China Foreign Investment: Expert Q&A Series – Spotlight on Automotive Manufacturing

Introduction

In our China Foreign Investment Q&A series, we will update you on recent developments in China’s foreign investment laws. The spotlight for this update is on the automotive manufacturing industry.

Developments

On June 30^th, 2019, the 2019 edition of the Special Management Measures for the Market Entry of Foreign Investment (the 2019 FDI Negative List) was published by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) jointly – this came into effect on July 30^th 2019. Together with the newly released Foreign Investment Law (to come into effect from January 1^st 2020), the trend points to a strong commitment of the Chinese government to further open its doors to attract foreign investment in China.

With the revised 2019 FDI Negative List, foreign investors can invest in an industrial sector which does not fall into the 2019 FDI Negative List and they will be treated in the same manner as domestic investment.

However, this does not mean foreign investors would now be free to do business in China because certain types of investment may fall into the licensed business category of the 2018 edition of the Market Access Negative List (the 2018 Market Access Negative List) which was jointly released by NDRC and MOFCOM in 2018. In such cases, the relevant review and approval procedure must be fulfilled for both foreign investors and domestic investors to obtain the proper license in conducting the licensed businesses in China.

The Automotive Manufacturing Industry

In terms of the automotive industry, the 2019 FDI Negative List repeated the significant liberalisation which was firstly introduced in the 2018 version. The key highlights include

• the lifting of foreign ownership restrictions on the commercial vehicle manufacturing business in 2020
• the lifting of foreign ownership restrictions on the passenger vehicle manufacturing business in 2022
• the restriction that a foreign investor can only establish a maximum of two joint ventures in China to manufacture the same type of vehicles will also be removed in 2022

In principle, this means that foreign investors will be permitted to own more than 50% shareholding of an entity or even form a wholly-owned subsidiary in China to manufacture commercial vehicles from 2020 and passenger vehicles from 2022, respectively. Foreign investors will also be allowed to set up more than two joint ventures with their Chinese partners to manufacture the same type of vehicles from 2022.

As mentioned above, this prospective removal of the existing restrictions does not mean foreign investors are free to invest in vehicle manufacturing business in China because vehicle manufacturing business in China falls into the licensed business category under the Market Access Negative List.

Here is a summary of the requirements of the FDI Negative List and the Market Access Negative List

What does this mean for foreign investors in the sector?

Foreign investors will be able to set up their controlled or wholly-owned subsidiary in China to manufacture

• special vehicles and new-energy vehicles
• commercial vehicles from 2020
• passenger vehicles from 2022.

Prior to 2022, a foreign investor is limited to establishing no more than two joint ventures or WFOEs (as the case may be) to manufacture one type of vehicles. However, from 2022, this restriction will no longer apply. This presents a very positive regulatory movement for international investors which look to gain a foothold or expand their operations in the largest automotive market in the world.