French automaker Renault SA (RENA.PA) is ditching its main passenger car business in China following poor sales at the loss-making venture with Dongfeng Motor Group (0489.HK).
A slowdown in Chinese automotive sales, which is expected to worsen this year due to the coronavirus crisis, has heaped pressure on carmakers that were already struggling to establish a big presence in China, the world's biggest vehicle market.
Renault, which entered the Dongfeng joint venture in 2013 and began producing gas-powered cars under the tie-up in Wuhan three years later, is one of the few global carmakers to exit a major project in China in recent years, however.
The carmaker, which will retain a presence in China with other ventures, including in electric vehicles, is trying more broadly to find cost savings and pull out of businesses where it is struggling to make its mark and turn a profit.
This is part of Renault's efforts to make the most of its alliance with Japanese partner Nissan (7201.T), and the two are due provide a strategy update by mid-May.
Dongfeng had been anticipating Renault's potential exit from the Chinese joint venture as long as a year ago, a banking source familiar with the matter said. Sales were under pressure long before the coronavirus crisis walloped demand further, another source with knowledge of the situation said.
The venture sold only 18,607 cars in 2019, far below its annual capacity of 110,000 and reported an operating loss of more than 1.5 billion yuan ($212 million).
Dongfeng, which will take on Renault's 50% stake in their venture, plans to revamp and upgrade the business's existing car plants, which will no longer make Renault-branded cars, a spokeswoman for the Chinese automaker said on Tuesday.
Dongfeng will arrange positions for staff at the venture within its wider group operations, she added.
Financial terms of the transaction were not disclosed.
Renault said it would focus on its light commercial vehicle business with Brilliance China Automotive Holdings (1114.HK). That venture plans to roll out five new models before 2023 and is planning export cars to other markets.
Another focus is electric vehicles, which will be built by its venture with Jiangling Motors Corporation Group.
Renault and Dongfeng also said they would continue to cooperate on "connected vehicles" and work with common partner Nissan Motor Co Ltd (7201.T) on new generation engines.
"We are opening a new chapter in China. We will concentrate on electric vehicles and light commercial vehicles, the two main drivers for future clean mobility and more efficiently leverage our relationship with Nissan," Francois Provost, chairman of the China region for Renault, said in a statement.
That could include relying on Nissan dealers rather than Renault ones in the longer term, a source familiar with the matter said.
Renault and Nissan, which both reported losses for 2019 even before the global pandemic hit, are looking to rebalance a relationship strained by the 2018 arrest and subsequent flight of former alliance supremo Carlos Ghosn.
The ex-boss-turned-fugitive, accused of financial misconduct, denies any wrongdoing.
Other international carmakers have struggled in China too.
In 2018, Japanese automaker Suzuki Motor Corp (7269.T) sold its stake in a venture with Changan Automobile (000625.SZ).
Renault's French rival PSA (PEUP.PA), meanwhile, is exiting a small joint venture with China's Chongqing Changan Automobile (000625.SZ) and said in February it had suffered 700 million euros in losses last year in the country.