Nikkei Asian Review | Time for International Carmakers to Change Partners in China?

May 11, 2018 16:35 JST
Bill Russo and Edward Tse

International automakers have earned hefty profits from China’s emergence over the past two and half decades as the world’s largest car market, yet have felt unsatisfied because of a regulatory requirement to share these earnings with a local partner.

The announcement last month that the rules requiring foreign carmakers to operate in 50/50 joint ventures with local automakers will be rescinded after years of lobbying might suggest that foreign companies will soon be able to boost profits by raising their ownership in their local operations to 100%. (Their share of profits was usually already more than half when trademark licensing and other fees were included.)

Yet the road ahead is not nearly so clear and straight. A crop of private Chinese automakers operating on their own are leading a surge that has seen local brands’ share of the domestic market start to approach 50%. Meanwhile, China’s powerful internet companies are focusing on mobility services as a critical growth driver for their digital ecosystems, putting themselves at the forefront of the industry’s impending technology shifts in what will be the biggest market for such offerings.

The outlook however need not be gloomy for foreign carmakers. They should seize Beijing’s market opening as a turning point to rethink their China strategy. This can be a chance to form new partnerships to build innovative vehicles in China for sale around the world, taking advantage of emerging suppliers who can produce component technologies at scale.

Mercedes-Benz showed off several new luxury models for the first time at the Auto China 2018 show in Beijing in April. © Reuters

The 50/50 joint venture rule dates back to 1994. At that time, Chinese auto manufacturing was dominated by state-owned enterprises which lacked the technical and financial means to develop their business further independently. The government hoped local carmakers would learn from experienced foreign partners and eventually emerge as successful global automakers in their own right.

This has not worked out quite as expected. While Sino-foreign automotive joint ventures have supported the development of networks of suppliers capable of high-quality production, no global car brands have emerged from China as a result of the 50/50 policy and foreign brands have dominated local passenger vehicle sales.

Nonetheless, on April 17, the National Development and Reform Commission announced that foreign ownership limits on ventures producing special-purpose vehicles and new energy vehicles will be eliminated by the end of this year. The foreign ownership cap is to be abandoned for commercial vehicles in 2020 and for conventional passenger vehicles in 2022. Foreign automakers will also no longer be limited to having only two Chinese joint ventures.

While the regulatory requirement for joint ventures will be scrapped, JVs are unlikely to disappear. Some, and perhaps most, existing joint ventures will probably remain as the foreign carmakers could find it difficult to reach agreement with their partners on restructuring ownership.

With the policy relaxation starting with new energy vehicles, wholly owned foreign carmaking ventures are likely to appear first in this area. U.S. electric car producer Tesla has expressed keenness to take this path.

Yet even with new ventures, foreign carmakers would be well advised to consider the merits of taking on Chinese partners, if not necessarily the same ones.

The leading domestic carmakers today are privately owned companies which have largely grown without the benefit of foreign joint-venture partners, such as Zhejiang Geely Holding Group, Great Wall Motor and BYD. The capabilities of local players are rapidly improving and Chinese brands now hold a 44% market share in the country. They are the pacesetters in the fastest-growing market segments — sport-utility vehicles and electric vehicles.

However, the real disruption of China’s car market is not coming from its traditional manufacturers. The prevalence of the mobile internet has made it possible for individuals to achieve personal mobility without vehicle ownership. Competing in the new business model requires more than the engineering of cars themselves, but also access to a digital ecosystem of mobility services. This new service-centric business model fundamentally transforms the car into a transportation and digital services platform and alters the economics for commercializing connected, electric and autonomous vehicle innovations.

Baidu, like rival Chinese internet companies, is investing in self-driving technologies, seeing the vehicles as a platform to offer a range of lifestyle services. © Reuters

Chinese mobility startups are quickly emerging and expanding, backed by deep-pocketed internet services companies including Tencent Holdings, Alibaba Group Holdings, and Baidu. All three companies are working on self-driving technologies. Both Tencent and Alibaba are also major shareholders of ride-share leader Didi Chuxing. Tencent has also invested in new electric carmaker Nio while Alibaba has invested in rival Xpeng Motors.

The internet companies are seeking to transform automotive hardware into an intelligent platform for a wide variety of online and offline lifestyle services. It is likely that the future mobility revolution will be largely led by Chinese digital companies and their ecosystem partners, especially in areas such as ride hailing and car sharing. Foreign automakers can gain an edge by seeking allies among these Chinese companies rather than taking advantage of their new freedom to operate independently.

Indeed, new forms of Sino-foreign collaboration are likely to surface as companies recognize the need for joint ventures that bring together complementary capabilities. At the same time, the removal of the compulsory joint venture structure will likely eliminate the last inhibitor that has discouraged foreign carmakers from making more use of China as an export platform.

The rapid evolution of China’s automobility industry now requires every participant, Chinese or foreign, to bring relevant capabilities to the world’s largest mobility marketplace. In this emerging arena, all players will have to apply a collaborative innovation model that matches local needs with global capabilities.

Beijing’s decision to scrap its automotive foreign ownership limits is a recognition that China’s industry has become a pacesetter for commercializing new mobility technology thanks to its advanced digital economy. The new policy will alter the industry’s competitive dynamics and accelerate commercialization of new mobility innovations at scale. It is up to foreign carmakers to find their own forward.

Bill Russo is managing director of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China, and a former Chrysler vice president for Northeast Asia. Edward Tse is Gao Feng’s chief executive.


SCMP | Mindset for Success

By Edward Tse | SCMP
April 20th, 2018

Edward Tse says while foreign companies clamour for China to speed up its market reforms, they need to rethink their strategies to survive in an increasingly competitive business environment

At this year’s Boao Forum, President Xi Jinping reiterated China’s commitment to further open the country’s market to foreign companies and improve intellectual property rights protection, an issue that has long been a concern for foreign companies operating in China.

A couple of weeks before Xi’s speech, at a press conference at the end of China’s Two Sessions, Premier Li Keqiang said China would not force foreign companies to transfer their proprietary technology to China.

Source: Google

While some say the plans lack detail, the leadership’s commitment to opening up China further for foreign business shouldn’t be underestimated.

So, what are the implications for foreign multinational corporations? Is there anything CEOs should do differently?

For a long time, some Western politicians, business executives, lobbyists and the media have held the view that foreign companies can’t grasp all the opportunities in China because of a lack of market access, unfair competition and poor intellectual property rights protection.

While such criticism is not unfounded, it is not the whole truth. Since its reform and opening up some 40 years ago, China has been gradually opening different sectors to foreign participation. Today, while some sectors, such as commercial banking and insurance, remain relatively closed, many others are entirely open, such as consumer products, appliances, retail and automotive parts.

Though there is a 50-50 joint venture requirement for automotive manufacturing, China’s automotive market as a whole is very open in terms of products and markets. And, Beijing has just announced it will scrap the foreign ownership restrictions in the automotive manufacturing sector over five years. In the tech sector, pundits have correctly pointed out that Facebook and Twitter are blocked in China, but they forget to mention that LinkedIn, eBay, Airbnb and Amazon e-commerce are not.

Source: Google

A remarkable development in China in recent decades has been the rapid rise of entrepreneurship. Today, China’s economy is best described as a duality (state and non-state). Business innovation, often enabled by technology, is thriving, driven largely by entrepreneurial companies, such as Alibaba and Tencent, which are now some of the world’s largest by market capitalisation. Droves of young people are being entrepreneurial, aspiring to be the next Jack Ma or Pony Ma. An increasing number of fast-growing, sizeable innovative companies are emerging that have built large ecosystems of collaborative partnerships.

China has found its own development path, the “China development model”. At the top, the central government actively plans the direction of the country. At the grass-roots level, entrepreneurship is thriving, driving economic growth. In the middle, local governments compete and sometimes collaborate in clusters of cities within regions. This model has become a major source of resilience for China’s growth.

Given this evolution, corporate decision-makers need an informed and sophisticated view of the country to devise an effective China strategy.

First, their strategy requires a thorough understanding of the China context, which is evolving in a peculiar and multidimensional manner. While China’s reform has been largely gradual, changes can at times be abrupt and rapid. Too often, foreign companies enter China with a market strategy at the business-unit level, using a linear, incremental approach. By focusing on the micro conditions, they often miss the big picture.

Second, China should be at the core of any global strategy. The speed of development, uniqueness, complexity and strategic importance of China requires foreign multinationals to fully embrace China as an integral part of their strategy and organisation, not just one of many markets.

Third, companies should participate in China’s thriving innovations, rather than being bystanders due to a lack of awareness or unwillingness to take risks. Companies could consider engaging in businesses that may not be their traditional core but could provide opportunities for growth, and also form ecosystems with Chinese companies.

I am not advocating diversifying aimlessly. However, I have seen numerous cases when CEOs missed opportunities in China because they either didn’t know about them or felt they needed to focus on their “core competencies”. As a result, they also missed out on the chance to learn from Chinese consumers and the best Chinese companies.

For example, by investing in Autohome, a leading Chinese online automotive advertising platform, Telstra, an Australian telecom and media company, whose core business in China is restricted by foreign participation rules, made a profit of around US$2.5 billion in less than 10 years.

Source: Baidu

Fourth, foreign multinationals should train their China managers to be thought leaders and place them at senior levels. Too often, they treat their managers in China merely as operational people. Strategy and major decisions come from the global or regional headquarters, making it difficult for businesses to come up with an effective strategy for China.

Finally, foreign companies need to shorten their decision-making process and become more agile and flexible. After all, China is evolving fast and competition is intense. Chinese companies are known for bring fast, nimble and innovative. Foreign multinationals should become “more Chinese than the Chinese”.

The rise of China and the simultaneous development of technology are changing the country – and the rest of the world – fast. China is on the verge of a sustained, generational rise that will generate even more opportunities, and challenges, for global businesses. Foreign companies need to figure out how to deal with this.

Clamouring for equal and full market access is not entirely fruitless but that is not where the real game is being played. China will reward those who are innovative and discover new ways of creating value. This requires foreign multinationals to approach China with a different mindset.

China will continue to open up and embrace the rest of the world, perhaps not all in one go, but its direction is clear. CEOs and boards should ask themselves: “How can we capture the potential that China offers us?”

Edward Tse is founder & CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. A pioneer in China’s management consulting profession, he led the Greater China operations for two major international management consulting firms for 20 years and is widely known as China’s leading global business strategist. He is author of The China Strategy (2010) and China’s Disruptors (2015).