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China’s look beneath Toyota’s hood sets uneasy precedent

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Watch out car companies, here comes the long arm of the Chinese state.

[HONG KONG] Watch out car companies, here comes the long arm of the Chinese state.

Toyota Motor Corp is preparing to hand Beijing the technology behind the Prius, its almost-eponymous hybrid car, Bloomberg News reported on Thursday. The move comes as Chinese officials push for bluer skies and cleaner vehicles, but it's an aggressive overture for a company that had, until recently, a passive presence in the world's biggest car market.

For Toyota's peers, the agreement would set a scary precedent. Sharing know-how has long been a contentious topic for foreign companies in China. Earlier this year Premier Li Keqiang reassured the world that China wouldn't force such transfers in the manufacturing sector.

Until recently, foreign car companies could only operate with Chinese joint-venture partners. Then, in April, Beijing started to loosen the noose in a bid to open up its car industry. Even if Toyota's hand isn't being forced, the decision shows how much carmakers may have to concede to gain access to China, as the going gets tough globally. If a company with Toyota's heft caves, will others have to follow?

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Toyota's path into China has been a bumpy one. In the 1980s China invited the company to set up production on the mainland, as it sought the carmaker's cutting-edge manufacturing proficiency. But Toyota demurred, or so the lore goes. (Meanwhile, the Chinese say they rejected the carmaker's bid to invest in China.) Either way, Toyota didn't get approval to set up shop in China until May 2000, when it established a production facility in Tianjin.

Over the last 18 years, Toyota has trodden carefully in China. Consumers' appetites for Japanese-made cars have also ebbed and flowed with political tides. The carmaker, for example, never really ramped up the way Volkswagen AG did, and still sells only half the number of cars as its German competitor's almost 250,000 a month – on a par with Toyota's much smaller peers. The recent cooperation also comes as US President Donald Trump's posture in Asia brings two long-time regional rivals closer together.

As Beijing goes full throttle on green cars, Toyota may have no other option but to join the race. Despite selling most of the world's hybrid cars, Toyota has lagged behind in the electric-vehicle race, focusing instead on hydrogen fuel cells. China's policy for so-called new-energy vehicles effectively forces carmakers to produce electric cars, or pay the price. The Chinese government is handing out subsidies for better-quality electric cars and batteries, along with preferential tax and licence-plate rules for consumers who buy electric cars.

Switching gears to China no doubt makes sense, with trade frictions hitting the global car market along with a broader slowdown in North America, Toyota's largest market. What other way to get ahead than put your best foot forward?

Toyota's sales at one of its Chinese joint-ventures with China FAW Group Corp. rose around 14 percent in July on the month, as the broader car market slowed. Toyota is now looking to boost its production capacity in Tianjin and Guangzhou by 20 percent to 240,000 vehicles a year.

China's great electric car ambitions have also struggled. Despite creating the world's largest market, China has failed to produce a national car champion or master auto technology.

Anecdotal reports suggest attempts to corner the market for electric car batteries – the most expensive component of such vehicles – are missing the mark, with subpar technology and manufacturing issues. Chinese carmaker Geely Automobile Holdings Ltd may come close. There, too, Toyota is now in talks to license its hybrid system, Bloomberg News reported. For China, hybrid petrol-electric technology is a good half-way house.

But much like Elon Musk's Tesla Inc showed earlier this year, the meeting of minds and technology will ultimately happen on Beijing's terms. Carmakers should only wonder what the costs of this precedent will be.

BLOOMBERG