Why BMW won’t buy more of Brilliance – at least not now

10 years - Picture courtesy China Daily

10 more years?

BMW is investing heavily into a raft of new models to dust rival Audi, but it won’t buy more shares in its Chinese joint venture partner Brilliance. This week in Munich, BMW’s CFO Friedrich Eichiner blew off a Bloomberg reporter who asked whether BMW would. “The market is regulated,” Eichinger snapped. “This question is not relevant, it is legally not possible.” Indeed, it is not. If you want to build cars in China, you need a Chinese joint venture partner who must own no less than 50 percent of the shares.

This system was put in place decades ago when China opened its doors to foreign automakers. The idea was that Chinese would learn on the job everything about developing, manufacturing, and selling cars. Once China was developed into an auto giant, one could dispose of the cumbersome laowei.

It just did not work out that way.

Global carmakers poured capital, know-how, and resources into China. Today, the Chinese market powers most of the growth of many global automakers. One fifth of BMW’s global sales were made in China last year. About a third of the global output of Volkswagen and GM, both early movers in China, is dependent on the Middle Kingdom.

However, Chinese automakers did not learn a whole lot about developing, manufacturing, and selling cars. A manager in a large JV learns that R&D is unnecessary, because it arrives automatically from Wolfsburg, Detroit, or Toyota City. He learns that production engineering is better left to foreign experts, and that marketing should take the advice of the advertising agencies brought in by their joint venture partners. The laowei meanwhile are becoming increasingly adept in keeping key technologies under wraps. Components are developed and made abroad. Local content laws? The components can be made in China by parts manufacturers under foreign control. Auto making requires a joint venture. The making of parts can be 100% in foreign hands.

In most developed countries, the national manufacturers lead the market. In China, they are the losers. The large, mostly government-controlled Chinese partners of global automakers are luckless in developing indigenous brands. SAIC, Dongfeng and China FAW Group generated less than 10 percent of their profits last year from selling their own passenger-vehicle brands, Bloomberg says. The market share of domestic brands is steadily eroding.

Some smaller, unattached Chinese automakers, for instance Great Wall, are the most innovative – because they have to. They are living dangerously. Half of China’s more than 100 domestic automakers are liable to shut their doors in the next three years, as China’s manufacturers association CAAM predicted. Instead of being kicked out of the country, early bird foreign JV partners have their 25 year contracts renewed for another term, as it happened to Volkswagen.

Realizing that the old plan backfired, last year China’s Ministry of Commerce proposed to relax the rules, and to allow foreign partners to own more than 50 percent. Being in control, foreigners would be more willing to bring in know-how, key technologies, and research, the ministry reckoned. The measure was drowned in a howl of protests by state-owned car companies who saw their sinecure evaporate.

So for the time being, Eichiner is right. More than 50% is against the law. It probably won’t last forever. Miao Wei, minister of Industry and Information Technology, told, via China Daily, domestic carmakers to be ready for relaxed joint venture rules. “We will try our best to give you time to prepare,” Miao said.

As for BMW, the Bavarians probably would not mind owning 100% of Brilliance. Their 10 year marriage had been rocky. Brilliance is prone to launching cars that are heavily inspired by BMW designs. Brilliance’s foray into the German market with BMW-Doppelgaenger were stopped by heavily publicized crash tests. Nevertheless, for the time being, the marriage will remain intact, and the profits will be split in the middle.