Foreign investment strategy changes parts and components joint ventures

Some people believe that after the restrictions on the proportion of foreign-owned enterprises in the parts and components industry were lifted, multinational corporations’ investments in China have shown a tendency toward sole proprietorship. However, since 2008, foreign investment strategies have undergone significant changes. According to Xinhua News Agency, Japan’s Seiko Corporation, a well-known manufacturer of precision instruments and a key player in Japan's automotive parts industry, has decided to establish factories in China to supply low-cost auto parts and components for emerging Chinese automakers. In December 2008, Seiko Group announced plans to form a joint venture with Zhejiang Wanda Group to build a new factory aimed at mass-producing affordable power steering systems for rapidly growing Chinese automotive manufacturers. According to Ms. Song, an advertising manager at NSK Investment Co., Ltd. (the Chinese headquarters of Japan Seiko), the new joint venture will produce electric power steering systems, with Seiko and Wanda investing 60% and 40%, respectively. The products will be exclusively supplied to Chinese car companies. The factory is expected to be located in Zhejiang. During an interview, the director of the Zhejiang Wanda Group Office confirmed that Seiko and Wanda would jointly develop high-quality power steering systems. The factory has already been completed and is situated within the Wanda Group’s premises. It is understood that, while some universities and companies in Tsinghua, Anhui, and Shanghai are researching electric power steering systems, there is still no large-scale industrial base in China. Currently, as the Chinese auto industry upgrades, the auto parts sector is also experiencing rapid growth. Technical requirements for advanced engine, steering, and chassis systems are increasing. Multinational corporations hold a clear competitive advantage in this area, and with more independent Chinese companies entering the market, a new competitive landscape is emerging. Wanda Group primarily focuses on power steering systems for cars. It has established long-term supply relationships with Chery Automobile and other major automakers such as SAIC-GM-Wuling, FAW-Volkswagen, and Hunan Changfeng Group. Meanwhile, Nippon Seiko has a strong network in parts and components, and Seiko has expertise in precision machining, with seven wholly-owned subsidiaries in China. This joint venture aims to develop cost-effective auto parts for the Chinese market. In fact, foreign investment in China had already begun shifting as early as 2007. On November 20, 2007, Johnson Controls Wuhu Auto Trim Co., Ltd., a joint venture between Chery and Johnson Controls Inc. of the U.S., signaled that multinational corporations were accelerating their involvement in the auto parts sector. This trend continued into 2008, with more joint ventures being formed. According to incomplete statistics, during the first three quarters of 2007, 12 new Sino-foreign auto parts joint ventures were signed, along with three additional projects. These included a diesel engine plant established by FAW Liberation and German Deutz, capable of producing 200,000 units annually, and a suspension system production base set up by China National Heavy Duty Truck and an Irish company with a RMB 100 million investment. In the third quarter of 2008, the number of wholly-owned projects by foreign companies declined, with only two new projects: a research and development center established by a German automotive system company in Shanghai, and Magna Powertrain (Changzhou), a Canadian-owned sole proprietorship. Foreign investment methods have gradually shifted toward joint ventures with local companies to produce low-cost auto parts specifically for Chinese automakers. Previously, Japanese auto parts suppliers mainly served Japanese car dealers in China, but now, with the rapid growth of Chinese companies, Japanese, South Korean, and other international auto parts firms are paying more attention to the Chinese market. According to Wanda Group, it had already recognized the potential of the automotive power steering system sector as early as 1997. At that time, it planned to set up a joint venture with Delphi Corporation in Zhejiang to produce steering gears. However, cultural differences eventually led to the termination of the project. “The joint venture with Japan is essentially a game process,” said Director Lai. “We provide supply channels, while they contribute their R&D products. Through this new platform, Wanda can absorb advanced technologies and gain a crucial opportunity for its own development.” Data shows that among the top 100 global auto parts suppliers, 70% have already started operations in China. More than 1,200 foreign-funded auto parts companies operate in the country, with 70% of foreign investors choosing sole proprietorship. However, the shift from sole proprietorship to stronger joint ventures and cooperation is expected to benefit the industry. Industry experts attribute this change to policy support and the need for local development. The "Eleventh Five-Year Plan for the Development of the Automobile Industry" clearly emphasized improving the competitiveness of the auto parts sector and aiming to become a global component manufacturing hub by 2020. With increased competition, foreign companies are increasingly aware of the importance of partnering with local players. However, foreign partners are unlikely to transfer technology freely. The 60-40 ownership split in the Seiko-Wanda joint venture was the result of a final negotiation. This is a common practice among most multinational corporations in China, where foreign parties initially seek higher control. For example, in February 2008, GETRAK, a joint venture between Germany’s Getrag Group and Jiangling Motors Corporation, saw Germany holding 66.7% of the shares. Compared to direct foreign ownership, joint ventures carry certain risks. Multinational giants can leverage their capital and technological advantages to maintain control over key projects, which may put pressure on local companies to develop independently.

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