Joint venture self-owned brands cannot help China build a strong, vibrant industry

Recent remarks made by two senior government officials have once again stoked debate on the future of joint venture self-owned auto brands in China.

Not too many people are aware that joint venture self-owned brands were first mentioned as part of the government's industry policy. The "Adjustment and Revitalization of the Automotive Industry Plan" released by the State Council in 2009 had set a target of increasing the share of self-owned passenger vehicle brands to 40 percent and self-owned car brands to 30 percent by the end of 2011.

Close on the heels of this, the automotive industry department released its target of self-owned brands accounting for 50 percent of the passenger vehicle market, and for 40 percent of the car market by 2015.

The target looks ambitious, considering that the performance so far has not been to expectations. Since 2010, the market share of self-owned brands has not increased but rather declined, and during the first eight months of this year was just 28 percent. Had not a sales slump hit Japanese cars makers, the market share of the self-owned brands would have been much worse in September and October. It is obvious that the government departments have realized the bigger picture of falling sales, and are using "joint venture self-owned brands" to achieve year-end targets.

Foreign joint venture partners are cool to the idea of joint venture self-owned brands as they feel that it would lead to loss of technologies to their latent competitors. So in most cases, the foreign joint venture partner transfers some outdated technologies and launches some low-end models instead of making concerted R&D efforts to nurture and grow self-owned brands. Their reluctance is understandable, considering that they do want to nourish and grow the competition in their own backyard.

The Chinese side in the joint venture also shows very little interest in joint venture self-owned brands. This is in part due to the failure of acquiring technologies, and in part due to the dent in their self-owned brand caused by the joint venture one.

Although both foreign and Chinese companies are not keen on joint self-owned ventures, it still remains the prerequisite for government approval of additional capacity. Hence it comes as no surprise that auto majors are actively launching joint self-owned cars.

The automotive industry policy launched in 2009 was without doubt an important catalyst for the conception of joint venture self-owned brand. However, the Chinese automotive industry's obsession with the 50-50 joint venture "opium" policy (as termed in a statement by He Guangyuan, the former mechanical industry minister) is the real reason behind such moves.

The word "opium" captured the essence of the automotive industry policy of China in the past 30 years. Under the guidance of such a policy, the best assets and resources of the native automotive industry are gained by the joint ventures. As for the large-scale state-owned companies, they have made great profits depending on their relations with the government and the technologies from the foreign partners. In contrast, the private enterprises and the local government-owned companies are often considered scattered, messy and bad, and in need of constant consolidation.

What's ironic is that nowadays the most successful self-owned brands are those once labeled "others" by the government - Chery, Geely, Great Wall and BYD. The self-owned brands launched by several large state-owned enterprises have failed to gain market share in spite of large-scale investments for several years. Therefore, the "joint venture self-owned brand" concept can only be termed a last-ditch effort by the government to achieve the target of self-owned brands accounting for 40 percent of the market.

The aim of cooperation between state-owned auto companies and the foreign parties in a joint venture so far has been based on higher output. Company officials often perceive R&D investment and self-developed brands as growth risks and so are not keen to change the current output-led growth pattern. The foreign company is wary of sharing key research and technology pertaining to production.

This tacit agreement between the parties in the joint ventures satisfies most of the needs of the government officials, as higher output ensures that foreign companies can tap the Chinese market without sharing key technologies. As a result, it has been relatively smooth sailing for most of the foreign auto JVs in China.

The execution of such a policy leads to over-dependence on the foreign company and the erosion of self-reliance built up my most state-owned enterprises. The SOE's role in the joint venture becomes more one of a financial investor and governmental liaison. The so-called self-owned brands have to put up the pretense of "joint venture self-owned" in order to live up to its name.

This kind of "opium" joint venture policy leads to the weird phenomenon of "opening-up to the outside and closing to the inside". The joint venture self-owned brand is just a new name for this old policy.

The 18th Communist Party of China National Congress has outlined its goal of establishing a fair and just society in China. We hope that government officials act in accordance with this policy and get rid of the "opium" obsession and extend the opening-up to inside the country as well as to the outside. Only this can create a fair and square competitive environment for privately-owned auto companies, and build up a strong domestic car industry.

The author is managing director of LMC Automotive Consulting (Shanghai) Co Ltd. The views expressed here are not necessarily those of China Daily.

(China Daily 11/30/2012 page7)