Audi Moves Ahead With SAIC Partnership

German luxury car brand Audi AG purchased a 1% stake in SAIC Volkswagen Automotive Co., taking a significant step forward in its long-pursued plan to set up a second venture in China.

Chen Hong, the chairman of SAIC Group, disclosed the Audi investment at the Chinese auto giant’s shareholders meeting Tuesday. The transaction was completed June 14, Chen said.

The investment will allow SAIC Volkswagen to become a second venture producing Audi branded vehicles in China. Audi has been producing its autos in China since 1988 through a venture with FAW Group and Volkswagen, Audi’s parent company.

SAIC Volkswagen is a joint venture set up by Shanghai-based SAIC and VW in 1984. After Audi’s investment, SAIC holds a 50% stake in the venture while Volkswagen AG holds 38% and Volkswagen China 10%. Volkswagen unit Skoda owns the remaining 1%, according to a business registration document.

Audi has sought since 2016 to establish a second venture in China in addition to the FAW partnership, in which Audi holds a 10% stake. Audi’s FAW dealers strongly opposed that effort because they feared a new SAIC-affiliated dealer network might hurt their long-term prospects with sales already in a sharp decline.

The tussle sent Audi’s China sales into a tailspin as dealers refused to fulfill their 2017 sales targets. As a result, Audi sales slumped 22% in the first quarter of 2017, and the longtime leader of China’s luxury car market lost its crown to German rivals Mercedes-Benz and BMW.

In May 2017, Audi agreed to abandon plans for a separate dealer network. Audi also promised that cars produced by an Audi-SAIC joint venture wouldn’t enter the market until 2022.

In April, Chinese regulators announced plans to remove existing restrictions on foreign investment in auto ventures. By 2022, foreign automakers will no longer be limited to two joint ventures in China and will be allowed to take full control of China ventures. The policy shift means that VW’s Audi unit will be free to expand China production through its own joint ventures rather than being limited to the two established by the parent company.

Contact reporter Han Wei (weihan@caixin.com)