Features
18 Oct 18

BMW increases China footprint

3.6 billion Euro is the price BMW was willing to pay in order to buy 75% worth of control of its main Chinese joint venture with Brilliance China Automotive Holdings, making this the largest investment to increase shareholder participation in the history of foreign-Chinese joint ventures.

Most of the global OEMs have demonstrated interest in acquiring additional shares in their Chinese joint ventures since the Beijing Government decided to lift the capping rules on foreign ownership for auto ventures (e.g. Daimler and BAIC).

This has also allowed companies such as BASF and Tesla to gain Beijing’s approval for a fully foreign-owned company on the Chinese territory

Rationale

Obviously, the trade war between China and the US is one of the potential reasons, but in reality BMW wants to benefit fully from its largest profit centre; until now, the profits were to be shared at a 50/50 ratio between Brilliance and BMW; this will now shift to a 75/25 ratio in favour of BMW.

The majority of shares also allows BMW to expand or increase production and decide which models will be produced in China. Expansion of the production facilities has already been announced, worth another 3 billion Euro of investment.

Brilliance

Since the rumours about the announced buy-out started, Brilliance’s share value has dropped nearly 50% and analysts are negative about the outlook of Brilliance’schine value on the long run. The reason why Brilliance agreed to drop its equal participation is not 100% clear, although some arguments might help to understand.

A first reason might be that car sales are predicted to be dropping in the next few years, due to regulation, a slowdown in the Chinese economy, changing consumer behaviour and so on. Brilliance might want to cash in.

A second reason could be the eagerness of BMW to work with other large Chinese partners, such as Great Wall Motors (for the electric Mini), but also tech companies, such as Baidu. It gives BMW more options than only the Brilliance cooperation and strong leverage during the negotiations.

Furthermore, BMW could also have decided to start a new legal entity, outside of any joint venture, and shift production to this new entity, which again gives BMW leverage when negotiating with Brilliance.

Finally, both companies might have further development plans that require new and different collaboration conditions, better protection for IPs or a different value of the Chinese operations in the Munich balance sheet…

Nevertheless, Brilliance’s CEO Qi Yumin put up a brave face and confirmed that both partners will “stick together through thick and thin”, and this at least until 2028.

Authored by: Yves Helven