The Chinese government has issued a draft of new regulations governing joint ventures between Chinese and foreign automakers planning to build electric vehicles. The draft is being circulated to government agencies and China’s state-owned automakers for comment, but foreign carmakers are not included.
A rules change could affect joint ventures with foreign automakers like Ford Motor Co. (NYSE: F), Daimler AG (OTC: DDAIF), PSA Peugot Citroen (OTC:PEUGY), Honda Motor Co. (NYSE: HMC), Toyota Motor Corp. (NYSE:TM), and Volkswagen AG. Component makers such as EnerDel, the batter-making division of Ener1, Inc. (NASDAQ:HEV) would also be affected. EnerDel recently entered a joint venture with Chinese auto parts supplier Wanxiang.
The primary changes to rules governing foreign carmakers address ownership ratios and technology transfer requirements, according to a report in The Wall Street Journal.� The proposed plan requires foreign firms to form joint ventures that are majority-owned by a Chinese partner if the firm plans to produce energy components such as batteries and high-power electric motors. The majority ownership would presumably carry with it the right to control the technology.
Under current regulations regarding manufacturing gasoline-powered cars in China, foreign firms can own 50% of a joint venture and retain the rights to proprietary technology. As at least one foreign automaker executive sees it, the plan is no less than “China strong-arming foreign auto makers to give up battery, electric-motor, and control technology in exchange for market access.” He added, “We don’t like it.”
Foreign carmakers may not like it, but they may not have any choice. China is now the world’s largest car market, and the government is eager to expand its role in auto manufacturing beyond supplying cheap labor and materials. The Chinese government essentially wants to make hay while the sun shines, trading access to the world’s largest market for technology that will jump-start the country’s transformation to technological leadership.
The Chinese are eyeing a move to become a global supplier of electric vehicles, and have already said that the government aims to create as many as five electric-vehicle automakers and three component suppliers by 2020 that are able to compete globally. That won’t happen if the companies must start from scratch.
Naturally, foreign carmakers are not interested in providing the technology that could lead to their own demise.
The problem for small US companies working on battery technology is perhaps more severe. Many of these companies are still in start-up mode, and many had plans to manufacture batteries in China. It’s not inconceivable that these companies will be forced to sign joint venture deals with the Chinese battery makers, essentially giving up the technology that the US companies have developed with (mostly) US venture funding and government grants.
China wants to be more than the world’s longest manufacturing line, and its soon-to-be position as the world’s second largest economy gives it serious leverage to demand a lot for access to its markets. The pressure on the auto industry may be just the first move.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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