Wrangling shareholders of Dongfeng Yueda Kia, a Sino-Korean car venture involving three firms, are expected to compromise soon with one agreeing to transfer part of its stake to another.

Dongfeng Motor Corp, China's No 3 vehicle producer, is likely to slash its stake in the venture in eastern Jiangsu Province to 20 percent from 25 percent, an informed source told China Daily.

Yueda, an industrial group in Jiangsu, would increase its share to 30 percent from 25 percent, said the source.

The stake of Kia Motors, owned by South Korea's top automaker Hyundai Motor, would remain unchanged at 50 percent.

A source from Dongfeng Yueda Kia said the board of directors of the venture would make a final decision on the deal next month.

But the source has not revealed how much Yueda would pay for Dongfeng's 5 percent stake.

The expected compromise comes after Yueda in June asked Dongfeng to pull out of the venture completely due to, as Yueda Chairman Hu Youlin said, "the unreasonable parallel equity structure and lots of disputes" between the two shareholders since late last year.

Hu said Yueda had hoped to pay 200 million yuan (US$24.6 million) to buy Dongfeng's 25 percent stake in the venture. But Dongfeng refused that overture.

Analysts said the upcoming compromise would be good for both Yueda and Dongfeng.

"The venture would possibly lose the central government's blessing for its future development if Dongfeng, a State-backed group, withdrew from the venture," said Zhang Xin from Guotai & Jun'an Securities Co Ltd.

The venture is more important for Yueda than for Dongfeng, which also runs three vehicle ventures with Nissan, Honda and PSA Peugeot Citroen, Zhang said. Dongfeng is a big name in China so it will be "a face-saving arrangement" to keep its presence, although smaller, in the venture, he said.

The venture has seen a loss this year due to high costs and price wars in China's car market, although sales in the first three quarters surged by 53 percent year-on-year to almost 74,000 cars. Statistics showed the venture reported 35 million yuan (US$4.3 million) in losses in the first eight months of this year, compared with a profit of more than 100 million yuan (US$12.3 million) in the same period of last year.

However, analysts said, behind Yueda's row with Dongfeng are Kia's attempts to dominate the venture.

In 1998, Yueda and Kia formed a partnership to make cars, but that suffered poor sales in the following years partly because it could not obtain the central government's blessing to introduce new products. At that time, Sino-foreign ventures' introduction of new models had to be approved by the central government.

In 2002 Dongfeng joined the Yueda-Kia partnership by gaining a free 25 percent stake.

"Yueda has apparently leaned to Kia and the latter wants to make use of the former to chuck Dongfeng out of the venture," said Jia Xinguang with the China Automotive Industry Consulting and Development Corp.

Dongfeng is still brooding over Yueda and Kia. At a car forum earlier this month in South China's Guangdong Province, Zhou Wenjie, vice-president of Dongfeng, "attacked" its two partners by saying: "The 50/50 equity structure of Sino-foreign joint ventures will be kept, but some (shareholders) are seeking unreasonable one-sided control."

According to China's auto industry policy, foreign carmakers are allowed to have a maximum stake of 50 percent in joint ventures with Chinese partners.

Dongfeng Yueda Kia now has an annual production capacity of 130,000 cars.

Last month it began building a new 300,000-unit plant with a planned investment of 6.8 billion yuan (US$840 million).

Chung Mong-koo, chairman of Hyundai, said last month that the venture would be one of Kia's core bases around the world. The venture now makes the Qianlima, Cerato and Optima small-and-middle-range sedans and the Carnival van.

(China Daily November 18, 2005)