Dongfeng, Geely Zoom In Smart New JVs

Renault enters China with Dongfeng JV

There’s upbeat news come from 2 of China’s top domestic automakers, led by word that Dongfeng Motor (HKEx: 489) has finally signed a joint venture deal to make sport utility vehicles (SUVs) with France’s Renault (Paris: RENA) after more than a year of negotiations. Meantime, Geely Auto (HKEx: 175), which is trying hard to turn around struggling Swedish automaker Volvo, has announced its own major new auto financing joint venture with France’s BNP (Paris: BNP). This sudden love fest between Chinese automakers and French companies is probably just coincidence, since the 2 deals look unrelated. But both look like smart moves, as they involve Chinese firms pairing up with relatively strong, experienced foreign partners. That contrasts sharply with the more common Chinese preference in the past for sickly, struggling companies, especially when Chinese firms buy equity stakes in their venture partners.

Let’s start with Dongfeng, which has just announced it will form a $1.3 billion 50-50 joint venture with Renault that will start producing SUVs for the China market in 2016. (English article) The venture in central Hubei province will have an initial annual capacity of 150,000 vehicles, but the figure is expected to double within the first few years after production begins. Talks for the deal were first reported more than a year ago, and formation of the venture makes Renault the last of the world’s top 10 car makers to form a China joint venture.

This particular deal is actually part of a more complex 3-way tie-up, since Renault is also a major stakeholder in Japan’s Nissan (Tokyo: 7201), which is also one of Dongfeng’s existing foreign joint venture partners. Dongfeng’s other major foreign partner up until now has been Honda (Tokyo: 7267). But that reliance on 2 Japanese partners has made Dongfeng vulnerable to sometimes-tense relations between China and Japan. Last fall the company saw its sales plunge at the height of a territorial dispute between Beijing and Tokyo, which prompted many Chinese consumers to boycott Japanese-brand cars.

This new deal looks smart, as the addition of the Renault nameplate will help to protect Dongfeng from similar downturns caused by anti-Japanese sentiment in the future. Dongfeng had also been in talks to buy a stake in another French automaker Peugeot (Paris: PEUP), though I suspect those talks will now end with the formation of this Renault tie-up. I like this new joint venture much more, since Renault is a much healthier and reliable company than Peugeot, which has struggled for the last few years. Investors also liked the deal, bidding up Dongfeng shares around 5 percent after the announcement.

Meantime, Geely’s new car-financing tie-up with BNP also looks like a smart move aimed at tapping Chinese consumers’ huge demand for cars. The new joint venture will have registered capital of 900 million yuan ($150 million), with Geely holding an 80 percent stake and BNP holding the remainder. (company announcement) BNP will have an option to boost its stake to up to 50 percent over the next 2 years.

This particular deal should cater to the growing number of Chinese consumers who have helped to make the country the world’s largest auto market. The move also comes as Geely is preparing a major ramp-up of production for Volvo-brand cars in China, following its purchase of the Swedish car maker from Ford (NYSE: F) in 2010. Geely is also preparing to build and aggressively promote a new line of electric cars as part of China’s green energy push. That means the venture could find healthy demand from buyers of both Geely and Volvo cars in China.

It’s also worth noting the venture faces several potential risks. Chinese consumers don’t make lots of big purchases on credit in general, meaning demand may not be strong initially for the new venture’s services. What’s more, China’s auto market could slow sharply in the next 2 years as cities curtail their issue of new licenses in a bid to control heavy air pollution. Still, I would expect the longer term prospects for the venture to be quite strong, assuming it gets proper funding and other support from its 2 parents.

Bottom line: New production and financing joint ventures by Dongfeng and Geely look like smart moves, drawing on strong foreign partners to tap demand for SUVs and auto financing.

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