Brilliance Boss’s HK Bribery Probe Poses Risks for JVs

Arrest of chairman adds to company’s controversial history

Aug 14

The investigation and arrest of the chairman of Brilliance China Automotive Holdings for suspected bribery in Hong Kong adds to the Hong Kong-listed firm’s history of scandal and controversy and offers an element of uncertainty for two of Europe’s most important carmakers’ operations in China.

On August 3, Hong Kong’s Independent Commission Against Corruption (ICAC) searched Brilliance’s headquarters and arrested chairman Wu Xiao An, the carmaker announced on August 8. The ICAC is investigating Wu, also called Ng Siu On, on suspicion of unidentified violations of Hong Kong’s bribery laws.

Wu was released on bail without charge on August 4, Brilliance said, adding that the ICAC’s raid of its headquarters and arrest of its chairman would have “no material adverse impact” on the company and that its operations remain normal. Wu is also chairman of another Hong Kong-listed company, Xinchen China Power Holdings, a Chinese manufacturer of car engines. On August 8, Xinchen also said the arrest had “no material adverse impact.”

Nonetheless, the probe and arrest pose various risks to its foreign joint venture partners, Jean-Marc Blanchard, the founding executive director of the Mr. & Mrs. S.H. Wong Center for the Study of Multinational Corporations, a US think tank, told Asia Sentinel.

Brilliance’s principal activities include the manufacture and sale of BMW vehicles in China through its joint venture with the German automaker, as well as the manufacture and sale of minibuses and multi-purpose vehicles through its subsidiary with Renault, a leading French car automaker, according to Brilliance’s website.

One risk to foreign joint venture partners is operational – normal day-to-day operations might be disrupted by the uncertainty created by the raid and arrest of the chairman, Blanchard said. “Such events often are paralyzing, at least for the short term, because company employees will await further government guidance before doing anything else; employees will be emotionally affected, and employees will be hyper-cautious about taking the initiative in the future for fear of further problems.”

Then there are reputational risks, Blanchard added. “The desire to protect one's brand may force foreign companies to find new "fixers," change compliance procedures, and make unplanned expenditures on lawyers/government and public relations in China/Hong Kong as well as Germany.”

There are also funding risks, as bankers may turn cautious about providing funding to the joint venture because they are fearful not only of the prospects of the joint venture but also of political risks, Blanchard explained.

BMW formed BMW Brilliance Automotive with Brilliance in May 2003. Brilliance sold a 25 percent stake in BMW Brilliance to its German partner in February 2022, raising BMW’s stake in the joint venture to 75 percent while Brilliance’s share fell to 25 percent. The joint venture, headquartered in Shenyang, the capital of Liaoning province, has about 23,000 employees and produced 700,000 BMW cars in 2021, according to its website. BMW Brilliance reported a revenue of €28 billion and an after-tax profit of €3.6 billion in 2021.

The joint venture between Renault and Brilliance to manufacture cars, also in Shenyang, was formed in 2017. The joint venture filed for bankruptcy in December 2021 and then embarked on a restructuring.

Any company, whether majority or minority shareholder, when investing in a foreign venture must have its own representative on the ground, visibility on all business transactions of the joint venture, and a robust compliance program which ensures that staff realize what is permitted and what is not, John Bruce, managing director of JB Advisory Services, a Hong Kong consultancy, told Asia Sentinel. This applies to any geography, not just China, Bruce stressed.

BMW did not reply to Asia Sentinel’s questions. BMW, Renault, and their joint ventures with Brilliance have not been implicated in the bribery investigation.

Brilliance’s controversial past

Brilliance and its controlling shareholder, Huachen Automotive Group Holdings, have histories marked by scandal. Huachen, a state-owned conglomerate based in Liaoning province in northeast China, owns a controlling 30.4 percent stake in Brilliance.

According to an independent investigation disclosed on August 19, 2022, from 2019 to 2021, several subsidiaries of Brilliance made unauthorized transfers totaling RMB43.5 billion (US$6 billion) to companies mostly owned by the Liaoning provincial government, while these Brilliance subsidiaries received unauthorized transfers back totaling RMB41.7 billion. None of the fund transfers had been reported to the board of Brilliance for approval, the investigation revealed. Brilliance incurred a loss of RMB2.35 billion from the fund transfers, according to the investigation.

Huachen has been undergoing bankruptcy restructuring since November 2020, after defaulting on a RMB1 billion bond in October 2020.

In March 2023, the China Securities and Regulatory Commission (CSRC) fined Wu RMB200,000 because Huachen’s annual reports in 2017 and 2018 contained misleading statements, Brilliance announced on March 10. Huachen used these annual reports to obtain approval from the CSRC and the Shanghai Stock Exchange to issue bonds. The offenses occurred while Wu was a director of Huachen. Wu ceased to be a director on June 29, 2020.

Qi Yumin, a former chairman of Huachen Automotive Group, was expelled from the Chinese Communist Party and placed under investigation, the anti-graft agency of Liaoning announced on June 15, 2021. Qi failed to truthfully explain Huachen’s financial statements and took advantage of his position to corruptly provide help to others to obtain office, engaged in profiteering, and embezzled public funds, the anti-graft agency said.

Tussle with Bo Xilai

This is not the first time that a Brilliance chairman encountered trouble. Wu’s predecessor, Yang Rong, had a tussle with Bo Xilai, a once-rising political star in China. On June 18, 2002, Wu replaced Yang as chairman of Brilliance, the company announced on June 19, 2002.

A pioneer in China’s auto industry, Yang founded a group of auto companies in Liaoning including Brilliance, engineering Brilliance’s debut as the first IPO of a Chinese company on the New York Stock Exchange in 1992. Yang was ranked No.3 on Forbes’ China Rich List in 2001 with a net worth of RMB7 billion.

Trouble came when Yang tried to establish a factory in the city of Ningbo in the eastern Chinese province of Zhejiang in 2001, incurring the wrath of Bo, then Liaoning governor. The provincial government then took over the state-owned assets of Brilliance and its related companies in March 2002. Yang fled to the US in May 2002. On October 18, 2002, officials of Liaoning province approved Yang's arrest for suspected involvement in economic crimes.

In September 2003, Bo told reporters that Yang was not a private entrepreneur who owned Brilliance, but an agent entrusted by the Liaoning government to run state-owned assets of Brilliance and its related companies. Yang has denied he committed economic crimes, CNN reported on October 24, 2002.

Yang’s fate turned out better than Bo’s. After fleeing to the US, Yang formed a US-based electric vehicle company called Hybrid Kinetic Group. After being governor of Liaoning, Bo was China’s Minister of Commerce from 2004 to 2007 and Party Secretary of Chongqing from 2007 to March 2012. In September 2013, he was sentenced to life in prison for corruption by a Chinese court.

Toh Han Shih is chief analyst of Headland Intelligence, a Hong Kong risk consultancy.