Will the Chery-Subaru joint venture get shut down before it even starts up?

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Bloomberg are reporting that the Chinese government may veto any chance of Chery starting a joint venture with Subaru due to joint venture laws. China’s current joint venture laws state that foreign companies can have a maximum of two partners in marriage within the Chinese market, of course Toyota is already in a polygamous marriage with First Automobile Works (FAW) in the North of the country and Guangzhou Automobile Corporation (GAC) in the South, now Bloomberg is not reporting facts but rather what a consultant thinks might happen:

Fuji Heavy Industries Ltd, in which Toyota owns a 16.5 percent stake, has applied to make cars with Chery Automobile Co. in the world’s biggest auto market. The government considers Fuji Heavy, maker of Subaru-brand cars, a part of Toyota, said the people who declined to be identified as the matter is confidential.

Fuji Heavy has heard the argument that the government could reject a venture in which the partner is controlled by Toyota, according to a Fuji Heavy executive familiar with the situation. Under Chinese regulations an overseas company is limited to two joint ventures manufacturing passenger cars.

Now 16.5% is far from being a controlling stake in a company, so it is unlikely that the government would deny a joint venture based on such a small amount, the real reason is that the Chinese car industry is already at major over capacity levels due to the boom years from 2008 to the end of 2010 when car manufacturers expanded at a rapid pace. On the other hand, if two countries (or we should say territories here) have exceptional relations with the central government then these things tend to get fast tracked rather quickly, take for example the joint ventures between Chang’an and PSA and Dongfeng and Yulong. Chang’an and PSA put their applications for a joint venture in and didn’t hear much for over a year – it took 18 months to gain official approval for the Shenzhen based business, Dongfeng and Yulong’s joint venture was approved in rapid speed owing to the warming of relations between Taiwan and Mainland China. Japanese-Chinese relations have been rather rocky of late, although to be fair they have not exactly been great since the early 2000′s when the Japanese embassy’s were pelted with rocks by rebellious students and the ongoing dispute over the DiaoYu Tai Islands remains a major thorn.

“The government is concerned about overcapacity of the auto industry and has been focused on slowing down automakers’ expansion pace,” Han Weiqi, an analyst with CSC International Holdings Ltd. in Shanghai said yesterday. “A venture between Subaru and Chery wouldn’t likely contribute much in terms of volume or improvements to the industry.”

China’s National Development and Reform Commission, which oversees approval of foreign joint ventures in the country, didn’t immediately respond to faxed requests for comment. Jin Yibo, an assistant general manager for Wuhu, China-based Chery, said yesterday he doesn’t have any information regarding the deal to release.

Now back to Fujitsu: They don’t believe that a 16% share is going to be a major roadblock here:

The venture should not be rejected because Toyota’s stake is only 16.5 percent, said the Fuji Heavy executive, who declined to be identified.

“We are not aware of this,” Fuji Heavy spokesman Kenta Matsumoto said by e-mail yesterday. “Our plan to realize local production in China remains unchanged.” Toyota spokesman Masami Doi in Japan said yesterday he was unable to confirm whether the government would reject the application.

Subaru is itching to get back into the Chinese market with locally made products after its original joint venture in Guizhou bombed, they originally produced the Subaru Justy in China in the late 90′s and early 2000 but the business was not a success and the company eventually pulled out of the Chinese market altogether. In 2004 Subaru signed up with Pangda to enter into the Chinese market with a limited amount of imported models per year, it was until the launch of the latest generation of Forrester that Subaru sales really took off in the Chinese market.