BMW may take the steering wheel in China. Much depends on the valuation it pays for a greater share of its joint venture with Brilliance Automotive. But once in the driving seat, the 53 billion euro car group would be better able to navigate US trade tensions.
Beijing makes foreign carmakers hand over intellectual property and buddy up with local companies to sell in the Middle Kingdom. The likes of BMW, Volkswagen and General Motors' joint venture stakes have long been capped at 50 percent - a bid by the state to strengthen domestic auto groups.
It hasn't worked. Chinese brands accounted for just one-fifth of the country's sales in the first two months of 2018, according to China Association of Automobile Manufacturers data excluding sport utility vehicles and minivans. The state now plans to scrap foreign ownership limits on passenger vehicles in 2022. BMW is considering upping its stake in BMW Brilliance Automotive to at least 75 percent from 50 percent, according to official news agency Xinhua.
The first benefit would be financial. Since it doesn't consolidate the Chinese JV, BMW just gets a stream of dividends. Had the high-margin business' 2017 results been included within the wider group, as they could if BMW takes control, the German group's closely-watched operating margin would have been 0.15 percentage points higher.
The cost is probably manageable. On the average price-earnings multiple of Chinese auto groups including Great Wall and Geely, buying an extra one-quarter of the joint venture would cost 3.2 billion euros, or 14 percent of the net cash analysts expect BMW to have at the end of 2018, using Thomson Reuters I/B/E/S. JV partner Brilliance has lost almost one-third of its value since a July Bloomberg report that BMW might raise its stake, implying investors think the German group will get a good price.
The biggest boon for BMW, however, would be controlling its destiny in the world's largest car market. Since foreign auto groups have to share profits from Chinese-made cars, they're reluctant to build more locally. That's a pain because selling US-made vehicles in the Middle Kingdom, as BMW does, is getting more expensive given new tariffs between the two countries. Taking control of the joint venture removes that hurdle, effectively giving BMW a cheaper hedge against trade-war tensions.
BMW will give careful consideration to the possibility of raising its stake in its Chinese joint venture, China's official Xinhua news agency reported on August 20, citing a company executive. China's National Development and Reform Commission said in April that the country would scrap foreign ownership limits on commercial vehicle manufacturers in 2020 and lift restrictions on passenger vehicle companies in 2022.
"For us it is clearly an important discussion and it needs to be done carefully. We move forward carefully and seriously," Thomas Becker, vice president of governmental affairs at BMW, was quoted as saying by Xinhua in response to being asked if the company would increase its holding in BMW Brilliance Automotive from 50 percent to at least 75 percent.
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