Business News

China relaxes some of its manufacturing rules for foreign owners

Key Points
  • China's state planner says some manufacturing plants could soon be wholly foreign-owned.
  • The rules affect autos, ships, and aircraft.
  • Auto firms have been forced into joint ventures with Chinese companies since 1994.
A car manufacturing plant in China.
Mick Ryan | Getty Images

New rules announced by China could benefit the plans of Elon Musk, but hurt at least one investment of American business magnate Warren Buffett.

China's state planner said Tuesday that caps on foreign ownership of the China-based manufacture of cars, ships, and aircraft are to be abolished within five years.

Since 1994, foreign carmakers have been restricted to a 50 percent share of any local manufacture of cars.

However, by the end of this year, any cap on foreign-invested shares for electric and hybrid vehicles are to be lifted. By 2020, restrictions will lift on commercial vehicles and by 2022 foreign firms will encounter no ownership rules for passenger vehicles.

Tesla car dealership in Shanghai taken on March 17, 2015.
Johannes Eisele | AFP | Getty Images

The new policy is seen as a boon to Tesla's plans to build its own plant in Shanghai. That project was thought to be under threat because the U.S. firm did not want to partner with a local Chinese firm.

In March, Musk replied to a President Donald Trump tweet to complain about the 25 percent import duty U.S. cars pay to be sold in China.

He said "I am against import duties in general, but the current rules make things very difficult. It's like competing in an Olympic race wearing lead shoes," he said.

Tweet 1

Last week, China's President Xi Jinping vowed to lower tariffs for foreign autos and enforce the legal intellectual property of foreign firms.

While the new rules over tariffs and ownership may benefit big foreign auto firms looking to manufacture in China, domestic carmakers could suffer.

BYD Company is a Chinese manufacturer of automobiles, buses, forklifts, rechargeable batteries and trucks. It currently has a partnership with German auto firm Daimler to build luxury electric cars.

In 2008, MidAmerican Energy Holdings, a subsidiary of Warren Buffett's Berkshire Hathaway, invested about $230 million for a 10 percent stake in BYD. Potentially meaning that Berkshire Hathaway's investment could be negatively affected by the new rules.

Shenzhen-listed shares of BYD dropped by more than 2.4 percent Tuesday, with much of that selling recorded after the state planner's announcement.

Warren Buffett
David A. Grogan | CNBC

George Galliers, an autos analyst at Evercore ISI, told CNBC Tuesday that larger auto firms such as Ford or Toyota, already have established Chinese production through joint ventures. He said it did open up possibilities such as buying out partners, increasing ownership or starting new production on their own.

Galliers also said going alone in China still presents some risk to any foreign manufacturer.

"For Tesla and others, who do not have local production or who have limited JV (joint venture) production today, then the route of wholly-owned operations probably does make sense on the surface at least," he said.

"However, there may remain advantages to having local partners and JV's which I am sure that anyone looking to establish facilities in China will continue to consider," Galliers added.