CHINA, NATIONAL,NEWS: China Likely to Prevent Foreign Control Over Key Auto-components Manufacture

by Li Mu and Wayne Xing

Approval of several auto parts joint ventures that have majority control by foreign partners has been delayed, according to a recent report in zhongguo qiche bao (China Automotive News).

While China is opening up its domestic auto parts sector to foreign investment as part of its WTO commitments, decision makers are becoming aware that multinational suppliers are expanding their control in their China operations by either taking up controlling shares of their joint ventures or shifting to setting up wholly owned foreign enterprises (WOFE). Ministries that supervise the country's automotive sector are now more cautious in the approval of joint-venture projects that may result in foreign control or monopoly.

When joint-venture projects are usually approved within 30 days, ThyssenKrupp's $39.19 million acquisition of 51 percent shares of the Tianrun Crankshaft Co., Ltd. has been sitting on the desk of the Ministry of Commerce since January, according to a company spokesperson in a telephone interview. The acquisition, if approved, will put the German company in control of 60 percent of China's crankshaft market share currently enjoyed by Tianrun, China's biggest State-owned and independent crankshaft manufacturer located in Wendeng, Shandong Province.

Another proposed joint-venture project waiting for approval from the Ministry of Commerce is a transmission joint venture between Gertrag of Germany and Jiangling Motors Transmission Co., Ltd. Gertrag plans to take up 66.7 percent of equity shares of the new venture. A Chinese executive working at Gertrag Beijing Office confirmed the situation in a telephone interview.

Foreign investors are snatching more control of domestic supplier businesses and moving towards larger market share and even monopoly, analysts say. This has been the case especially since the State Development and Reform Commission released the new Automotive Industry Development Policy in 2004. According to the new policy, foreign investors are allowed to have majority shares in auto parts joint ventures, including engine joint ventures.

Industry analysts indicate that the growing foreign control in China's equipment manufacturing industry as a result of local government approval has alarmed the central government. Decision makers are therefore contemplating on setting up guidelines as to how to prevent foreign equipment manufacturers, including key parts and components manufacturers, from controlling the domestic industries.

"The swarming in of foreign investment has created adverse environment for domestic innovation," said Sui Yongbin, vice secretary general of China Machinery Industry Federation, in an interview with jingji guancha bao (Economic Observer), "Further regulations on foreign acquisition is a must, and such regulations are in compliance with acceptable international practice," he said.

Sui is involved in the drafting of a regulation on foreign investment in the equipment manufacturing industry, which is expected to be released by the State Council. He said the new policy would protect major domestic companies from foreign control and prevent local governments from giving indiscriminative approvals to projects that are detrimental to the strategic development of the national economy.

The State Council is also considering setting up inter-ministerial conferences headed by SDRC to inspect major foreign acquisitions, according to a Hong Kong newspaper. Insiders say that these joint-venture auto parts projects are not likely to be approved until the new regulation on foreign acquisition come out.

According to some analysts, the tightening up of government control on multinational acquisitions of key automotive parts and components manufacturers has been prompted by the aborted joint venture deal between Hangzhou Advance Gearbox Group and ZF of Germany last year.

ZF's intention of controlling 70 percent shares of a partnership with the Hangzhou Advance Gearbox Group has been curbed by decision-making government departments, according to a Xinghua News report. The joint venture is "cancelled at the behest of some senior officials and professors," according to the person in charge of HAGG's public relations. He denies that there has been government intervention, however, saying instead that it is because the management of the corporation could not accept the unfavorable conditions set by ZF.

As the largest gearbox producer dominating over 80 percent of domestic market share, Hangzhou Advance Gearbox Group has doubled its annual revenue over the past five years, but its deal with ZF would prevent it from developing and manufacturing products such as marine and transmission gearboxes under its own brand, and the contract would also cost it more than ¥39 billion worth of royalties for technology over the next seven years.

Executives of the company said in an interview with Xinghua News that if the deal is made, the Chinese partner will have little say in the management of the joint venture, and may, following several precedents of foreign acquisition, eventually give up the equity interests.

The article has been published in an August newsletter of China Business Update, a company owned by Gnix Transpacific Co., Ltd in United states, which specializes in automotive industry publication. Wayne Xing, co-writer and the CEO of China Business Update, has authorized the publication of this article in WOW.