The debate on lifting equity share control

This year's Global Automotive Forum held in Wuhan triggered a heated debate among automotive circles about whether China needs to relax the 50:50 equity control policy over investment by foreign automakers in whole vehicle assembly plants.

It all started with Alan Mulally who commented during the event that China's 50:50 equity structure requirements for Sino-foreign vehicle JVs, if lifted, would be a natural occurrence. "The different arrangement for equity here is a natural evolution as you open up the market and Ford is pleased to be part of the solution," Mulally said during a media briefing.

Supporters of continued equity share control in whole vehicle JVs were quick to respond to Mulally's statement. "It is not appropriate for Americans to talk nonsense during their visit!" tweeted a senior editor at one of China's leading internet automotive portals. "Equity shares are the rule of the game here in China and we will have the say as to whether to open it up or not! Ford would better worry about its own future!"

Dong Yang, secretary general of China Association of Automobile Manufacturers, claims that those who support the relaxation of the 50:50 equity regulations are "big traitors". It is not surprising to hear such comments if we realize that CAAM is a semi-government agency with a declared mission of "serving members of the industry, serving government departments and the society." It is also not surprising to know that CAAM's chairmen of the board of directors have been CEOs of China's leading state-owned auto groups such as FAW, SAIC and Dongfeng.

The 50:50 equity investment restriction adopted 20 years ago was adopted mainly to protect the interests of large and medium state-owned automakers in their JV assembly plants with multinational carmakers.

Industry voices advocating further opening up the market and relaxation of equity investment controls are also loud and clear. Jiangnan Xiaosong, a micro blogger on auto.sina.com, believes that sticking to the 50:50 equity policy is equivalent to "drinking poison to quench thirst." The blogger believes that the relaxation of equity control would eliminate the current JV brands – foreign brands assembled jointly with state-owned Chinese carmakers. JV brands are in direct competition with local Chinese brands because they benefit from crucial policy, financial and R&D support from the government via the Chinese partners. If JV brands become foreign brands, the cost for multinational assembly plants with controlling shares is bound to rise, offering local Chinese brands a better competitive environment.

Xiaosong believes that keeping the current equity control helps only protect China's short-term interests. "As a member of the WTO, China will eventually lift equity investment control," he writes. His comments echoes a statement by a MOFCOM official who advised local carmakers during the Wuhan conference that they must be prepared to face the removal of equity control in the future as a growing number of Chinese companies are building assembly plants overseas without any local equity investment restrictions.

A number of automotive executives from state-owned, JV and private companies who spoke at the Wuhan conference believe that the real opportunities for local Chinese brands depend on open market competition.

There are a number of analysts who support the principle of lifting the equity control but believe that forces of vested interests of large state-owned automakers in China may still be powerful enough to pressure the government to preserve the status quo. While this may be the true, the direction of the country's policy orientation under the new leadership seems to be the opposite: further opening up, continued economic reform, relaxation of investment control and reducing entry barriers are expected to be the central focus of the ruling Party’s 3rd Plenary to be held on November 9-12.