China to Relax Joint Venture Requirements for Manufacturing
On Tuesday, Chinese President Xi Jinping announced a planned rollback of the manufacturing foreign ownership limits first set forth in the 1990s, which require that manufacturing operations in China be at least 50% Chinese owned. Specifically, China will begin by eliminating this ownership requirement for electric vehicle production and gradually roll back the requirements for all other automobiles as well as airplane manufacturing and shipbuilding until all limits are lifted in 2022. This move, coupled with China’s aggressive 10% electric vehicle mandate starting in 2019, emphasizes the concerted efforts being taken by the Chinese government to dominate the future global electric vehicle manufacturing industry.
In concert with the easing of foreign ownership limits, China has also indicated that it is likely to dramatically lower its current 25% tariff imposed on imported vehicles. In a shift from its historical protectionist position, China is clearly readying its economy to be a global EV manufacturing hub. By dropping import tariffs, Chinese exports are less likely to be met with reciprocal tariffs which would have a chilling effect on the growing Chinese automobile export market.
While U.S. companies have only recently looked to China as a global manufacturing source (in 2017, about 50,000 vehicles were imported from China to the United States), Chinese business have long had eyes on the United States as a target export market. In the startup space, Chinese-backed companies such as Faraday Future and SF Motors have aimed to enter the U.S. market by following Tesla’s model. In fact, SF motors has even brought in original Tesla founder, Martin Eberhard as its Chief Innovation Officer to help launch the company. Using a different approach, Geely, which had tried and failed to enter the U.S. market on its own in 2008, acquired Volvo from Ford in 2010 and has enabled Volvo to almost double its annual sales since the acquisition. Even with the prior failures of both Geely and Chery to directly enter the United States, that has not stopped GAC from making its own entrance after displaying its product at the 2018 North America International Auto Show in Detroit.
However, finding a consistent way into the United States or even global automobile manufacturing market will present its challenges. U.S. manufacturers have long been skeptical of entering China due to misappropriation of intellectual property, which will only become a larger concern with the advent of autonomous technology. While President Xi has indicated that IP rights will be strengthened in the future, the similarity between GAC and GMC in both name and appearance, and Geely’s Lynk & CO and Ford’s Lincoln brand, which also challenged Geely’s attempted trademark registration, are clear representations that Chinese companies will still push the limits with intellectual property.
In the meantime, some relationships between global automobile manufacturers and their Chinese joint venture partners have been in place for almost two decades and regardless of the shifts in ownership restrictions, easing of tariffs, and strengthening of IP protections, global manufacturers have expressed initial resistance to change. After hearing many of these manufacturers assure the public that these joint venture partnerships are here to stay, the attempted economic transition may be slower than initially anticipated, but rest assured, it’s coming.