BMW to gain control of China venture in 'new era' for foreign carmakers

By Norihiko Shirouzu

SHENYANG, China (Reuters) - Germany's BMW said it will take control of its main China joint venture for 3.6 billion euros ($4.2 billion), the first such move by a global carmaker as Beijing starts to relax ownership rules for the world's biggest auto market.

The luxury carmaker will boost its stake in its venture with Brilliance China Automotive Holdings Ltd to 75 percent from 50 percent, with the deal closing in 2022 when rules capping foreign ownership for all auto ventures are lifted.

The move will likely spur BMW to shift more production to China, helping boost profits amid a whipsawing trade war between Washington and Beijing that has raised the cost of BMW importing cars manufactured at its South Carolina plant.

The deal also marks a milestone for foreign carmakers which have been capped at owning 50 percent of any China venture and have had to share profits with their local partner.

"We are now embarking on a new era," BMW Chief Executive Harald Kruger said in a speech on Thursday in the northeast city of Shenyang where the joint venture is based. He thanked Chinese Premier Li Keqiang who he said had "personally supported" the plan.

Beijing has been keen for global carmakers to invest more in China and has also eased restrictions that cap foreign ownership of electric vehicle businesses at 50 percent this year.

As trade tensions have escalated, China's government has pledged to open up its markets more widely, including cutting taxes on imported vehicles, cancer medicines and a range of consumer goods.

The country's leaders have also played up other milestone deals such as German chemical maker BASF winning approval in July to build China's first wholly foreign-owned chemicals complex.

The rule changes have already helped Tesla Inc gain Beijing's approval for a wholly owned China manufacturing and sales company in Shanghai, marking the first time a foreign carmaker will be able to establish a full presence in China without a partner.

BMW is one of the biggest exporters of vehicles from the United States to China, putting it firmly in the crosshairs of the trade war.

"Given the trade dispute between the U.S. and China, there is a powerful incentive for automakers to produce vehicles in the market where they sell them," said independent auto industry analyst James Chao.

He said control of the joint venture could spur BMW to bring production of models like the BMW X4, X5 and X6 sport utility vehicles, which are currently built in the United States, to China.

NOT BRILLIANT FOR BRILLIANCE

But if the move is a big win for BMW, it spells a diminished role for its Hong Kong-listed partner.

Brilliance, which makes the vast majority of its revenue from BMW-branded cars, has seen its shares tumble nearly 50 percent this year on talk that such a deal was in the offing. Its shares were suspended on Thursday.

Brilliance Chairman Qi Yumin lauded the venture's past success and said the future offered further opportunities, in comments posted on firm's WeChat account. He added that while the situation was complex, the partners would need to "stick together through thick and thin".

Yale Zhang, head of Shanghai-based consultancy Automotive Foresight, said the move would likely spur other global carmakers to push for higher ownership of their China ventures, though it remained to be seen how the new structure would work in practice.

"Others will follow over time, but the divorce schedule depends on how strong or capable the local partner is," he said.

A number of carmakers, including Mercedes-Benz parent Daimler and Honda Motor Co said earlier this year they had no immediate plans to change their China JV structures despite the planned rule changes.

BMW said the aim of the deal was to increase production capacity in Shenyang and expand the localisation of additional models including so-called new energy vehicles.

The joint venture plans to add a new plant, spending over 3 billion euros on a large-scale expansion of the existing production facility, Kruger said.

The term of the joint venture will also to be extended to 2040 from 2028.

The deal comes at a time when China's auto market is slowing down, with industry insiders and analysts fearful sales could fall this year for the first time in decades. China auto sales dropped in July and August.

BMW CFO Nicolas Peter said, however, the firm remained bullish about its top market.

"Number one reason why we invest in China is because we are absolutely convinced the market has a further growth potential," Peter said in an interview at the Shenyang event. He said the firm was also investing in extra capacity in the United States.

In addition to its Brilliance partnership, BMW is also working on a new venture for its Mini brand with China's Great Wall Motor Co.

($1 = 0.8649 euros)

(Reporting by Norihiko Shirouzu in Shenyang; Additional reporting by Yilei Sun and Gaurika Juneja in Bengaluru; Writing by Adam Jourdan; Editing by Edwina Gibbs)