BEIJING -- In October 2003, the first China-made BMW 325i sedan rolled off a new production line owned by the premium brand and its joint venture partner, Brilliance, a subsidiary of provincially owned automaker Huachen Group.
It was a milestone for the brand, whose cars proved massively popular in what became the world's largest market. Over the next nearly two decades, the joint venture was a lucrative cooperation for both BMW and Huachen, which is run by the government of the northeastern rust-belt province of Liaoning.
But this month, Huachen stands on the brink of bankruptcy, defaulting on 6.5 billion yuan ($987.48 million) in debt obligations. Chinese regulators have launched an investigation into possible violations of disclosure laws by the company.
The defaults by Huachen and two other Chinese state-owned companies have angered investors, who say their faith in the companies' top-notch ratings, seemingly sound finances and implicit state backing has been violated.
An examination of dozens of bond filings as well as interviews with former Huachen employees and experts shows how the automaker squandered its advantage of having a major partner and was unable to leverage its know-how to develop competitive cars of its own. Some strategic missteps on the choice of models hurt it badly and an expansion into electric vehicles, funded by debt, came too late.
"Management's key selling point to BMW to win the partnership was simple: as a smaller and weaker Chinese company, Brilliance will follow what BMW says without making trouble," said a person close to Brilliance's top management at the time, declining to be named given the sensitivity of the matter.
Bigger state automakers like SAIC Motor and Guangzhou Automobile Group were actively involved in their joint ventures and used the expertise of foreign partners to build stronger domestic brands.
Huachen and its Hong Kong-listed Brilliance unit, which also has a joint venture with Renault, did not respond to requests for comment. BMW declined to comment for this story.
BMW told Reuters last week that the JV's operations "are not directly affected by the payment difficulties" of the Huachen group. The German company has agreed to pay 3.6 billion euros ($4.2 billion) in 2022 for a further 25 percent stake in the venture with Brilliance, a deal brokered in 2018 by China's Premier Li Keqiang and German Chancellor Angela Merkel.
Renault said its JV "is running normally."
A court has accepted a restructuring application by creditors of Huachen, which employs over 40,000 people and has assets worth 190 billion yuan, including the BMW Brilliance tie-up. Huachen said in a filing that if it is not able to restructure, it will declare bankruptcy.
Lou Weiliang, a Shanghai-based lawyer at Fangda Partners, said it was possible that all or part of Huachen's stake in China Brilliance could be sold to a third-party under a restructuring, with proceeds used to repay creditors. But nothing will be clear until a restructuring plan is announced, he said.
As recently as May 13, in a call with nearly 90 investors, Huachen executives told creditors that money to repay debt due in the second half of the year had been "adequately arranged."
Chief Accountant Gao Xingang said that as a "dragon head," or leading, automaker in Liaoning province, Huachen enjoyed strong local government backing, according to meeting minutes seen by Reuters.
But at the end of September, one month before its bond delinquency, Huachen transferred its prize 30 percent stake in Brilliance to a subsidiary, making it harder for bondholders to access those assets.
Investors cried foul.
"After all, Huachen is a big state-owned company in Liaoning province, and we thought they had core assets including an attractive stake in the BMW joint venture," said Shanghai-based hedge fund manager Vincent Jin.