Sieren's China: Too late to separate

The Beijing Auto Show is now the biggest of its kind in the world. Right from the start of this year's edition there have been heated discussions about innovations in e-mobility that could be game changers as well as the political reforms that Beijing has finally announced after years of criticism.

The requirement on foreign carmakers to enter into a joint venture will apparently be abolished this year. First, for the makers of electric and hybrid vehicles, then by 2020, for trucks and, eventually, for the whole sector by 2022. Tariffs on cars will also be decreased "significantly." This could end up being the most comprehensive and daring market opening that the government has embarked on over the last few years.

Foreign firms no longer a threat

Since China opened up, foreign firms have been required to enter a joint venture with a Chinese partner and be satisfied with a maximum of 50 percent of the proceeds. The idea was to ensure that a still weak China would not be overtaken by foreign manufacturers.

Read more: German carmakers among biggest losers in US-China trade wars?

That risk is now very limited. In 2010, China surpassed Japan as the second most important economy in the world. Only the US is stronger. With 6.8 percent growth in the economy in the first quarter, China has once again has surpassed expectations, even its own. Having said that, the fact that China's per capita income is currently on a par with that of Macedonia means there is still plenty of potential.

As a trade war with the US looms, Chinese President Xi Jinping can now use this trump card to prove that the world can count on him for better market conditions and fair competition.

Of course, Xi also knows that the big Chinese carmakers are now robust enough to survive such an opening and could even become stronger with more competition, especially in the area of e-mobility, where Chinese firms are currently the frontrunners.

Flourishing Chinese car market

While Europe's car market is stagnating, 28.9 million vehicles were sold in China last year. In the first quarter of 2018, the small-vehicle market rose by another 4 percent. By contrast, the number of new registrations in the EU decreased by 5.4 percent to just about 1.8 million.

Read more: Beijing Auto Show trains spotlight on China growth market

The fact that Chinese makers such as SAIC and BAIC are now making good cars is also due to the know-how of their partners in joint ventures. Chinese companies have not only been burdensome opportunists, however. They served the purpose of minimizing risk and opening doors, thus helping to lower costs or obtain better loans and authorization, for instance from local governments to build new plants. It could be that some companies will voluntarily choose this path in future so as to get a foothold in China.

The first German company that dared make the move to China was Volkswagen, 30 years ago. This venture continues to pay off today. Every other VW car is now sold in China. The joint ventures with SAIC and FAW have brought a lot of profit to the company, which has since sold over 27 million vehicles.

The situation is similar for BMW and Daimler, which has two Chinese partners - BYD and BAIC - but also a big Chinese shareholder in Geely CEO Li Shufu. Last year, Mercedes sold 588,000 premium cars in China. Now, the Bavarian company is planning to start producing electric Minis in China alongside the Baoding-based Great Wall company.

Binding contracts

Against this backdrop, it might not be so easy to "separate" in legal terms. VW has signed up to contracts that will not expire for decades. Its joint venture with the state company SAIC runs out in 2035, while its contract with FAW won't run out before 2041. The most recent joint venture that VW entered into - with JAC from central China to build e-cars - envisages a cooperation until 2042. Therefore, the new reform comes far too late for Germany's biggest carmakers.

It is newcomers that will profit from this opening, especially Tesla head Elon Musk who has been calling for the opening of an e-car factory in Shanghai without Chinese participation for months. In March, he complained about the "unfair environment” in China. Now there should be nothing in the way of his ambitious plans.

It remains to be seen how much more open the market will become to foreigners and whether they will be able to open and own factories without restrictions.

Read more: Volvo has high hopes for Chinese market

Last fall, the Communist Party announced that it was going to expand its influence over companies, including at management level with newly-created party cells. Chinese competitors will also be hard to beat since they will make the most of their home advantage to make it more difficult for foreign companies to go it alone. 

New strategy needed

In the long term, foreign companies will have to come up with a new China strategy. German companies, which are already well established with joint ventures, in particular, will have to put their thinking caps on . They might well continue to expand production and build new factories that not only serve the Chinese market, where German companies are extremely popular, but also markets of the future, such as Vietnam and Indonesia.

China in this way will have more capital to expand its own e-car sector. Consumer data pools, state subventions, sophisticated software and better access to natural resources for use in batteries mean that China is already at a great advantage.

VW has announced that it will invest $15 billion into e-cars and digitalization by the end of 2022 alongside its Chinese partners.

Frank Sieren has lived in Beijing for over 20 years.