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China to Ease Rules on Foreign Auto Makers

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Employees work on the Honda Civic production line at the automaker’s Dongfeng Honda factory in Wuhan, China.
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str/Agence France-Presse/Getty Images

SHANGHAI—China said Tuesday it will phase out rules requiring foreign auto makers to share their factory ownership and profits with Chinese companies by 2022, answering U.S. calls for a level playing field in the world’s biggest auto market.

China now forces foreign auto makers to set up 50-50 joint ventures with Chinese partners if they want to locally produce cars to avoid 25% tariffs. The government said these rules will be eliminated this year for companies building electric vehicles—a move that could benefit

Tesla Inc.

—and for all vehicles by 2022.

“This will completely change the situation in China within 10 years,” said Yale Zhang, managing director of Shanghai-based consultancy Automotive Foresight.

The action could bolster President

Donald Trump’s

assertions that his policy of pressuring China to modify its trade behavior is yielding swift results. Even so, people in the industry said the reshaping of China’s auto sector wouldn’t necessarily hand an advantage to foreign players, many of whom have come to rely on their Chinese partners.

These partners are often influential state-owned enterprises. Although foreign auto makers entered into the joint ventures reluctantly, some say they have come to accept them as a fact of life in a country where foreign businesses can struggle to succeed without local allies.

“We have no plan to change our investment ratio,” said Keitaro Nakamura, a China-based spokesman for Honda Motor Co., which operates joint ventures with local state-run auto makers Guangzhou Auto and Dongfeng Motor Co. “If we had this option 20 years ago when we were first coming into the market, we might have thought differently. But we’ve been working with them for two decades.”

Beijing established its joint-venture rules in the 1990s to enable fledgling Chinese auto makers to learn from foreign market leaders. The joint-venture structure proved a poor vehicle for technology transfer, however, and today China’s most capable auto makers are widely held to be private-sector players that have never been involved in foreign JVs, such as

Great Wall Motor Co.

and Zhejiang Geely Holding Group Co.

Even so, Chinese state-run auto makers have long argued against reforms to the joint-venture system to safeguard the healthy profits they generate from mass-producing foreign-badged cars for the China market.

The threat of a trade war with the U.S. appears finally to have eclipsed those arguments in the minds of Chinese policy makers. “I think the trade threat hastened it and forced the top to make a tough call after so many years of bureaucratic bickering and pushback by vested interests,” said a China-based executive at a foreign auto maker.

Michael Laske, China president of Austrian powertrain supplier AVL GmbH, called the action a “positive step forward for global trade” but added that the big winner would likely be China itself. Lifting limits on electric-car makers by the end of this year would encourage foreign investments from Tesla and others, helping China to strengthen its EV supply chain and become the world’s factory for EVs, he said.

While handing the U.S. an important concession, China wouldn’t have lifted investment restrictions unless “they felt they were ready to compete,” he said.

Chinese auto makers have already closed the gap on foreign rivals and would enjoy home-market advantages to help them compete in the future, such as favorable access to finance and land grants from local governments, Mr. Laske said.

Tesla, which has been struggling to complete a deal to open a plant in China, could be the chief foreign beneficiary of the changes announced Tuesday, if indeed they clear the way for the electric-car maker to open a wholly owned company here. Under earlier proposals floated by Chinese officials, Tesla would still have been required to pay import tariffs on cars built locally in free trade zones.

Last month Tesla Chief Executive

Elon Musk

appealed to Mr. Trump via

Twitter

for help in China. For a foreign auto maker, operating there was “like competing in an Olympic race wearing lead shoes,” Mr. Musk complained.

Tesla didn’t immediately respond to questions.

Rules requiring auto makers such as

General Motors Co.

and

Ford Motor Co.

to set up joint ventures were criticized by U.S. Trade Representative

Robert Lighthizer’s

investigation into Chinese trade practices last month, which triggered tit-for-tat punitive measures between the world’s two largest economies.

“Made in China 2025” is Beijing’s industrial plan to dominate high-tech industries including robotics, aerospace and computer chips. The Trump administration argues China is using the plan to give its tech companies unfair advantage over foreign rivals. But what is it exactly?

The U.S. investigation contended that China’s investment restrictions were a means of forcing foreign auto makers to transfer technology to local partners.

Last week, President

Xi Jinping,

addressing the Boao Forum in southern China, said those restrictions would be removed, in an apparent attempt to defuse trade tensions.

Mr. Xi also said that tariffs on foreign import vehicles would be significantly reduced from their current 25% level. Tariffs weren’t mentioned in Tuesday’s announcement, but auto analysts say that they are highly likely to be cut later this year now that Mr. Xi has personally promised to act.

Foreign-investment limits on companies building new energy vehicles—a term covering electric cars powered by batteries or fuel cells—will be removed this year. Limits on those building commercial vehicles and passenger cars will be lifted in 2020 and 2022, respectively.

For some auto makers, staying together could prove easier.

“GM’s growth in China is a result of working with our trusted joint-venture partners,” said a spokeswoman for GM, which builds cars in China with state-run Shanghai Auto. “We will continue to work with our partners to provide high-quality products and services to consumers.”

Ford, which operates two joint ventures in China and is in the process of establishing a third to produce electric cars said, “We are encouraged by the announcement this afternoon from the National Development Reform Commission, which is a clear demonstration of the Chinese Government’s commitment to further open the automotive industry. We will continue to monitor developments and look forward to learning more.”

A spokeswoman for U.S. trade representative Robert Lighthizer, who is leading the Section 301 trade case against Beijing, declined to comment on China’s steps to open up auto investment and underscored previous comments from the White House on the need for “concrete actions” from China. “We’re going to continue moving forward in the process and in the negotiations until those happen,” White House spokeswoman Sarah Sanders previously.

While some foreign auto makers said Tuesday they would stick with their joint ventures, Mr. Zhang, the industry analyst, predicted that most of China’s car-making joint ventures would be gone by 2030, with foreign companies unlikely to pass up the chance to operate independently.

Freed from their JVs, foreign auto makers would be able to retain all their China profits, and wouldn’t have to negotiate over strategy with a local partner.

With limits due to be swept away in 2022, foreign auto makers that want to go it alone now “have four years to arrange the divorce,” said Mr. Zhang.

However, foreign auto makers could find it difficult to extricate themselves from joint ventures that have existed in some cases for more than two decades; reaching an agreement on the JV’s valuation is likely to be one obstacle. And even if a price could be agreed upon, foreign auto makers might not be able to afford to buy out their Chinese partners, said Janet Lewis, Macquarie Capital Research’s managing director of equity research.

Write to Trefor Moss at Trefor.Moss@wsj.com

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