In China, Power in Nascent Electric Car Industry

The New York Times, December 26, 2011

by Keith Bradsher

GUANGZHOU, China — Three years ago, as part of its green-energy policy, the Chinese government set an ambitious goal: by the end of 2011, the nation would be able to produce at least 500,000 hybrid or all-electric cars and buses a year.

With only about a week to go, it is clear China will fall far short of that target. Despite dozens of electric-vehicle demonstration projects around the country, analysts put China’s actual annual production capacity at only several thousand hybrid and all-electric cars and buses.

“It’s pretty trivial at this stage — they hardly sell any,” said Lin Huaibin, the manager of China vehicle sales forecasts at IHS Automotive, a global consulting firm.

Obstacles include continued technological hurdles, disputes over technology transfers by multinational automakers, and a broad wariness by the Chinese public regarding alternative-technology cars.

But it would be shortsighted to count out China’s electric car efforts just yet. Only a few months ago Prime Minister Wen Jiabao called for Beijing to create a new “road map” for energy-saving vehicles.
Unlike in other nations, where automakers are leading the push for electric vehicles, in China the effort is being led largely by one of the country’s most powerful industries — the state-run electric companies that operate the national power grid. With China expected to surpass the United States in the number of all vehicles on the road by as early as 2020, the government-run utilities see it as their job to provide an alternative to imported oil as a way to power several hundred million cars, trucks and buses.
This month in this sprawling southern industrial city, for example, the giant China Southern Power Grid company opened a sales and service center for electric cars.
The new three-story building, resembling a giant lizard egg of lime-green glass, is a showcase for technology supplied by Better Place, a start-up based in Palo Alto, Calif. Under the Better Place business model, customers not only recharge their electric cars but also periodically stop at an electric filling station to swap their nearly depleted batteries for freshly charged ones.
And just because there are no customers kicking the tires now doesn’t mean China Southern Grid, as it is commonly known, isn’t in the electric-vehicle game for the long haul. The power company and Better Place are in talks to sell electric cars to the Guangzhou municipal government and to taxi fleets, according to Shai Agassi, Better Place’s founder and chief executive.
The demonstration project showcases imported Renault Laguna sedans and Nissan Dualis crossover utility vehicles whose gasoline-fueled power trains have been replaced with electric motors and swappable batteries. But the companies are in talks with Chinese automakers to produce battery-powered cars, for which no price has been set.
In a separate bet, meanwhile, China Southern Grid has also built recharging stations in another big southern industrial city, Shenzhen, for electric buses and cars made by a Chinese automaker, BYD, which has Warren E. Buffett among its investors.
Though automakers in other countries have supplied charging equipment to be installed at homes and parking lots, China’s power industry has already made it clear that it wants to dictate when and how plug-in gasoline-electric hybrids and all-electric cars are charged, by owning the charging equipment and setting technical standards.
“It is more and more difficult to manage the grid; we need more flexibility,” by controlling how cars are recharged, said Zhang Diansheng, the deputy general manager of China Southern Grid.
After initially seeking to leapfrog Japan and the West by moving straight from internal combustion engines to cars powered only by batteries, Chinese policy makers are now paying more attention to hybrids that combine gasoline engines with electric motors. (As battery-fire problems with the Chevrolet Volt in the United States have recently indicated, technical problems still bedevil electric automotive technology.)
Even some of the Chinese companies like BYD that have bet most heavily on all-electric cars are now investing in plug-in hybrid cars that have gasoline engines as well as batteries.
“More and more companies are certainly going to do it like this,” Wang Chuanfu, BYD’s founder and chairman, said in an interview at his company’s headquarters in Shenzhen. But he quickly added, “there is still tremendous potential in the Chinese market for electric cars.”

Some of the obstacles that have slowed deployment of all-electric cars in China also exist in other markets. The cars’ range, less than 200 miles even under ideal conditions, falls steeply in cold weather, if the air-conditioner is turned on or if the car was not fully charged overnight.

“I’m not interested in them — I worry I’d run out of electricity and get stuck,” said Mu Zhongbao, a 31-year-old businessman who paid the equivalent of $130,000 for an Audi Q7minivan on a recent afternoon here at one of the many dealerships near the Better Place site.

Southern China Grid’s Better Place demonstration project indicates that powerful interests in China still back the development of all-electric cars.

“I see the Chinese fully committed on a path toward electric vehicles — the time frame may shift, the volume numbers may shift,” said Raymond Bierzynski, the executive director of electrification strategy at General Motors China.

Some executives say that China has fallen behind its schedule for hybrid and all-electric cars because it has put heavy pressure on multinationals to transfer technology to their Chinese partners to be eligible for generous subsidies for the sale of alternative-energy vehicles in China. Some foreign manufacturers have responded by withholding some of their latest models from the Chinese market — as Nissan has with the electric Leaf.
G.M. has put the Volt on sale in China, despite the Chinese government’s decision to make it ineligible for renewable energy subsidies of up to $19,300 per car. That is because G.M. has not transferred enough of the technology to satisfy Beijing, although G.M. did agree this autumn to share some electric technology in the coming years.
“By forcing foreign technology sources into a junior role, that’s going to significantly slow the development of the technology in China,” said Bill Russo, a former auto executive who oversaw the Chinese and Korean markets for Chrysler and is now an industry consultant in Beijing.
But the betting in China is that China Southern Grid and another big grid operator, the State Grid Corporation, and their allies among the country’s five main electricity generation companies have much more influence in Beijing than the auto industry.
The Chinese auto industry was tiny until the last decade, and very few of its executives have wound up in senior government positions. By contrast, specializing in electric power has long been a path to the top of the Chinese Communist Party for leaders like Li Peng, the former premier.
And as long as the electric companies are influential, all-battery cars may hold the political edge over hybrids.
But what is not clear is which of three experimental approaches to recharging will eventually dominate the field: the so-called fast charging of vehicle batteries at recharging centers; overnight charging options at homes and parking lots; or battery swapping à la Better Place.
Meantime, World Trade Organization rules are also influencing how China approaches electric cars, said a Chinese official close to the decision-making who insisted on anonymity because he was not authorized to publicly discuss transportation policy.
The government wants to build an electric car industry that can export vehicles all over the world. But it does not want to someday face W.T.O. trade complaints from other countries that might accuse China of violating free-trade export rules by subsidizing the industry’s development. With China having raised trade tensions with the United States earlier this month by slapping additional tariffs on a range of American imported autos, Beijing may need to tread more carefully than ever.
The most promising trade strategy for China to avoid legal pitfalls might be for the government first to subsidize the development of a network of charging stations for electric buses and other municipal vehicles, the Chinese official said. Mass transit subsidies are hard to challenge at the W.T.O. because they involve an almost purely domestic government service.
The bus recharging stations, and the lessons learned in building them, might then be used in a more extensive network of electric car recharging stations. Subsidizing the charging stations could help make electric cars more affordable, and in turn help Chinese automakers achieve economies of scale in their home market that would help them build up an export business.
Already BYD is expanding its annual capacity to manufacture all-electric buses — 1,000 this year, up from 500 last year and with a target of 5,000 next year.
Mr. Agassi of Better Place predicted China would become a large-scale maker of electric cars and then start exporting them. “This is the fork-in-the-road moment” for China, Mr. Agassi said. “You get to a trade deficit on oil imports, or you get to a trade surplus with a lot of car exports.”
Click here to read the article at www.nytimes.com:



China Auto Industry: Recent and Future Trends

Laowaiblog.com, December 20, 2011

See full text of the interview here:
China Auto Industry: Recent and Future Trends

Lior Paritzky from Laowaiblog and Mr. Bill Russo, China auto industry expert, discuss recent trends in China's auto industry market.

In times of financial uncertainty, how do foreign car manufacturers, which have become accustomed to China being the biggest auto market in the world, cope with slowing economic growth? Has the potential of the Chinese auto market been fully appreciated? And what type of cars can we expect to see on China's roads in the next few years?


VW’s path to the top lies in east and west

The Financial Times, December 19, 2011

During the Frankfurt auto show in September Martin Winterkorn was seen circling Hyundai’s new i30 hatchback, probing every inch of the South Korean car’s fittings with a tape measure and miniature flashlight.

With a retinue of anxious underlings in tow, Volkswagen’s chief executive tested the release of the car’s steering-wheel. When it changed position soundlessly something seemed to snap in VW’s chief executive.

“There’s nothing rattling,” he barked at his chief designer. “We can’t do it, BMW can’t do it – why can they do it?” The moment was captured on camera and soon became a viral hit on YouTube.

The incident underscored both VW’s obsessive attention to high-quality engineering and the carmaker’s acute awareness of the threat posed by its main competitors.

Industry consultants will this year crown VW as the world’s biggest carmaker, but the German company must fight hard to fend off Toyota, General Motors and Hyundai in order to keep the title in the years ahead.

The battle for the number one spot may well be decided in the world’s two largest car markets: China and the United States. For VW, however, these countries represent markedly different challenges.

VW was a pioneer among western carmakers in building local production capacity in China and is now the market leader there.

In contrast, VW has struggled in the US with quality, pricing and brand-positioning issues, and has for years trailed rivals and lost money. To turn this round, it needs to convince Americans that it its cars offer the same value for money as those offered by the market leaders, GM, Ford Motor and Toyota.

In May VW opened a new ultra high-tech plant in Chattanooga, Tennessee, its 62nd around the globe, but its first in the US since its withdrawal in the late 

“Success in the US is an important component of our overall 2018 strategy to become the world’s leading automotive company,” Jonathan Browning, head of VW in the US told the FT recently. “The most tangible evidence of this is very much in Chattanooga.”

VW, which in the past confused American carbuyers who were unsure whether it was a premium or a mass-market brand, is pinning its hopes on a modified version of its Passat saloon.

Whereas the prior generation Passat was priced higher than most of its competitors and covered only 8 per cent of the midsize segment, the new model made in Chattanooga comes with a variety of trim levels, engine packages and prices that cover 80 per cent of the midsize car segment, VW says.

“It’s a fundamental shift in how we’re able to participate in the US marketplace,” Mr Browning says. “It allowed us to get this message out that VW is affordable, more accessible, with the same VW qualities, but in reach of a broader population.”

The carmaker’s renewed assault on the US has been backed up by a canny marketing push. Last year VW presented 275 audience members of the Oprah Winfrey show with a yet-to-be-built new Beetle. During this year’s Super Bowl, VW debuted a well-received advert starring a child in a Darth Vader outfit attempting to harness “the force”.

Its efforts may be starting to pay off. Volkswagen’s US sales were up 23 per cent to almost 400,000 units in the first 11 months of the year.

However, Mr Browning must maintain this momentum if VW is to achieve a company target of at least 800,000 US car sales by 2018 and fulfil VW’s goal of returning to profitability in the US by 2013.

The challenges that VW faces in China are of a very different order: holding on to the top spot as the country’s largest foreign car brand.

After entering the Chinese market before its major rivals in 1984, VW has consolidated its position through its successful, highly profitable joint ventures with domestic carmakers SAIC and FAW.

“A significant part of VW’s margin is generated through royalty payments and part sales in China – they’re really making money there,” says Max Warburton at Bernstein Research. “VW uses these profits to subsidise the VW brand in Europe.”

VW has over time moved from selling stripped-down, basic cars such as the Santana, the workhorse of Shanghai’s taxi fleet, to sophisticated models designed expressly with Chinese tastes in mind, such as the VW Lavida and the long wheelbase Audi A6.

“They’ve transitioned from selling what’s on the shelf to adapting products to the unique needs of the market,” says Bill Russo of Synergistics, a China-based automotive consultancy. “That’s proving a solid formula for success.”

VW delivered 2.1m vehicles to Chinese customers in the first 11 months of the year, an increase of 15.5 per cent on the same period a year earlier, cementing China’s position as VW’s largest market.

The company will invest €14bn in 2012-2016, in an attempt to double production capacity to 3m units by 2015 and increase its presence in the south of the 

Many believe Karl-Thomas Neumann, head of VW’s China operations, could succeed Mr Winterkorn as group chief executive, if he succeeds.

Still, VW lacks a model to compete in the increasingly important ultra-low cost segment in emerging markets such as China and India. Although such cars tend not be to very profitable, they are set to become a significant source of industry volume growth in the coming years.

VW’s forged an alliance with Suzuki in 2009 that it hoped would give it access to the Japanese’s small-car expertise. But these plans were left in disarray after Suzuki requested dissolution of the tie-up following huge cultural differences.

The carmaker is now said to working on a stripped down version of its new small car, the Up!. “VW needs to develop a really cheap car if it wants to maintain a dominant role in the global car industry,” says professor Ferdinand Dudenhöffer at the centre for automotive research at the university of Duisburg-Essen.

American automakers prepare for China tariff

China Daily, December 19, 2011

New taxes on US cars may not make big dent, analysts say
NEW YORK - While American politicians have lashed out against China's new two-year tariff on imported cars from the United States, business analysts don't expect them to have that much of an effect on the industry.
China's Commerce Ministry said on Wednesday duties between 2-21.5 percent would be imposed starting on Thursday on large cars and SUVs with 2.5-liter engines and above.
Chinese authorities, citing that US imports were "damaging the local car industry", listed the following companies required to pay the tariff: General Motors Co, Chrysler Group Ltd, Mercedes-Benz US International Inc, BMW's factory in Spartberanburg, South Carolina, and Honda of America Manufacturing Co.
The ministry noted that GM and Chrysler were bailed out by the US government in 2009 and the others have received local government tax credits and other subsidies to support production in the US.
Growth of car sales in the world's largest automobile market has hit a 13-year low, hurting Chinese producers more than foreign automakers.
For some analysts, this appears to be a "retaliatory measure" by China in response to the World Trade Organization rejecting its appeal of a ruling in favor of US duties on imported Chinese tires.
This action, which "reflects the rising tensions between China and the US on trade matters", will have only a small impact on the industry, said Bill Russo, founder and president of Synergistics Ltd, an international advisory firm.
"The impact on GM is very limited. GM imports less than one-half of 1 percent of its Chinese volume, and the imported vehicles in GM's lineup, such as the Cadillac SRX and Buick Enclave, are sold to customers who are less sensitive to prices," Russo said.
JP Morgan analyst Himanshu Patel agrees that China's tariff - 8.9 percent anti-dumping duty and 12.9 percent anti-subsidy duty - won't hurt GM's profits in China much.
Patel, in a research report to address China's import tariffs, cited that GM sold fewer than 32,000 imported vehicles in China, compared to its total of 2.4 million car sales in China.
Ford imports just one model to China and is not likely to be affected. Chrysler, on the other hand, is completely reliant on imports.
"The tariff impacts Chrysler significantly since they import about 24,000 vehicles, and have no local partnerships after the separation from Daimler. This action will have a significant impact on pricing for models like the Wrangler and Grand Cherokee," Russo said.
Chrysler plans to localize production through its majority shareholder Fiat SpA's partnership with Guangzhou Automobile Group, according to Russo.
To account for the new tariff, carmakers will either pass on the higher price tag to consumers or absorb the added cost, which will impact their profit, said Russo. But in the long term, they need to "shift to a localized business model to mitigate such trade risks" he said.
Patel projects China's tariff will motivate GM to produce cars in China. Klaus-Peter Martin, GM spokesman, told Bloomberg in an interview that the company's goal is to build where it sells.
German carmaker BMW leads the pack in "material exposure" to the tariff, with about 25,000 vehicles imported from the US, Itay Michaeli, a New York-based analyst for Citigroup Inc, wrote in a note to clients.
Washington-based US-China Business Council (USCBC), said in a statement that motor vehicles affected by the tariff represents about 3 percent of all American exports to China.
In 2010, the US exported about $3.5 billion worth of motor vehicles to China and this amount is projected to increase to almost $4.5 billion this year.
"The ability for American companies to export and sell cars to China is important," USCBC President John Frisbie said in a statement.

Dongfeng: 30b yuan for own brands

China Daily, December 19, 2011

Ambitious expansion plan by No 2 automotive group
BEIJING - Dongfeng Motor Corpthe second-largest automaker in China by salesrecently announced it will invest 30 billion yuan ($4.7 billionin its own-brand vehicles over the next fiveyears.
Aspiring to become the top domestic automaker and a first-class international producerits goal is to sell 3 million of its own-brand vehicles in 2016, up from about 1 million this year.
The automaker based in Central China's Hubei province said a third of the 3 million units will be commercial vehiclesIt plans to develop 14 new platforms in the sector in the next five years.
Wholly owned
Another third will be passenger vehicles carrying the nameplates of Dongfeng's wholly owned brands Fengshen and Xiaokangaccording to the recently announced plan.
The company said it will introduce 18 new models - carsSUVs and MPVs - as well as three minivan series before 2016.
Its Fengshen A60 sedan rolled off the production line earlier this month and will go on sale next yearIt is the fourth model under the Fengshen brand following the S30, H30 and H30 Cross.
The remaining 1 million vehicles will include cars made at its joint venture with Taiwan's Yulon Motor Co and new local brands developed at its partnerships with Nissan and Honda.
Dongfeng plans to introduce 20 new passenger cars and one family of microbuses as jointventure-built models in the next five years.
Zhu Fushoumanaging director of Dongfengsaid the company will fight "on two fronts" - with joint ventures and its own-brand businesses.
The company said it aims to increase the ratio of R&D investment to 3 percent of revenuesupfrom the current 2.36 percent.
Slow to develop
Along with boosting salesindustry observers said the ambitious plan is designed to respond to criticism that State-owned automakers have long been slow to develop homegrown brandsinstead relying on foreign partners to generate sales and improve technology.
Dongfeng has joint ventures with Japanese carmakers Nissan and HondaSouth Korea's Kiaand France's PSA Peugeot Citroen.
Other large State-owned carmakers - SAIC Motor CorpFAW GroupChang'an Automobile GroupBeijing Automobile Group and Guangzhou Automobile Group - all have lucrative Sino-foreign joint venturesbut generally lack competitiveness with their wholly owned brands.
Dongfeng sold some 2.8 million vehicles in the first 11 months of this year - an increase of 12 percent from a year ago - and is expected to break the 3-million-unit benchmark in full-year salesBut only 300,000 - or 10 percent - are its own-brand cars.
Domestic drop
The market share for domestic-brand cars was down 1.5 percentage points to 29 percent inthe first 11 monthsaccording to China Association of Automobile ManufacturersAs wellmost domestic brands compete in the medium and low-end segmentswhich have thin profit margins.
Zeng Zhilingdirector of JD Power-LMC Asia Pacific Forecastingsaid that the decline in share for domestic brands was mainly due to the expiration of government subsidies on small engine vehicles that over-stimulated customer demand over the previous two years.
He predicts their share will bounce back to more than 30 percent next year on favorable government procurement policies and a resurgent overall market.
Domestic carmakers are also working hard to improve competitiveness.
SAIC Motor Corpthe largest automaker in the countryannounced earlier this year that it will invest 22 billion yuan in its wholly owned brands Roewe and MG between 2011 and 2015.
Beijing Automobile Group rolled out its first own brand car at the end of 2010 and plans to introduce more than 20 new models over the next five yearsincluding cars based on the Saab technologies it acquiredThe company's goal is to reach annual sales of 700,000 own brand vehicles in 2015.
Guangzhou Automobile Group unveiled its first own-brand car last year carrying the badge TrumpchiAn SUV from the new brand made its debut at the Guangzhou auto show in November.
Fierce market
But domestic brands will be battling in the world's fiercest marketChina now has the most carbrands on sale than any other country and already successfulglobal brands are racing to greatly expand production.
Local products will struggle for the foreseeable future in such a crowdedhyper-competitive marketsaid Bill Russosenior advisor at consultancy Booz & Co.
As wella significant number of used cars will add additional competitionas many consumers prefer a foreign-brand used car as a reasonably priced alternative to a new Chinese modelhe said.

Click here to read the article at chinadaily.com


China hits back at US car imports

The South China Morning Post, December 16, 2011

Beijing slaps punitive duties in move seen as retaliation for sanctions on Chinese tyre exports

by Neil Gough

Beijing's decision to impose anti-dumping duties on cars imported from America appears to be politically rather than economically motivated, but that will have minimal impact on the US car industry, say analysts and industry executives.
Starting yesterday, the Ministry of Commerce began slapping punitive duties of between 2 per cent to 21.5 per cent on exports of United States-made big-engine cars and SUVs to China.
That is in addition to the 25 per cent tariff it currently assesses on imported cars, the maximum allowed under the terms of its World Trade Organisation entry agreement.
The move appears to be Beijing's retaliation after China lost its final appeal to the WTO in September against a 2009 US move to impose anti-dumping duties on tyres imported from China.
Nevertheless, analysts said the real impact of China's punitive duties on US carmakers would be minor.
"This appears to be a retaliatory measure taken by China which only strikes at the margins, since the import car market has a rather small share of the auto market," said Bill Russo, a senior advisor at Booz & Company and the former head of Chrysler's business in China.
"Normally, such actions are taken in order to help local manufacturers. However, this makes little sense in this case, as no local manufacturer directly competes in the price segments where imported cars are positioned."
General Motors, Ford and Chrysler collectively sold 1.37 million cars in China in the first 10 months of this year, of which more than 95 per cent were made in China, according to data from JD Power and Associates. About 58,000 of those cars were imported, and not all from US plants.
"This looks like a case of killing the chicken to frighten the monkey," said Michael Dunne, president of industry consultancy Dunne & Company and author of American Wheels, Chinese Roads: The Story of General Motors in China.
"China wants to send a signal to Washington: `See how quickly we can move on your car imports? What if we decided to target Boeing instead?' Now, that would really sting."
Chrysler cars account for many of the low export volumes of US-made cars to China, as Chrysler does not have a production presence there.
The US car exports affected include Honda America's small-scale imports, a few models under General Motors' Buick and Cadillac brands, and high-end, US-made Mercedes-Benz and BMW SUVs.
"GM generally builds where we sell," Shanghai-based spokeswoman Dayna Hart said yesterday.
"In fact, GM's import volume out of the US is less than half of 1 per cent of its domestic production in China and is limited to selected Buick and Cadillac models."
Ford spokesman Trevor Hale said: "We don't export any vehicles from the US to China. Our entire China vehicle portfolio - except for the Edge [SUV], which is imported from Canada - is built locally."
US car exports to China tend to be high-priced, low-volume models whose buyers are wealthy.
"Luxury car buyers are typically more affluent and are not going to fret over this extra cost," Samsung Securities car analyst Steve Man said.
"We see little or no impact to demand for luxury cars as a result of these new duties."