BMW to raise stake in China joint venture to 75% in €3.6bn deal

BMW will pay €3.6bn to increase its stake in a Chinese joint venture to 75 per cent by 2022, following Beijing’s relaxation of investment restrictions in the automotive sector, which will hand foreign companies more control in the world’s largest car market. 

In April, Beijing announced it would ease decades-old restrictions — requiring foreign vehicle manufacturers to form joint ventures with Chinese partners and capping ownership at 50 per cent — by the year-end for electric vehicles, and by 2022 for others.

BMW’s joint venture in the northern city of Shenyang with local company Brilliance Auto Group would increase its production capacity including for new energy vehicles, the German company said in a statement, adding that the joint venture would be extended to 2040. 

The venture will be consolidated into BMW’s financial statements as a result.

Increasing their JV stake gives companies such as BMW greater control while boosting overall margins, as carmakers are generally more profitable in China than in other markets, said Benjamin Lo, an industry analyst at Nomura. 

“In the past, with ownership divided 50-50, they have to reach a consensus on longer-term decisions,” he added. “When things are good there is not much disagreement, but when things are not good, then it delays decision making.”

China set up the ownership restrictions in the 1980s in the hope that Chinese joint-venture partners would absorb knowhow from the foreign partners.

But most Chinese companies have been weak at developing their own brands, even as China overtook the US to become the world’s largest automotive market, with 29m vehicles sold last year.

Analysts said that the ability of foreign automakers to increase their stake would depend on their bargaining power relative to their joint venture partner. 

For instance, GM’s partner in China, SAIC Motor, “has a much stronger brand in comparison, meaning GM might not be as daring in its share demands”, said Zhong Shi, an expert committee member of the China Automobile Dealers Association. 

But Brilliance is a small company relative to BMW.

“They already are a weak party in the joint venture — all of their profits need to rely on BMW and their own Chinese brand segments are losing money,” said Xing Lei, chief editor of China Automotive Review.

BMW in July said it would set up a 50-50 joint venture with China’s Great Wall Motors to produce electric-powered Mini cars outside Europe for the first time.

BMW and Great Wall will each invest Rmb850m ($123m) in the venture under a 15-year agreement. 

Analysts said some carmakers might choose to retain 50-50 ownership of their Chinese ventures because the arrangements were highly profitable.

“A lot of the contracts have been renewed for another 20 years or so,” said Ron Zheng, a partner at consultancy Roland Berger.

Shares in Brilliance fell 12 per cent on Hong Kong’s stock exchange in July after China’s premier Li Keqiang said during a visit to Germany that BMW might increase its stake.

Brilliance announced that the company would halt trading in its shares with effect from Thursday morning, pending the publication of an announcement in relation to a proposed disposal by the group.