Tier 1 autoparts suppliers are lobbying behind the scenes in an effort to dissuade China’s NDRC from passing a proposed restriction aimed at limiting foreign control of hybrid and electric car part manufacturing in China.
Some boundaries in the traditional auto sector are already in place, but the Chinese government is now proposing limits on the nascent new energy vehicle space, a strategy which appears to be specifically aimed at controlling technology, industry sources told mergermarket.
First proposed in April by China’s National Development and Reform Commission (NDRC), the potential amendment to the Guiding Catalogue for Foreign Invested Industries would mean that any foreign entity engaged in the manufacturing of “key components for new energy vehicles” in China may not hold more than a 50% equity interest in the enterprise. The list of key components as defined by the NDRC is long, and very specific, but the parts are considered essential to the manufacturing of hybrid and electric vehicles.
The proposed amendment to the catalogue has not yet been passed, but one China-based industry source said that based on previous catalogue releases, a decision could be made by Q3 or Q4, and that there is a 50/50 chance of the revision being passed.
Waiting on NDRC decision
Tier 1 auto suppliers such as Germany-based Robert Bosch, Germany-based Continental, US-based Delphi and Japan-based Denso, which all have either a significant footprint or expansion plans for China, could all be affected, industry sources said.
Bosch holds 51% of a 51/49 auto part JV with China’s SAIC, for example, and this partnership may not pass the new revision, said the China-based industry source.
A spokesperson from Bosch in Germany said it could not provide any statement on the subject at the moment, as it has to first examine the implications of the amendment in China internally.
Meanwhile, an automotive banker in Germany described the situation as “very, very serious” for European automotive components makers and OEMs. He said France-based Valeo, which makes electric motors, as well as US-based Johnson Controls, and Evonik and Daimler in Germany could be impacted.
Potential Impact
If the revision is passed, any foreign auto player with a wholly owned new energy vehicle (NEV) part manufacturing business in China must either 1) find a domestic Chinese partner or 2) decide to produce outside China and ship parts into the country, according to a spokesperson for Delphi in China.
“This will impact our decision on where to produce,” the spokesperson said. Delphi currently has plans to manufacture products in China, but within Asia-Pacific it also has operations in Singapore, Korea, Japan and India, and could shift manufacturing to one of these markets. Other foreign companies are contemplating the same possibility, according to the American Chamber of Commerce in Shanghai.
While the volume of new energy vehicle manufacturing in China is still small, there is much at stake because the auto industry has a longer term view, and China boasts an “aggressive” new energy vehicle plan, the spokesperson noted.
“If you don’t do something today in the new energy space, you won’t have any place in the new energy space in the future,” he said.
He declined to comment on the value of Delphi’s new energy vehicle-related business in China, but did explain that most of Delphi’s activity in the space involves working with customers such as state-backed SAIC and California-headquartered Coda Automotive on R&D, with the aim of securing future contracts.
There is also the potential financial impact to consider, said a US-based auto sector banker, who noted that reduced ownership could affect how large publicly held companies report their existing JVs and co-owned entities in China. Both valuation and legal structuring problems could result, he said.
Technology implications
Perhaps most significant are the implications for IP protection, a longstanding concern among all technology-related players doing business in China. Downgrading a wholly owned business to a 50/50 JV could result in the loss of control of IP, loss of operational control, and consolidation of revenue, the China-based industry source said.
The US-China Business Council, which represents more than 220 US companies with significant investment and operations in China, has said that removing ownership restrictions would encourage more foreign companies to bring capital, technology, global best practices and employment opportunities. The USBC has requested that the drafters of the new catalogue change its proposed stance on new energy vehicle components, and allow foreign companies to establish majority-owned JVs and wholly owned foreign enterprises in this space.
The “new energy vehicle is the new battlefield,” the Delphi spokesperson said. He explained that despite China manufacturing more vehicles than any other country, it still does not control the technology. China should “learn its lesson” he said, adding that this new revision may be aimed at helping these Chinese companies to control the technology this time around.