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China’s foreign automotive joint ventures lose luster under EV onslaught

Written by Nikkei Asia Published on   6 mins read

Weaker earnings spotlight the state players’ overreliance on the likes of Nissan and Honda

For years, Chinese state-owned automakers could count on joint ventures with major foreign brands as a magic fuel for profit. But the latest earnings suggest those days may be ending, as newer solo players like BYD have ridden a wave of electrification in the world’s largest automotive market, while foreign marques have lagged behind.

Dongfeng Motor Group, a core Hong Kong-listed arm of state-owned Dongfeng Motor Corp., reported a net loss for last year, its first since it went public in 2005. The red ink amounted to RMB 3.99 billion (USD 564 million), versus a net profit of RMB 10.26 billion (USD 1.4 billion) the previous year.

The slip into negative territory came as the performance of two separate 50-50 joint ventures—one with Japan’s Honda Motor and another with Nissan Moto—declined significantly. Dongfeng Nissan’s sales volume dropped 21.5% on the year, while Dongfeng Honda’s fell 8.5%. Total profit derived from the ventures and associates plunged by over RMB 11 billion (USD 1.5 billion), making a loss unavoidable.

Lou Jia, an analyst at BOCI Research, a unit of Bank of China, said the group’s loss was mostly attributable “to the substantial decline of investment income caused by weakening profitability of major joint venture brands.”

Dongfeng highlights a unique, lucrative financial structure that long supported certain Chinese state-owned automakers. The bottom lines of these companies were enhanced by profit contributions through equity-method accounting—a single line on their income statements reflecting cars sold by partnerships with foreign brands, enabled by compulsory arrangements under Beijing’s policies.

This structure traces back to the time when China was steering toward reform and opening up in the early 1980s.

After the economic shambles left by a series of political campaigns including the Cultural Revolution, Chinese authorities turned to foreign companies to build the country’s industrial base—without losing control. In the automotive sector, all foreign manufacturers wishing to produce in China were forced to team up with a local state-owned company with a cap of 50% ownership, at least until a rule introduced in 2018 allowed them to hold larger stakes.

A turning point for Dongfeng—once a highly indebted automotive group owned by the central government—was a drastic restructuring effort in 2002 that pulled in Nissan, then led by Carlos Ghosn. A cash injection, along with the introduction of brands, engineering and expertise from the Japanese partner, rejuvenated the ailing enterprise.

At a conference of state enterprise bosses in August 2004, Li Rongrong, then head of the State-owned Assets Supervision and Administration Commission (SASAC), praised Dongfeng’s restructuring with Nissan as a “very good example” of a successful turnaround. Miao Wei, then president of Dongfeng, was promoted to lead the city of Wuhan and later rose to become the central government’s minister of industry and information.

The flip side of the success was an overreliance on foreign forces that is starting to haunt such companies.

Since the adoption of new accounting rules in 2012, Dongfeng posted an aggregate of RMB 125.63 billion (USD 17.7 billion) in net profit. But the profits accrued by its joint ventures and associates came to RMB 146.44 billion (USD 20.6 billion), about 16% more than what the entire company made over the last 12 years.

It is a similar story for Guangzhou Automobile Group (GAC), whose major foreign partners are Honda and Toyota Motor. Their aggregate net profit since 2012 was RMB 71.87 billion (USD 10.1 billion), while the total profit contributions from the joint ventures and associates was over 20% more at RMB 87.28 billion (USD 12.3 billion).

SAIC Motor, which has long-term alliances with Volkswagen and General Motors, is not as reliant as Dongfeng and GAC on the partners. Still, over 80% of the Shanghai-listed company’s aggregate net profit came from its joint ventures and associates over the same period.

Unlike Dongfeng, GAC and SAIC remained profitable last year overall. But their earnings declined, mainly as the foreign joint ventures have been gradually losing steam.

At least, the operations involving Toyota, Honda, Nissan, VW and GM are still producing cars. Other endeavors have met unceremonious ends.

GAC’s venture with Mitsubishi stopped operating last year, as sales had been “far from expectations,” according to a notice sent by GAC Mitsubishi Motors’ management to employees. The owners from the Japanese side, Mitsubishi Motors and Mitsubishi Corporation, sold their respective 30% and 20% stakes to GAC for just RMB 1 each.

Stellantis, a Euro-American automotive group formed through a merger of Fiat Chrysler Automobiles and France’s Groupe PSA, also pulled out from a 50-50 Chinese venture, GAC Fiat Chrysler Automobiles. Established in 2010, the venture became insolvent by 2022, and the final stages sparked rare open criticism by a foreign player of its Chinese state-owned partner.

Stellantis CEO Carlos Tavares blamed the breakup on a “breach of trust” by GAC, while the Guangzhou company denied those claims, insisting it had “made various efforts” to save the ailing relationship.

While Stellantis decided to maintain another 50-50 framework with Dongfeng, the Chinese side sold about half its shares in Stellantis for EUR 934 million (USD 1 billion) last November, slashing the holdings to 1.58% and diluting their capital relationship. Meanwhile, Dongfeng bought land-use rights and buildings for RMB 1.71 billion (USD 241.7 million) from the joint venture.

At Groupe Renault, its joint venture with Brilliance China Automotive Holdings filed for bankruptcy in a local court at the end of 2021, and the restructuring process is still ongoing. The French automaker dissolved another key partnership in China with Dongfeng in April 2020, when it sold its 50% stake to the Chinese partner.

Still, while China’s traditional joint ventures with foreign automakers are in retreat under the onslaught of electrification, some industry veterans anticipate that some of the global players will charge back.

“In the long run, I would expect Japanese car companies to make a very strong competition with the Chinese in low-end electric vehicles,” Martin Eberhard, co-founder and former chairman and CEO of Tesla, said at an investment forum hosted by HSBC in Hong Kong on April 9. He added that the South Koreans are capable of catching up as well.

He was more skeptical about others. “I don’t know yet [whether] any of the US companies can compete on the low-end like that,” he said. “Tesla apparently has shunned” that segment, alluding to a report on the US EV leader reportedly abandoning development of a low-priced entry-level Model 2.

Even if some of the foreign joint ventures do manage to strike back in EVs, overcapacity is eroding the profits of the Chinese players.

“Overcapacity has seriously impacted negatively the structure of the economy in China,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China, who has been in the country for more than three decades. Predicting further consolidation in an overcrowded sector, he estimated, “We have 140 car companies in China [and] I would say maybe seven or eight of them are profitable.”

Frontrunner “BYD can afford” to compete, he said, but he questioned how many others would hang in. BYD’s net profit almost doubled in 2023 to RMB 30.04 billion (USD 4.2 billion), whereas other young EV companies such as Nio, Xpeng Motors, and Li Auto all lost money. “So, this year, we’ll see, I guess, one-third of the Chinese car industry exiting the market,” he predicted.

Gui Shengyue, CEO of Hong Kong-listed Geely Automobile Holdings, told reporters and analysts in March that the company is “not going to easily give up” on gasoline cars, quoting billionaire founder Li Shufu. According to Gui, Li, at a recent board meeting, underscored the struggles of many pure EV makers to turn a profit. Geely’s net profit last year was virtually flat at RMB 5.3 billion (USD 749.1 million), although without a one-off gain from the 2022 acquisition of 34% of Renault Korea, the profit rose 51%.

For state-owned automakers with surviving joint ventures, one response to the severe competition could be establishing new product lines under their own brands—the original aim of the Chinese government. But the earnings show they remain heavily reliant on foreign joint ventures, and time may be running short.

“May I ask, when would SAIC Group be freed from the confinement of traditional automaking mentality?” an investor questioned during an online text conference with management on April 1. SAIC President Wang Xiaoqiu replied, “The company is now under the process of transformation.”

This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.


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