A recently announced joint venture (JV) between China and the US could make the world's second largest economy a major player in the automotive interiors market.

A JV between Yanfeng Automotive Trim Systems Co and Johnson Controls Inc (JCI) will form the world's largest auto interiors firm, a move that one analyst sees as a boon for US-based JCI's bottom line.

Yanfeng, a wholly owned subsidiary of Huayu Automotive Systems Co (HASCO), will maintain a 70 percent share in the new company, while JCI's holdings will take the remaining 30 percent.

David Whiston, a senior equity analyst with Chicago-based investment research firm Morningstar Inc, said the deal is a way for JCI to divest itself of a branch that has been too "capital intensive".

"What they're doing now with this joint venture is reducing their overall exposure in terms of an earnings impact," Whiston said. "But by keeping a 30-percent interest they get some of the upside to continued growth in China from a newly-formed interiors company that is supposed to be much more profitable than what JCI's interiors business has been on its own."

JCI, a global multi-industry conglomerate, announced the partnership with Yanfeng on Sunday in Shanghai.

Headquarters for the new business will be located in Shanghai, but customer service, development and engineering outposts will be scattered throughout China, Europe, India, Japan and the US.

Bruce McDonald, JCI's executive vice-president and chief financial officer, said the leadership on both sides of the deal are confident that the business will see solid returns in the near future.

"Putting our two businesses together really blankets the market from top to bottom," McDonald said. "We've changed the profile of our interiors business and this solidifies our relationship with SAIC, who we've been in a relationship with for about 17 years."

JCI, one of the largest home furnishings companies in the world, employs more than 170,000 employees worldwide at more than 1,300 locations and deals in three distinct sectors - heating, ventilation and air conditioning systems (HVAC), automotive batteries and automotive interiors.

JCI provides interiors to a number of international auto manufacturers - including the Ford Motor Co, Daimler AG and General Motors Corp.

But the recent partnership focuses more on JCI's automotive interiors offerings.

As a result of the recent partnership, JCI's CFO McDonald said the JV will start with a number of competitive advantages including: solid positioning in the Chinese market, increased access to engineering technologies and opportunities for low-cost manufacturing.

SAIC Motor Corp, the parent company of HASCO, is one of the leading state-owned automotive manufacturers in China.

Alex Molinaroli, chairman and CEO of JCI, said the joint venture with SAIC, HASCO and Yangfen increases the growth opportunities for all of the involved parties as JCI looks to further opportunities to "participate in the China market".

"Joining our two interiors businesses is a natural extension of our existing partnership with Yanfeng in automotive seating, which has flourished over the past 15 years," Molinaroli said in a statement. "It creates a strong combined company with a market leading position and a foundation for sustained global growth."

"This also aligns with Johnson Controls' corporate commitment to China, which is increasingly becoming a major center for the global automotive industry," he said.

Whiston, the Morningstar analyst, said the deal is a "win-win" for JCI.

"For several years China has been the largest single-nation auto market in the world, and this new company is going to have a 25-percent share of the interiors market in China," Whiston said. "Financially this move is about lowering JCI's risk, but the growth [in China] is robust and the auto demand is quite healthy."

The companies expect the deal to receive regulatory approval within a year.

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(China Daily USA?05/20/2014 page2)