By Bloomberg
October 11, 2018

BMW AG will plow 3.6 billion euros ($4.1 billion) into securing control of its Chinese joint venture, a deal that will see the German automaker retain more of its earnings in the world’s biggest car market and potentially spur similar moves by its rivals.

The agreement with Brilliance China Automotive Holding Ltd. (bcauf) makes BMW (bmwyy) the first automaker to take advantage of China’s policy to let foreign companies take majority control of their local partnerships. The luxury-car maker said Thursday it is increasing its stake in the venture with Brilliance to 75% from the current 50%.

The agreement gives BMW a bigger say over its business in China, and lets it keep more of the earnings it generates in the massive market. China is a key focus for all major car companies, but sales of luxury vehicles have been coming off as the trade war with the U.S. damps consumer demand. The deal will help BMW lessen the impact of higher tariffs imposed in the trade fight, as it now plans to boost manufacturing capacity in China and expand local production of models including electric cars.

“We see this as a game changing strategic achievement,” Arndt Ellinghorst, a London-based analyst at Evercore ISI, said in a note to clients. “This will make BMW more nimble, larger and less volatile.”

Removing Restrictions

The pact shows China’s government is following through on its pledge to open up the economy to foreign ownership after the 50:50 joint-venture rule that has restricted global brands’ access to the market for decades. The policy change also gives carmakers such as Daimler AG, Volkswagen AG and General Motors Co. a chance to obtain a bigger control over their businesses in China. The world’s biggest car market is fast becoming a major development and production center for plug-in hybrid and electric vehicles, BMW said.

BMW fell 1.3% to 74.34 euros a share at 10:54 a.m. in Frankfurt trading, compared with a 1.8% decline in the Stoxx Europe 600 Automobiles & Parts Index amid a broader market slump.

“BMW’s move is a signal that China may be giving a green light for foreign carmakers to lift their stakes in local joint ventures ahead of the original timeline,” said Tian Yang, an analyst with China Securities International in Hong Kong.

Until now, foreign carmakers’ ownership in Chinese joint ventures has been capped at 50%. China said in April it is scrapping the limit for electric-car ventures as soon as this year. For commercial vehicles, the cap will be eliminated in 2020 and the one for passenger vehicles will end in 2022, the government said at the time. BMW said its deal will be completed in 2022.

“We could see there’s another round of opening up now happening and we took the chance,” BMW Chief Executive Officer Harald Krueger said in an interview on Bloomberg TV. “The right way strategically is to always have a partner in China to better know the country, to develop things together. I see it as a long-term partnership even though we have the majority stake now.”

China Partners

The agreement has been a drag on the shares of Brilliance. Other Chinese car stocks have also slumped amid investor concerns that the companies will be left with a smaller share of their ventures’ future earnings should their global partners increase control.

While Brilliance is getting a hefty payment from BMW for the 25% stake, it is reducing its holding in a partnership that accounted for most of its profit last year. The shares, the second-worst performer this year among Chinese car stocks traded in Hong Kong, were halted early Thursday. Brilliance has a market capitalization of about $7 billion.

Shares of BAIC Motor Corp., a partner of Daimler, fell as much as 18%. SAIC Motor Corp., Volkswagen’s local companion, declined 4.6%.

“Investors are now looking to Mercedes-Benz to see when it might raise the stake in its joint venture with BAIC Motor,” China Securities’ Tian said. “If that happens, it will definitely cut contribution to the Chinese carmaker and hurt their profits.”

All global car companies in China are now approaching their Chinese partners over their joint-venture stakes, Brilliance CEO Qi Yumin said at the Shenyang event. Daimler said it welcomed China allowing companies to take majority stakes, adding there wasn’t “more to say to that from today’s perspective.”

“Being the first usually means we have to face a lot of questioning,” Qi said. “But we’d rather do it earlier rather than waiting till 2022 to sit down and start the negotiations.”

Trade Tensions

BMW is the biggest exporter of vehicles from the U.S. to China, putting it among major companies most exposed to a trade war. BMW has warned that trade tensions could drag on profits in the coming months. Last year, the carmaker shipped more than 100,000 sport utility vehicles to China from its Spartanburg plant in South Carolina.

Krueger met Chinese Premier Li Keqiang Wednesday in Beijing. Krueger said China will not only become BMW’s biggest market but also an important manufacturing hub to make cars for export to other markets, according to a Chinese government website.

The BMW-Brilliance joint venture will invest about 3 billion euros to expand its plant structure, raising annual manufacturing capacity to more than 650,000 vehicles from the early 2020s on. BMW’s Chinese operations produced 400,000 vehicles last year.

BMW will start making its first pure electric vehicle in China under the joint venture with Brilliance by 2020. The model will be sold in China and also exported to other markets.

China and Germany are forging closer ties with each other as trade relations worsen with the U.S. Krueger was in Berlin in July during a summit between Li and German Chancellor Angela Merkel. Among discussions were opportunities to open up China more to foreign investment.

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