China car group shares hit by liberalisation fears

China’s biggest domestic carmakers saw their share prices gyrate wildly on Wednesday and Thursday after a decision to lift foreign investment restrictions in the industry.

Guangzhou Automobile Group (GAC), one of China’s largest car companies, suffered a share price fall of 10 per cent in early trading.

Shanghai-based SAIC Motor Corp, Shenzhen-based battery carmaker BYD, and Shenyang-based Brilliance, also saw large drops in early morning trading. 

SAIC and BYD share prices later recovered, while Hong Kong-traded GAC ended the day down 10 per cent and Brilliance fell 9 per cent. On Thursday morning, both those stocks roared back, recovering most of the ground they lost. 
 
At the heart of investor anxiety was the uncertain future liberalisation presents for Chinese domestic carmakers. 

The new rules will allow foreign companies to build wholly owned plants starting next year for electric vehicles, and for combustion engine passenger cars in 2022.

That undermines what one analyst referred to as the Chinese car industry’s “iron rice bowl” — a reference to the guaranteed social security of the Mao era. 

For decades, China’s domestic car companies had been defended by 25 per cent tariffs on imported cars and a requirement that foreign companies building plants in China must have a 50-50 Chinese partner, with whom the foreign company shares profits and technology.

With the decision this week to phase out the so-called 50-50 rule, many Chinese carmakers face an uncertain future. 

However, according to analysts, the government has clearly decided it is time for local car companies to stand on their own feet, say analysts.

“The government feels that having this protection with the joint ventures has made the domestic industry lazy,” said Yale Zhang of Autoforesight, a Shanghai car consultancy.

Chinese brands have been steadily gaining market share in China, he said, hitting 44 per cent of the 25m passenger cars sold in China last year.

“China’s auto policy has been to allow brands to hit 40-50 per cent market share — this is the target. Once they demonstrated that they have the momentum, the government wants to push them” he said.

Few believe that things will change overnight for the Chinese companies — foreign companies have learnt to make handsome profits in China despite splitting them with their partners — they sell licences, collect royalties and sell spare parts.

They will also find it expensive to buy out their Chinese joint venture partners, said Janet Lewis of Macquarie, the investment bank. “It probably doesn’t make a lot of difference in the near term in that the car industry is very established, which creates barriers to entry.

“It is unlikely that foreign automakers will look to buy out their partners as the cost of buying the existing investments would be prohibitive,” she said.

With the barriers to investment falling for electric vehicles first, many companies may see that as a first area in which to test the waters in China. 

Tesla, for example, may see an opportunity to break into the China market. But most experts see incremental, rather than imminent change.

“Even if Tesla were to announce a new China plant tomorrow I doubt the start of production will come pre-2021, so the difference in dates is largely academic,” said Robin Zhu of Bernstein in Hong Kong.

But investors are pessimistic — even Geely, one of China’s strongest car companies, which does not have any joint ventures with foreign companies (it bought Volvo Cars in 2010) — saw shares fall 3 per cent on Wednesday. 

“This is an irreversible trend,” said Mr Zhang “but not everyone is ready for it. The industry will have to digest the changes.”