9% of sales: FAW and public stocks retreat from suspense

The adjustment of the equity ratio of China's JV car companies has been re-emerging.

At the end of July 2011, FAW Group and Volkswagen's joint venture company, FAW-Volkswagen, had renewed concerns over the company's approval of the board of directors. The public has repeatedly tried to change the number of shares of FAW-Volkswagen. The last time he was building a factory in Nanhai, Foshan, Wendeng, chairman of the board of directors of Volkswagen Group, discussed with senior officials of the Ministry of Industry and Information Technology the proportion of shares in FAW-Volkswagen.

Prior to FAW-Volkswagen, SAIC Motor and General Motors had made adjustments to Shanghai GM’s equity. Shanghai Group’s shareholding in the joint venture company increased from 50% to 51%, and GM’s shareholding ratio was reduced to 49%. This is the first case in which Chinese and foreign shareholders have publicly adjusted their shares after the implementation of the joint venture policy. In this equity adjustment, SAIC Group stated that it was due to the need to consolidate financial statements. Therefore SAIC paid US$84.5 million to GM China. Later, SAIC and GM launched a wide range of cooperation. The two sides not only established an investment company in Hong Kong, but also formulated detailed plans for the East Asian and Southeast Asian markets.

As the second joint venture company of Volkswagen in the Chinese market, the shareholders of FAW-Volkswagen have chosen to make equity adjustments in Sri Lanka. What exactly is this? To this end, the newspaper Automotive Research Institute and Gasgoo.com conducted a joint investigation.

1.98 billion sales and purchases As to why the 9% shares are given to Audi rather than the public, there is a direct relationship with the contribution of the Audi brand to the interests of FAW-Volkswagen. At the same time, this is also related to FAW Volkswagen's plans for the next step of the Audi Division.

According to the current statement, the shareholders of FAW-Volkswagen have reported the plan for equity adjustment to the competent national authority. In this plan, FAW Group will sell 9% of shares to Audi, and VW’s shareholding ratio will remain unchanged. After adjustment, the proportion of shares of FAW-Volkswagen will be changed: 51% by FAW Group, 30% by Volkswagen, and 9% by Audi.

Although the incident has not yet been approved by the Chinese government authorities, 84% of the survey participants believe that Volkswagen’s plan to increase its shareholding in FAW-Volkswagen will be passed. After the Chinese market has become the largest market for Volkswagen and a source of profit growth, it is inevitable that the shareholding ratio of the joint venture company will increase from 40% to 49%. The company’s public statistics show that in 2010, the net profit of FAW-Volkswagen was approximately 22 billion yuan, accounting for one-third of Volkswagen’s global operating profits. Volkswagen has no reason to abandon the greater benefits that can be obtained under the Chinese joint venture policy.

According to the 2010 net profit of FAW-Volkswagen, 9% of the shares were worth 1.98 billion yuan. Why did FAW Group agree to sell this net income? FAW may give up some of its shares because of some short-term or long-term benefits. For example, in terms of the overall listing of FAW, FAW needs the support of the public and thus made concessions on the equity ratio. If we speculate on Chinese companies or approving agencies with the worst possible malice, then the reasons may be even more complicated.

In fact, during the 20 years of the joint venture, FAW-Volkswagen FAW, despite possessing 60% of the shares, did not have much say in product, technology, or management. Foreign countries have always occupied absolute dominance. When there is only 5 years remaining in the joint venture period between the two parties, the public obviously will actively launch the offensive and strive to obtain more favorable conditions in the renewal. If FAW really makes a retrogression at this time, it is also a helpless move.

As to why the 9% shares are given to Audi rather than the public, there is a direct relationship with the contribution of the Audi brand to FAW-Volkswagen. At the same time, this is also related to FAW Volkswagen's plans for the next step of the Audi Division.

The final shield was to reduce the loss of shares, and Volkswagen had strengthened its control over the purchase of parts of FAW-Volkswagen. The purchase price of core components is much higher than the benchmark price sold to FAW-Volkswagen, and FAW-Volkswagen can only accept it.

Currently, Volkswagen operates two joint ventures in China - Shanghai Volkswagen and FAW-Volkswagen. This strategy has been considered as an effective means for the public to check and control the two joint ventures. During the negotiation process, the foreign side usually suppresses the other with the conditions of a joint venture company. If the Chinese side does not agree, the foreign side will threaten to transfer the joint venture's product resources and force the Chinese to submit. This change in shareholdings shows that Volkswagen’s business balance in China will be further tilted toward FAW. Many facts also show that Shanghai Volkswagen China has performed even more strongly in the game with foreign players. This can be explained by the models produced by the two joint ventures. The LaVida and the new Bora, the new Passat and the new Magotan, which are already available, are the direct result of this game.

Although Volkswagen Group's shareholding in FAW-Volkswagen is only 40%, this does not fundamentally reduce the profit of Volkswagen Group. In order to reduce the loss of the company's shares, Volkswagen has strengthened its control over the procurement of parts and components of FAW-Volkswagen. The purchase price of core components is much higher than the benchmark price sold to FAW-Volkswagen, and FAW-Volkswagen can only accept it. The loss caused by the share ratio, Volkswagen has received returns in a multiple of the proceeds. Not only that, the change in the way vehicles and technology is transferred has also brought continuous benefits to Volkswagen. In short, Volkswagen's revenue from FAW-Volkswagen is no less than the gain from holding 50% of the shares in other joint ventures.

FAW Group's catering to Volkswagen's wishes. Before and after the financial crisis, FAW Volkswagen became the ideal choice to accept Volkswagen’s overseas overstaff when Volkswagen conducted market adjustments in Western Europe. Among the various functional departments of FAW-Volkswagen, Volkswagen has found the most profitable arrangements.

However, as far as the actual situation of FAW Group and FAW-Volkswagen is concerned, in the face of the equity of the transfer, the Chinese itself could not get too many chips. The policies formulated by the Chinese government have become the last line of defense for the game between FAW Group and Volkswagen, and this reason has been used for years as a shield. To sum up, FAW Group is now faced with the replacement of senior executives. The 9% change in the shareholdings of FAW-Volkswagen is far from the focus of Chinese executives.