BMW set to become first beneficiary of China's auto reforms

[BEIJING] BMW AG, among major companies most exposed to a trade war, is poised take majority control of its venture in China, becoming the first beneficiary of the reforms the government has unleashed in the world's largest car market.

The Munich-based luxury-car maker plans to unveil the new ownership structure of its venture with Brilliance China Automotive Holdings Ltd soon, according to a person familiar with the plan, who asked not to be identified because the accord remains confidential. BMW currently holds a 50 per cent stake in the partnership.

The move would make BMW the first foreign carmaker to own a majority stake in a Chinese joint venture, and shows Beijing is following through on a pledge for greater market access. China and Germany agreed this week to facilitate the move. Shares of Brilliance and BAIC Motor Corp, a partner of Daimler AG, both declined on concerns they will miss out on the ventures' future profit growth.

BMW Chief Executive Officer Harald Krueger was in Berlin at the start of the week during a summit between Chinese Prime Minister Li Keqiang and German Chancellor Angela Merkel. Among discussions were opportunities to open up China more to foreign investment. As part of corporate deals signed at the meeting, chemicals company BASF SE agreed to invest as much as US$10 billion in a new factory in China that it would wholly own, also a first for that industry.

Volkswagen AG, the biggest foreign automaker in China, also held talks with China's premier in Berlin, resulting in an initial agreement with partner FAW Group to advance electric vehicles.

BMW declined to comment on the state of its discussions with Brilliance. Brilliance, which now owns 40.5 per cent of the venture, didn't immediately return a call and email seeking comment. The German company is set to boost its stake in the venture to at least 75 per cent, Manager Magazin reported earlier. Daimler said it's very happy with its partnerships in China and is following the regulatory developments closely.

Owning a larger slice of BMW Brilliance Automotive would come at an opportune time for BMW. The company is heavily reliant on output from its factory in the US, where BMW makes sports utility vehicles for the global market. That strategy risks coming under strain as a trade war between the US and China starts escalating, potentially raising the prices of vehicles exported from the US Daimler already issued a profit warning a few weeks ago, citing the risk of falling demand from Chinese consumers for US-made SUVs.

A move by BMW would follow plans outlined by China in April to ease foreign-ownership restrictions in the country, with the possibility that foreign automakers could eventually buy out their local partners. China said in April it is scrapping the current 50 per cent ownership cap for electric-car ventures as soon as this year. For commercial vehicles, it'll be eliminated in 2020 and the one for passenger vehicles will end in 2022, China said at the time.

Shares of Brilliance fell as much as 20 per cent for its biggest intraday drop since October 2008. BAIC Motor Corp, a partner of Daimler, declined as much as 12 per cent. Companies including Volkswagen, General Motors Co, Ford Motor Co and Toyota Motor Corp also work with local partners in China under rules that have existed for more than two decades.

On Tuesday, the Chinese Foreign Ministry said in a statement that China and Germany "for the first time reached the agreement on increasing the share of German automobile companies in the jointly invested projects in China." BMW would be first example owning a stake larger than 50 per cent, it said.

The company this week signed an agreement with Brilliance to expand the joint venture, boosting production and plans to export the upcoming electric iX3 sport utility vehicle from China. The pact was one of dozens sealed by German and Chinese companies during Premier Li's visit to Germany.

The remaining 9.5 per cent of BMW and Brilliance's venture is held by Shenyang City.

BLOOMBERG