a smaller share of their ventures’ future earnings should their global partners increase control.

While Brilliance is getting a hefty payment from BMW for the 25 percent stake, it is reducing its holding in a partnership that accounted for most of its profit last year. The shares, the second-worst performer this year among Chinese car stocks traded in Hong Kong, were halted early Thursday. Brilliance has a market capitalization of about $7 billion.

Shares of BAIC Motor Corp., a partner of Daimler, fell as much as 18 percent. SAIC Motor Corp., Volkswagen’s local companion, declined 4.6 percent.

“Investors are now looking to Mercedes-Benz to see when it might raise the stake in its joint venture with BAIC Motor,” China Securities’ Tian said. “If that happens, it will definitely cut contribution to the Chinese carmaker and hurt their profits.”

All global car companies in China are now approaching their Chinese partners over their joint-venture stakes, Brilliance CEO Qi Yumin said at the Shenyang event.

“Being the first usually means we have to face a lot of questioning,” Qi said. “But we’d rather do it earlier rather than waiting till 2022 to sit down and start the negotiations.”Speech

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