Energy
Monday, August 1st, 2022 12:15 pm EDT
In January of this year, Stellantis was all aglow about how successful its business in China was. Sales nearly doubled in 2021 compared to 2020 with more than 100,000 units sold, many of them Jeep Wranglers, the much loved off-road brand that enjoys customer loyalty akin to that of Harley-Davidson owners.
“Since day one of Stellantis, we analyzed the situation together with our partners and we are now finalizing our plans for China, which we consider as a strategic market in terms of untapped potential,” said Grégoire Olivier, chief operating officer for Stellantis China. Previously, any company that wanted to manufacture things in China was required to partner with a local company. GM, Volkswagen, BMW, and others all formed joint ventures with Chinese manufacturers in order to avoid China’s import duties on foreign made cars. Stellantis chose GAC Group as its local partner.
A major part of the company’s plans for developing the Chinese market was taking advantage of the change in the country’s policies regarding foreign manufacturers. The new policy allowed it and other companies to take majority control of their manufacturing partnerships or to proceed without a partner at all. Earlier this year, Stellantis said it wanted to increase it ownership stake on the joint venture with GAC to 75%. Tesla was the first (and so far as we know the only) company to enter the Chinese market without a partner and build a local factory that is wholly owned by the company.
The Bloom Is Off The Rose
So it’s a bit of a shock that Stellantis has announced just six months later it will stop manufacturing vehicles in China. In a press release on July 18, the company said a “lack of progress” in the previously announced plan for Stellantis to take a majority share in their joint venture led GAC Group and Stellantis to initiate discussions to terminate the joint venture that produces and distributes Jeep products in China.
The company says it is going forward with an “asset light” approach that will have it sell imported Jeep products, including some that are electrified. “Stellantis intends to cooperate with GAC Group in an orderly termination of the joint venture formed in March 2010, which has been loss-making in recent years, and will recognize a non-cash impairment charge of approximately €297 million in its first half 2022 results. The Jeep brand will continue to strengthen its product offering in China with an enhanced electrified line-up of imported vehicles meant to exceed Chinese customer expectations.”
That seems fairly optimistic. Chinese customers show a marked preference for Chinese-made products. There will be a lot of ill will over Stellantis decision to pull out of its manufacturing agreement with GAC, which could dampen enthusiasm for Jeep products.
According to Nikkei Asia, last Thursday Stellantis CEO Carlos Tavaras said the decision to end its joint venture with was due to a “breach of trust” by GAC. But there’s more to it than that. Tavares is also nervous about the geopolitical situation between the US and China, particularly with regard to Taiwan. The lessons from Russia’s war on Ukraine are resonating within industries around the world, as corporation after corporation found itself held hostage by Russia. After the invasion, they were severely constrained in their ability to shut down operations in Russia and leave the country.
Autoblog reports Tavares also said last week, “We have been seeing over the last few years more and more political interference in the world of business in China. We don’t want to be a victim of cross-sanctions as has been the case for other companies in other regions of the world recently.”
In every divorce, each side tells a different story, and that is the case here. Reuters reports that GAC has hit back at Stellantis, saying it, not GAC, is responsible for the breakdown in trust between the two companies. It says it is “deeply shocked” by critical comments from Stellantis and that it was Stellantis that “didn’t fulfill its commitment.”
The Takeaway
We will never know the messy details of this business breakup, but the political implications should be sending a shudder through every boardroom of every company that does business in China. If Nancy Pelosi’s visit to Taiwan causes China to freak out, all bets are off. At a time when we should all be cooperating to find an answer to a rapidly overheating planet, the nations of the world seem intent on squabbling with each other instead.
Tesla has placed a major bet on manufacturing in China. Elon Musk thinks he and Xi Jinping are best buddies, but so did Jack Ma. The Marvelous Mister Musk might want to take a moment to re-read Frank Stockton’s The Lady? Or The Tiger? It’s from 1882, but it’s just as relevant today as it was back then.
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