On April 10, 2018, President Xi Jinping attended M88 game APK Boao Forum for Asia (“BFA”) Annual Conference 2018 and delivered a keynote speech stressing that “China will remain unchanged its adherence to reforming and opening up, and will continue to launch new, major measures to pursue furM88 game APKr opening.” Following this speech, M88 game APK National Development and Reform Commission (“NDRC”) published its Answers to Reports’ Questions Regarding Promulgating New Negative List of Foreign Investment (“Negative List”) and Opening-Up of M88 game APK Manufacturing Industry (“Answers”) on M88 game APK official website of M88 game APK Central Government. Through this document, M88 game APK NDRC expressed its efforts to accelerate its pace to formulate a new Negative List along with oM88 game APKr relevant departments, which echoed M88 game APK major measures mentioned in President Xi’s speech. It also stressed that M88 game APK manufacturing industry will be M88 game APK priority in M88 game APK new Negative List, and easing M88 game APK restrictions on foreign investment in M88 game APK automotive industry will be M88 game APK focus in this prioritized area.

I. Easing Restrictions on Foreign Investment in Vehicle Manufacturing: Backgrounds & Current Trends

In M88 game APK Answers, M88 game APK NDRC released its orderly plans for relaxing restrictions on M88 game APK proportion of foreign shares in M88 game APK automobile Original Equipment Manufacturer (“OEM”) sector, distinguished by different types of vehicles. Specifically, for special-purpose vehicles and new energy car manufacturers, M88 game APK ratio restriction of foreign shares will be eliminated in 2018. FurM88 game APKr, M88 game APK restriction for commercial vehicles and passenger cars will be removed in 2020 and 2022, respectively. Meanwhile, M88 game APK rule that foreign car makers shall not have more than two joint ventures on as single vehicle type in China, is also expected to be removed by 2022. M88 game APK NDRC expects to remove all M88 game APK foreign investment restrictions on M88 game APK OEM sector through a five-year transition period counted from 2018.

In fact, it has been a long-standing plan to ease M88 game APK foreign investment restriction on M88 game APK automobile OEM sector. In M88 game APK Plan for M88 game APK Middle and Long-Term Development of M88 game APK Automotive Industry jointly issued by M88 game APK Ministry of Industry and Information Technology, M88 game APK NDRC and M88 game APK Ministry of Science and Technology in 2017, M88 game APK strategy to “improve M88 game APK domestic and foreign investment administration regime and gradually relax restrictions on M88 game APK proportion of foreign shares in joint ventures” was clearly mentioned. Moreover, Report on M88 game APK Work of M88 game APK Government of this year also pointed out M88 game APK idea of “substantially reducing restrictions on foreign investors to furM88 game APKr open-up M88 game APK new energy vehicles sector”. However, neiM88 game APKr a specific timetable nor a detailed roadmap was formed during those plans and discussions.

President Xi’s declaration in the BFA and the NDRC’s quick follow-up in publishing specific implementation plans coincided with the recent tension in Sino-US trade conflicts. Nobody can tell whether the two events are indeed correlated or just pure coincidence. Still, what has to be admitted is that the Chinese Government is under huge external pressure in further opening-up the automotive industry. There is a long tradition of government protection in the Chinese automotive industry. Foreign car makers have to form joint ventures with Chinese partners to produce cars within the Chinese territory, plus various strict restrictions of share ratio, total number of joint ventures and brand identifications, etc. Furthermore, imported cars that were manufactured overseas have to bear a tariff as high as 25%. All of these restrictions are clearly inconsistent with the Chinese Government’s basic principles of furthering the opening-up of China. On the other hand, the Chinese domestic automotive industry has gained enormous progress in technological development, product manufacturing, talent training and etc. during its practice of forming joint ventures with foreign counterparts, by which the Chinese automotive industry has won considerable competiveness. In this context, as the world’s largest and fastest growing automobile market, removing foreign investment limits is imperative-- at the current stage, discriminations between the Chinese and foreign players in the automotive industry have already drawn skepticism from some foreign car makers and foreign governments. Removing these limits may also clearly illustrate China’s steady determination to open-up its markets and encourage foreign investment.

II. Policy Development: Deregulation towards a More Open Economy

M88 game APK development of foreign investment policies regarding M88 game APK Chinese automotive industry over M88 game APK last 20-plus years could be summarized in M88 game APK chart below:

As demonstrated above, regulations on foreign investment in M88 game APK automotive industry are mainly through M88 game APK adjustments in M88 game APK Catalogue of Industries for Guiding Foreign Investment and Policy on Development of Automotive Industry. Although multiple modifications were presented, M88 game APK core restrictions on share ratio and number of joint ventures in car manufacturing remained M88 game APK same. M88 game APK Chinese Government historically has made no compromise on M88 game APKse issues, and only has accepted some insignificant changes, such as shifting M88 game APK classification of vehicle manufacturing between M88 game APK restricted category and M88 game APK encouraged category, and canceling M88 game APK restriction on foreign investment in engine manufacturing under M88 game APK pressure of fulfilling WTO commitment. M88 game APKrefore, M88 game APK Chinese Government’s determination to remove its longstanding restriction on foreign ownership in car manufacturing entities is considered a significant reform.

III. Possible Impact on Automotive Industry

1. Foreign Investors Flood into M88 game APK Sector of New Energy Car

M88 game APK Answers suggested that new energy cars will be M88 game APK first sector for opening-up in M88 game APK five-year transition period. Currently, M88 game APK new energy car market is a favorite of investors, but M88 game APK key players are mostly state-owned enterprises and private enterprises, while foreign car makers are still largely outside this hot market. However, those foreign car makers are traditional multinational corporations (“MNCs”) with solid foundations of developed technology and products in this sector, thus it is only a matter of time until M88 game APKy finally enter M88 game APK Chinese market with M88 game APKir new energy cars. As a result, M88 game APK cancellation of foreign ownership restrictions in new energy car manufacturing is a double dose of good news for those who have been eager to fight a battle over Chinese market shares. Also, oM88 game APKr foreign automobile brands who were passively observing in M88 game APK past may mark “establishing new energy car factories in China” in M88 game APKir calendar. Predictably, foreign investments will flood into M88 game APK already highly competitive new energy car market with M88 game APK current players of state-owned enterprises, private enterprises and M88 game APK so-called “new car-making forces”.

2. Strikes on M88 game APK Local Automotive Industry

Despite M88 game APK progress gained through several decades’ cooperation with foreign brands, China’s automotive industry is still famous for its quantity raM88 game APKr than quality, especially concerning M88 game APK problems in M88 game APK R&D of key components and spare parts and M88 game APK influence of its own brands, as well as quality issues. Once M88 game APK foreign restrictions are all cleared, foreign brands will be in direct competition with M88 game APK Chinese national brands and joint venture brands. Moreover, for M88 game APK existing joint ventures, even though M88 game APKir foreign investors will not immediately exist or obtain M88 game APK majority shares, M88 game APKy could still diminish current joint ventures’ competiveness by controlling M88 game APK input of eiM88 game APKr car models or relevant technologies, and thus indirectly may assist M88 game APK foreign investors’ wholly owned or majority controlled subsidiaries, granting M88 game APKm competitive edges down M88 game APK road.

3. M&A in M88 game APK Automotive Industry May Increase

If M88 game APK Answers are effectively implemented, M88 game APKn foreign investment in new energy cars will be freed from share ratio barriers in this year. In 2022, passenger cars, which occupy M88 game APK largest market shares, will also face no restrictions in share ratio. Finally, M88 game APK cap on two joint ventures for a single foreign investor will be removed. Thus, by 2022, foreign car makers will, in M88 game APKory, have more options and opportunities for investment ahead of M88 game APKm, and will face far fewer restrictions than have existed since M88 game APKy began doing business in China.

However, M88 game APK foreign car makers still need to be aware that even with M88 game APK gradual easing of restrictions in share ratio and number of investments, it does not mean that M88 game APKre will be no threshold at all for M88 game APK foreign investors to manufacture cars in China. M88 game APK explicit requirements and conditions established by M88 game APK prevailing automotive industry development policy and planning, regulations on market entrance and project investment, administrative rules on manufacturers and products of different types of vehicles and etc. are still in effect and applicable.

In addition, since risks of excessive production capacity (including new energy car production capacity) are growingly evident, industry regulators such as NDRC and Ministry of Industry and Information Technology have already expressed M88 game APK principle that no approval will be granted for new investment projects producing traditional fuel cars. It is also noted that M88 game APK approval for investment projects producing new energy cars has also been suspended and M88 game APK new criteria on securing M88 game APK approval, which are expected to be issued in M88 game APK near future, are very likely to be stricter. As a result, even with all foreign share ratio restrictions removed towards 2022, making greenfield investments (such as setting up a WFOE) to produce traditional fuel car is almost impossible, and in M88 game APK short run, it largely remains similarly infeasible to produce new energy cars by establishing a WOFE.

M88 game APKrefore, we predict that M&A may become M88 game APK main stream for foreign car makers entering M88 game APK China market by acquiring M88 game APK existing Chinese companies with proper regulatory approvals, and swapping new energy car capacity with traditional fuel car capacity. M&A may also be more welcome and acceptable to M88 game APK Chinese authorities from M88 game APK standpoint of resolving M88 game APK redundant car manufacturing capacity.

IV. Remarks

Phasing out foreign restrictions in M88 game APK automotive industry will definitely surge foreign investments in M88 game APK automotive industry, and on M88 game APK oM88 game APKr hand, it is both an opportunity and a challenge for M88 game APK growing Chinese automotive industry. People may need to wait and see how M88 game APK foreign brands will enter M88 game APK China market, and how M88 game APK Chinese brands will cope with this new market dynamic.