China plan to force green-car marriages raises concerns

Reuters, April 21, 2011

* Foreign players maintain ambitious goals

* Potential for China electric-car market too big to ignore

* E-mobility policy may get almost $15 bln in subsidies

By Jacqueline Wong

SHANGHAI, April 21 (Reuters) - A tentative move by China's government to force foreign suppliers of electric-vehicle components to share technology and team up with Chinese companies has raised eyebrows, but few foreign companies have scaled back their big plans for the world's largest auto market.

Since April 1, China's top economic planner has floated the idea on its website (www.ndrc.gov.cn) that foreign players who supply green vehicles and parts must partner with local partners and cap their holdings at 50 percent, a major setback for companies such as Delphi Automotive.

But nearly all industry players, from Johnson Controls to Valeo SA and others, are gearing up to secure a foothold in a country where 10 percent of the vehicles on the road could be electric by 2020, double the share of the world average, according to Deloitte Touche Tohmatsu.

"All these years, foreign parts suppliers have been able to operate on their own if they want to," said Yale Zhang, managing director of industry consultancy Automotive Foresight (Shanghai) Co. "But all of a sudden they are told to find a partner or else. Of course they will be upset. Why should they want to share technologies with anyone, especially those related with green vehicles?"

At the Shanghai auto show this week, a Johnson Controls subsidiary announced plans to supply battery systems for two electric vehicles, the C30 and M30, made by state auto group Beijing Automotive Industry Company (BAIC).

Johnson is also planning to set up a technical center in China and may follow that with a design and development center, testing labs and manufacturing facilities, according to Robin Choi, director of commercial business development for the Asia-Pacific division of Johnson.

"We are kind of surprised that they limited it at 50 percent," Choi told Reuters. "It's a little bit of a concern for us. To be honest, we don't know what the result will be, but we are continuing the dialogue with the government. It's not official yet. If it is, we might have to follow the rules."

The German auto parts maker Schaeffler is in the same boat. The company has been among a select few overseas suppliers that have been running their China business independently over the past decade.

The company made 50 percent of its $1.5 billion sales in China last year from its automotive business and its Asia chief sees new opportunities in China's E-mobility drive, which is said to be receiving more than 100 billion yuan ($14.8 billion) in government subsidies over the next 10 years. [ID:nTOE67303F]

"We just have to be alert to watch very carefully about what will happen. No matter what the final outcome will be, we can contribute one way or the other," said Wolfgang Dangel, president of Schaeffler's Asia-Pacific division.

"At the end of the day, we are still confident as we have enough technology and expertise on our hands."

Schaeffler has just set up an E-mobility team in China, heavily focused on the automotive business.

Hans-Peter Kunze, Valeo's senior executive vice president of sales and business development, also offered a positive spin on the proposed change before it is put into law.

"It's still a draft and how many drafts have we seen in our lives?" he said with a laugh.

Valeo is part of a consortium of suppliers capable of supplying a range of green technologies from electric motors to battery management systems.

It has started to supply the Chinese market with start-stop technologies for energy-saving cars this year and already has several Chinese automakers on its client lists, which Kunze declined to name.

Many suppliers are actively lobbying Chinese policy makers through various channels in the hopes they could end up getting a level playing field in what is arguably becoming the world's most important auto market.

An upcoming visit to Germany by China's technology and information minister, Wan Gang, provides an opportunity for "communication," as Schaeffler executives like to put it.

Wan, whose career included a stint in Audi AG , is the mastermind behind the country's green mobility blueprint.


While most foreign parts suppliers are relatively muted in their criticism, some executives have not hesitated to speak their minds.

"I think what they are trying to do is to mandate innovation," said Craig Giffi, global automotive sector leader of Deloitte Touche Tohmatsu. "It can create as much negative impact as positive impact."

"Naturally this is the most attractive market all over the world, but you can create a bunch of policies to make it unattractive," he added.

China, industry observers say, has a practical reason to open the door to outside investors to jump-start the market and achieve its ambitious target to have 1 million green vehicles on the road by 2020. Currently sales are estimated to be no more than a few thousand at best.

"Frankly, the local industry cannot mass-market EVs on the back of what they have in technology in China right now," said William Russo, an industry veteran who is running his own consultancy, Synergistics, in Beijing. "Foreign companies have to bring more current EV technologies to the market."

"It is the largest auto market," he added. "It will be the largest EV market, provided both the industry players and infrastructure players want to invest. I don't think China needs the investment capital, but they do need the know-how."

Tesla Motors , which supplies powertrains to Toyota Motor's electric RVA and is setting its sights on China, is obviously frustrated.

"It's a classic political economic model," said Diarmuid O'Connell, vice president of business development for Tesla. "I understand why the Chinese government wants to pursue it. When you have leverage, you want to use it to develop your domestic industry."

"But we are not constrained like that in any partnerships," he said. "It certainly gives any company the cause to think very seriously whether it's worth the effort."

Tesla, however, still wants to be part of the game "if the Chinese government is practically endorsing the technology and saying if EV is going to take off, it should take off here," he said.

Wang Dazong, president of BAIC, seemed to have his own interpretation of Beijing's tentative rule.

"That's not how I understand the policy because it's discriminatory to foreigners. I don't think that's the policy," he said. (Additional reporting by Chang-Ran Kim; Editing by Ken Wills and Matt Driskill)

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