ANJANI TRIVEDI: Bailing out Chinese joint-venture partner a deft move by BMW

BMW is set to effectively bail out its flailing Chinese joint-venture partner. For the German carmaker, that is a smart move.

The carmaker’s China unit is close to a deal to buy production assets worth $252m from the parent of its main partner, Brilliance Auto, Bloomberg News reported, citing people familiar with the matter.

The information was disclosed at a creditors’ meeting for Brilliance Auto on Tuesday.

State-owned Shenyang-based Huachen Automotive Group Holding, the parent, has been navigating a bankruptcy restructuring process since November 2020 after it defaulted on 6.5-billion yuan of debt. The deal, if approved, would allow it to pay down some of its borrowings. 

Beyond alleviating the debt troubles of its China partner’s parent, premium carmaker BMW’s move to pick up production assets out of the restructuring in its biggest market is a clever one — especially right now. With this potential purchase, the German company can make more quality cars at increasingly affordable prices. That is in keeping with Beijing’s focus on “common prosperity”, or a more equitable distribution of incomes across the country.

The plan to address regional, urban-rural and income gaps matters for automakers, as Beijing’s proclamation is likely to affect how consumers make and spend their money. Cars account for one of the largest portions of discretionary expenditure in China. President Xi Jinping’s common prosperity push will thus force a rethink of how vehicles are priced. As disposable incomes rise, and Beijing focuses on closing the large wealth gaps between tiers of cities, the likes of BMW and its peers will have to find a way to be part of the solution.

Crucial base

Navigating this impending shift in spending power is critical for BMW. About 36% of the company’s premium cars are priced at less than 250,000 yuan — the lowest end of the range — compared with more than 40% for competitors such as Volkswagen-owned Audi and Mercedes-Benz. As China tries to create what officials are calling an “olive-shaped social structure”, with a wider middle class, lifting the portion of cheaper but better-made cars would give it a leg up in lower-tier cities, where Brilliance has historically (though still relatively poorly) made and sold cars.

“To BMW, Liaoning province and the city of Shenyang have become the crucial innovation and production base in China, and the cornerstone of our future success in China,” BMW said in a statement, without giving details about how it plans to participate in Huachen’s restructuring.

BMW’s China business has always done well. It grew 11.7% in the second quarter and more than 40% in the six-month period ending June. Most of the cars it makes for Chinese buyers are manufactured on the mainland. The company imports about 20%-25% of its sales volumes of its almost 800,000 units. Even the troubles of its local partner have not got in the way. 

BMW was the first international automaker to increase its holdings in its China venture after Beijing allowed foreign companies to raise their stakes a few years ago. At the time it seemed expensive, but now the move looks prescient.

While Brilliance will only have a 25% stake in the joint venture in 2022, the dividend from BMW and investment income will still be significant, according to Daiwa analysts. The German company’s latest move, much in the same way, is likely to keep it well ahead of its peers — and could give its flagging partner a lift, too.

Bloomberg Opinion. More stories like this are available on bloomberg.com/opinion