Dongfeng Revs Up Renault JV Talks 东风汽车加紧与雷诺汽车联手
Long-running talks about a new joint venture between domestic automaker Dongfeng Motor (HKEx 489) and France’s Renault (Paris: RENA) appear to be gaining new momentum, driven by urgency for the former to diversify following the recent territorial dispute between China and Japan. Regardless of what’s driving this new development, it does seem to mark an important move for Dongfeng, a top Chinese automaker that is going through a painful period right now due to its big dependence on joint ventures with Honda (Tokyo: 7267) and Nissan (Tokyo: 7201). Those automakers have all seen their sales plunge over the last 3 months as Chinese consumers boycotted the brands at the height of the territorial dispute between China and Japan. In related news, it does look like the peak of the boycott has finally passed, with new reports indicating that sales for the big Japanese brands are starting to pick up again after bottoming out in late October.
Let’s start off by taking a look at the latest Dongfeng-Renault news, which has domestic media reporting the 2 sides have hammered out most of the major details for a joint venture whose discussions were first reported back in the spring. (English article) According to the latest reports, the 2 sides would invest about 6.5 billion yuan, or just over $1 billion, in the venture, which would have the capacity to initially product around 200,000 cars per year.
The reports also note that Renault already has a license to manufacture in China from a previous failed joint venture, meaning it wouldn’t need to get permission from the powerful state planner for this new venture. That’s important because such approval from the National Reform and Development Commission is usually a mandatory step, but has also become more difficult in the last year due to overcapacity in the domestic car manufacturing market.
The news should help Dongfeng to diversify its business, which now relies heavily on its joint ventures with Nissan and Honda. The company also has a joint venture with another French automaker, Peugeot (Paris: PEUP), although that accounts for a relatively small part of its business. Dongfeng’s shares lost about a quarter of their value in a sell-off after the China-Japan dispute flared up in September and October, but have rallied since then and are now close to their previous levels as the situation stabilizes.
With regard to the broader situation, Chinese media are citing executives at Japanese car-making joint ventures saying that sales are starting to rebound following sharp drops in September and October at the height of the boycott. (English article) The movement saw sales of Japanese brand cars drop by around 40 percent, as those brands’ share of the China car market fell by more than half to just 8 percent in October.
The latest reports are quoting a Toyota official saying the sales plunge bottomed around mid October, and levels have been rebounding moderately since then. They quote Nissan and Honda officials also saying that sales have started to recover in recent weeks, though the recovery has been relatively weak so far.
Based on past experience, this diplomatic flare-up will probably quickly recede in the minds of Chinese consumers as they return their focus to matters more related to their daily lives, which probably explains the quick rebound in Dongfeng stock. Still, the danger of new flare-ups remains a very real possibility, making this latest joint venture with Renault an important hedge for Dongfeng against the fallout from future conflicts.
Bottom line: Dongfeng’s new joint venture with Renault will be an important hedge against its strong dependence on joint ventures with Japanese brand automakers.
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This article was first published in the online edition of the South China Morning Post at www.scmp.com.
