Breaking a barrier

BMW spends €3.6 billion to control Chinese joint venture

main 61913292 DPA – BMW CEO Harald Krueger Kruger Chancellor Merkel Germany Chinese joint venture Brilliance China control
China is finally opening its doors to Western ownership. Source: DPA

In the first deal of its kind, BMW will become the first foreign carmaker in the China to control a joint venture to produce conventional autos. The German maker of luxury vehicles – the world’s second-largest after Mercedes-Benz – will pay €3.6 billion ($4.2 billion) to increase its 50 percent stake to 75 percent in BMW Brilliance Automotive in China. Brilliance will cut its stake to 14.5 percent from 40.5 percent currently.

Buying majority control will entitle BMW to a larger share of the lucrative Chinese business, now BMW’s single-biggest sales channel on the planet. China, the world’s largest car market, had long sealed off its industries from foreign competition, forcing non-Chinese companies to operate in joint ventures with local businesses.

The protectionist rules helped China obtain crucial know-how and build up its own industrial giants, such as carmakers Geely and BYD, the latter minority owned by billionaire investor Warren Buffett and phone maker Huawei. Last year, China decided to open its markets after Western governments and companies pushed the Communist government to dismantle its trade barriers. Harald Krüger, BMW’s CEO, said Chinese Prime Minister Li Keqiang personally supported the negotiations with Brilliance.

Assuming regulators and its partner, Brilliance China Automotive, approve the deal, BMW will take control of the Chinese business in 2022, when the government lifts its 50-50 ownership requirement for passenger cars powered by gasoline or diesel. For electric-car joint ventures, Beijing already scrapped the rule this year, and Tesla won approval to set up a fully-owned electric-car plant in Shanghai.

main 0204593633 Reuters – BMW CEO Harald Krueger Kruger Chinese joint venture Brilliance China control
Mine, 75 percent of it. Source: Reuters

Bypassing Trump

BMW’s joint venture with Brilliance dates back to 2003. Last year it turned out almost 400,000 vehicles at two plants in the northeastern city Shenyang, which owns the remaining 9.5 percent of equity. Without proceeds from the joint venture, Brilliance would have made a loss last year.

Over the past decade, BMW rapidly expanded in China, selling 560,000 of its luxury BMW 3 Series sedans, X1 and X3 SUVs and other models in the country last year. That accounts for almost a quarter of BMW Group’s global vehicle sales. The German carmaker extended the contract to operate the joint venture to 2040 from 2028 originally.

Furthermore, the BMW joint venture will spend more than €3 billion to build a new plant in Shenyang and increase capacity at two existing factories to 650,000 vehicles a year. It will start producing electric SUVs, the BMW iX3, to be sold outside China. The expansion could help offset Chinese tariffs, totaling 40 percent, which Beijing slapped on cars imported from the United States because of Donald Trump’s trade war with the country.

BMW exported 81,000 cars to China last year from Spartanburg, South Carolina, where the Germans have their biggest production facility. An X5 SUV lists for $105,000 in China, but sells for $57,000 in the US. Manufacturing these vehicles in China could either help BMW sell more of them at a lower price, or simply earn more money per vehicle sold. Just last month BMW lowered its 2018 profit outlook, citing the trade war among other reasons.

The German carmaker is also planning a new venture with Great Wall Motor to jointly produce electric Mini vehicles in China. Mini, a British brand owned by BMW, currently only produces cars in the UK and the Netherlands.

Whether other carmakers will follow BMW’s example and take over control of Chinese joint ventures remains to be seen.

Sha Hua is Handelsblatt’s China correspondent, based in Beijing. Markus Fasse specializes in aviation and automobile industry news and works from Handelsblatt’s Munich office. Gilbert Kreijger is an editor with Handelsblatt Global. To contact the authors: hua@handelsblatt.comfasse@handelsblatt.com and kreijger@handelsblatt.com

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