BMW Buys Control Of Brilliance In China.
Deal Takes Effect In 2022; Likely To Spur Similar German Forays
“We see this as a game changing strategic achievement”
“This looks like a win for the Germans and a negative for their Chinese partners”
BMW became the first Western auto maker to buy a majority and controlling stake in a Chinese auto company, and investors were impressed but pointed to potential risks in a country where long-term prospects are hard to predict.
BMW was lauded for daring to be first, but some commentators pointed out that the deal coincided with the Chinese market turning negative for the first time in almost 30 years. Others were nervous about the current trade turmoil between China and the U.S., which might yet infect the German presence.
BMW said it will raise its stake in its main Chinese venture Brilliance China Automotive Holdings to 75 per cent from 50 per cent for €3.6 billion, effective 2022 when rules capping foreign ownership on auto joint ventures expire.
Investment researcher Evercore ISI was impressed.
“We see this as a game changing strategic achievement. In the future, BMW will have the full control over the biggest regional profit pool of its business. It will fully consolidate earnings and cash flows. In a nutshell, this will make BMW more nimble, larger and less volatile. BMW’s long term shareholders should welcome the deal. It highlights hidden value in other valuations, most notably VW,” said Evercore ISI analyst Arndt Ellinghorst.
Investment bank UBS liked it too, and said the joint venture would increase production to 650,000 a year in three years from the current 400,000.
Full managerial control
“We think the terms look attractive for BMW because the deal comes with a long-term commitment by BMW to the JV (joint venture) and full managerial control; and it enables BMW to use China as a global production hub now that the lion’s share of the high China profitability will end up in BMW’s bottom line,” UBS analyst Patrick Hummel said.
The Wall Street Journal’s Heard on the Street column pointed out that global automakers will all be able, in theory, to orchestrate similar deals
from 2022, but given they will need Chinese government backing that would exclude U.S. car makers like GM while the country is at loggerheads with China.
“BMW, too, is risking President Trump’s ire. Currently, BMW imports roughly a third of the vehicles it sells in China, particularly X5 SUVs from Spartanburg, South Carolina. Its deal with Brilliance will involve building X5s locally. BMW gets to dodge China’s punitive tariffs on car imports from the U.S. and China gets to improve its trade position. But in this win-win deal, U.S. exports are the likely loser, Street columnist Stephen Wilmot said.
Reuters’ Breaking Views column also saw some negatives.
“There are significant open questions. It’s unclear when the money will change hands and whether the current price is guaranteed. The deal can’t close until Beijing formally lifts the restriction. A lot could happen in four years, but if the trade war eases, BMW may have locked in a tidy profit,” said Views columnist Pete Sweeney.
Bernstein Research like the deal, on balance.
“BMW’s move suggests its now “game on”, that China is keen to demonstrate its openness to further investment, at least from Germany, and that it is logical to expect other such moves,” Bernstein analyst Robin Zhu said.
Zhu said the China market is normalising, and if the Joint Venture rule is history, value will accrue to companies with real brands and technology, “rather than rent seeking Chinese partners”.
“A reshuffling of assets, partners and broad industry consolidation may soon follow. Net, this looks like a win for the Germans and a negative for their Chinese partners. But this must be seen in the context of a Chinese market that’s getting tougher and a Chinese government that will remain interventionist in other ways. Identifying winners and picking stocks in this environment is already a nightmare, and may get harder,” Zhu said.
Investment bank Morgan Stanley was sceptical, and saw electric cars as a potentially problematic heart of the matter.
“This could potentially be a template for further capital and technology transfer by foreign partners into a Chinese EV (electric vehicle) market,” Morgan Stanley said in a report.
“It is not yet clear that the gamble will pay off”
“BMW’s move may signal an acceleration of the capital formation and R&D development of EVs in China. In our opinion, China is the accelerator laboratory for the global implementation of EVs, batteries, and EV infrastructure. The implications of foreign firms doubling-down on China and China EV has global implications for EV penetration with a potentially positive bias,” Morgan Stanley said.
The Financial Times Lex column said the state’s role in China had to be considered.
“German brands recognise China as a laboratory for their future; a chance to sell low-emission vehicles and see what works and what does not. But Beijing retains tight control of the supply chain and even on the sale of cars. It is not yet clear that the gamble will pay off,” Lex said.