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Foreign shareholding restriction in auto industry will be lifted

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On 22 July 2016, China Association of Automobile Manufacturers and representatives from FAW, Dongfeng Motor, SAIC Motor, BAIC Motor as well as experts from China Automotive Engineering Research Institute and China Automotive Technology & Research Center discussed over whether foreign shareholding restrictions in auto-manufacturing JVs should be lifted, which initiated discussions and speculations on this topic among various stakeholders in the industry.

During the past two years, the relevant Chinese government authorities in charge of automotive industry have released many positive signals on the possible lifting of foreign shareholding restrictions in auto-manufacturing JVs. On 10 April 2018, President Xi Jinping announced at the Boao Forum for Asia Annual Conference 2018 that “China will greatly further open up market access and relax foreign shareholding restrictions especially those in the automotive sector as soon as possible”.  

Only one week after President Xi’s speech, China’s National Development and Reform Commission (“NDRC”) released a specific plan on lifting foreign shareholding restrictions in the automotive industry in a press conference. NDRC said that “by 2018, foreign shareholding restrictions in special purpose vehicles and new energy vehicles (“NEV”) will be lifted; by 2020, foreign shareholding restrictions in commercial vehicles will be lifted; by 2022 foreign shareholding restrictions in passenger vehicles will be lifted and the restrictions on the number of automotive joint ventures not exceeding two will be lifted at the same time. Through a five-year transitional period, all foreign investment restrictions in the automotive industry will be lifted.” The timetable released by NDRC provided a clear answer to the discussions among stakeholders on this topic and it can be anticipated that the industrial landscape of the automotive industry will face significant reform. 

I. Foreign investment restrictions in NEV manufacturing and power battery manufacturing have already been gradually relaxed before the release of the timetable

The Opinions on Improving Administration of Automotive Investment Projects jointly issued by NDRC and Ministry of Industry and Information Technology (“MIIT”) on 4 June 2017 already provided that the restriction on number of Sino-foreign auto manufacturing JVs only applied to traditional fuel vehicle manufacturing JVs, and the setting up of pure electric passenger vehicle manufacturing JVs would be free from such restriction.  

Subsequent to that, the Foreign Investment Industrial Guidance Catalogue (Amended in 2017) further expanded the scope of such exception from pure electric passenger vehicle manufacturing to cover pure electric commercial vehicle manufacturing as well.  In addition, it abolished the 50% foreign ownership restriction in power battery manufacturing and foreign investors were allowed to set up wholly foreign-owned (“WFOE”) power battery manufacturing companies all across China since July 2017.  Nevertheless, the 50% foreign shareholding restriction with special purpose vehicle and complete vehicle (including NEV) manufacturing was maintained.

II. NEV manufacturing WFOEs may be set up first

The Ministry of Commerce (“MOFCOM”) publicly mentioned in its regular press conference in September 2017 that China might issue policy to remove foreign shareholding restrictions in NEV manufacturing as soon as possible. Following the meeting between the presidents of China and the US, it was also indicated that China would launch a trial program to remove foreign shareholding restrictions with special purpose vehicles and NEV manufacturing in free trade zones before June 2018. 

The geographic area for setting up NEV manufacturing WFOEs is subject to clarification by the negative list

NDRC did not mention whether there would be any geographic restriction for removing foreign shareholding restrictions in special purpose vehicle and NEV manufacturing.  Therefore, auto OEMs need to wait for the national negative list and free trade zone negative list to be published by NDRC by June this year in order to ascertain whether the foreign shareholding restrictions with NEV manufacturing is lifted on a nation-wide basis or just in the free trade zones. 

Pure electric vehicle manufacturing company needs to have self-owned trademark and brand for its products

As one of the conditions for investment project approval and product market access approval, to set up a new pure electric vehicle manufacturing company in China (including both pure electric passenger vehicle and pure electric commercial vehicle), such company must own the trademark and brand to be used on its vehicle products.  For global auto OEMs, since it is not possible for them to transfer the ownership of their global brands (e.g., “Volkswagen”, “Mercedes-Benz”) to joint ventures set up with a Chinese auto OEM, the pure electric passenger vehicle manufactured by the joint venture can only use a newly created brand unknown to the consumers with the name of the manufacturing JV shown on the body of the vehicle.  If it is legally permissible to set up a new energy vehicle manufacturing WFOE in China, this undoubtedly will give more room and options to global auto OEMs in terms of the ownership and choice of the trademark and brand to be used by their China manufactured new energy vehicles. 

III. Regulation on controlling increase of output of traditional fuel vehicles will continue to play the role

Although foreign shareholding restrictions in the automotive industry will be gradually lifted, the Chinese government would still strictly control any output increase of traditional fuel vehicles and in principle, no approval would be given for investment projects of new traditional fuel vehicle enterprises based on the relevant regulations of the State Council, NDRC and MIIT. For an existing traditional fuel vehicle manufacturing OEM to expand its production capacity, it must meet a series of conditions which include for example, its NEV production volume in the previous year exceeds the average level in the automotive industry in the same year. Therefore, even if the foreign shareholding restrictions in the automotive industry are gradually lifted, application for setting up a new traditional fuel vehicle manufacturing WFOE will not be approved if the above mentioned regulations continue to apply. 

IV. Conclusion

After the expiry of the five-year transitional period, foreign shareholding restrictions in the automotive industry and the number restriction of automotive JVs in China will become history. Global auto OEMs would be finally able to participate in the competition in the Chinese automotive market on its own. Considering the policies issued by the Chinese government in the past two years concerning strict control of increase of traditional fuel vehicle output as well as the double credit management measures, we anticipate that global OEMs would accelerate adjusting their investment layout in China, including setting up NEV WFOEs and consolidating the current traditional fuel vehicle manufacturing JV arrangements. For Chinese auto OEMs (especially the new start-up NEV manufacturing companies), they need to be fully prepared during the transitional time period to face the more fierce market competition in the future. 

The text of NDRC’s release of timetable for lifting foreign shareholding restrictions in the automotive industry was published on NDRC’s official website available at:

http://www.ndrc.gov.cn/xwzx/xwfb/201804/t20180417_882711.html 

                                                                             

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The information contained in this article represents the views of the author only, and does not constitute the rendering of legal opinion or advice by Tongshang. If you need legal advice or professional analysis, please consult a qualified advisor or get in touch with your usual contact at Tongshang.


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