China's auto industry will open wider to foreign investment, which has already played an important role, especially in the passenger car segment.

Foreign investment in the auto industry totals more than US$20 billion so far.

Foreign investors will be permitted to control stakes of more than 50 percent in automobile and motorcycle joint ventures (JVs) with Chinese partners if their JVs are built in China's export processing zones and aimed at overseas markets, according to China's new auto policy released in June.

In the past, foreign investors were only allowed to have a maximum stake of 50 percent in automobile and motorcycle joint ventures with Chinese partners.

The equity structure requirement was seen as one of the most important resorts of the Chinese Government to protect local manufacturers from controls of foreign partners as the nation is cutting its tariffs on auto imports and will remove non-tariff barriers in its commitments to the World Trade Organization (WTO).

Japan's Honda Motor Company has become the first foreign automaker to have a controlling stake in automobile JVs with Chinese partners.

Honda holds a 65 percent stake in a JV in Guangzhou, capital of South China's Guangdong Province, with Dongfeng Motor Corp and Guangzhou Automobile Group.

The JV, set up last year, is located in Guangzhou's export processing zone.

All small-size cars, to be produced by the JV later this year with an annual production capacity of 50,000 units initially, will be exported to the European and Southeast Asian markets.

China, which joined the WTO at the end of 2001, has lifted the ban on foreign automakers to control more than 50 percent stakes in engine and spare parts joint ventures with Chinese partners.

The new auto policy will allow foreign investors to establish more than two JVs in China to make the same types of vehicles (passenger vehicles, commercial vehicles and motorcycles), if they join forces with their existing Chinese partners to acquire other auto firms in China.

General Motors (GM), the world's largest automaker, has four automobile JVs in China through mergers and acquisitions (M&As) of smaller local players jointly with Shanghai Automotive Industry Corp (SAIC) - one of China's top three automakers.

GM's four JVs are located in Shanghai, East China's Shandong Province, northeastern Liaoning Province and southern Guangxi Zhuang Autonomous Region.

Previously, foreign automakers were only permitted to set up at most two joint ventures to produce the same types of vehicles.

Big Chinese automakers will be encouraged to team up with foreign counterparts to merge both domestic and foreign vehicle firms to expand business boundaries in line with the auto industry's globalization.

However, some barriers against foreign investment in China's auto industry remain in place.

One of the Chinese shareholders must have a stake bigger than the total share of all foreign investors, if a Chinese listed automobile, motorcycle or other special-purpose vehicle producer sells its corporate shares, according to the new policy.

If a foreign automaker controls a relative majority stake in another foreign one, they will be treated as one entity when it comes to the requirement on the number of their JVs with local partners in China.

At present, there are more than 1,000 foreign wholly-owned firms and Sino-foreign joint ventures in the auto industry in China.

All of the world's main automakers - including GM, Ford, DaimlerChrysler, Toyota, Volkswagen, Nissan, Renault, PSA Peugeot Citroen, BMW, Honda and Hyundai - and world's big auto component names have local production plants in China.

Beijing Jeep, jointly controlled by Daimler-Chrysler and Beijing Automotive Holdings Corp, was the first Sino-foreign automobile joint venture. It was launched in 1984.

Shanghai Volkswagen, owned by Volkswagen and Shanghai Automotive Industry Corp, was the first Sino-foreign passenger car joint venture in China. It was formed in 1985.

Volkswagen, also running a car joint venture with First Automotive Works Corp (FAW), has been the biggest foreign car producer in China for almost two decades. It sold 697,000 cars in China last year.

Foreign automakers are increasing their investment in China to cash in on the fast-growing car market.

Volkswagen plans to invest 60 billion yuan (US$7.2 billion) and increase its annual production capacity to 1.6 million cars in China by 2008.

GM will also invest more than US$3 billion and double its annual capacity to 1.3 million vehicles in China within the next three years.

Last month, Toyota and Guangzhou Automobile launched a 50-50 joint venture in Guangzhou with a total investment of 3.82 billion yuan (US$461.7 million).

The venture will start to produce the Camry middle-sized sedan during the first half of 2006 with an initial annual capacity of 100,000 units.

However, there are still some barriers to foreign investment.

Under WTO obligations, China will cut its tariffs on auto imports to 25 percent by the middle of 2006 from 34.2-37.6 percent at present.

Quotas on auto imports will be removed next year.

According to the new auto policy, the following forms of key component imports to assemble vehicles in China will be treated as completed automobile imports:

l         Engines and auto bodies

l         Engines and any three or more of a combination of transmissions, driving axles, driven axles, chassis, steering systems, braking systems and air conditioning systems

l         Auto bodies and any three or more of a combination of transmissions, driving axles, driven axles, chassis, steering systems, braking systems and air conditioning systems

(China Daily October 8, 2004)