In China, hybrids can't seem to sell without a lustrous nameplate

Nikkei Asian Review, December 19, 2013

A Lexus ES300h on display at a dealership in Shanghai.(Mark Andrews)

SHANGHAI -- Hybrid cars haven't been a big hit in China.
Shanghai rolled out 350 Buick LaCrosse Hybrids for use as taxis for the green-themed World Expo in 2010, but the cars disappeared soon after the exhibition ended.

Toyota infamously sold only one of its world-leading Prius models in China during the same year.

Sales of the utilitarian Prius have rebounded slightly but are still slow. Imported Honda gasoline-electric cars, meanwhile, have been faring worse.

Hybrids, however, are making inroads at the premium end of China's car market.

Toyota's luxury Lexus division is on track to sell close to 20,000 hybrids in China in 2013. Last year, it unloaded 16,000 of the things, leaving Prius sales way behind at 2,434.

Lexus last month pointedly unveiled the revamped CT200h model at the Guangzhou Auto Show rather than at shows going on at the same time in Tokyo and Los Angeles. Mercedes is also finding a welcome for its hybrid S-class sedans, though it isn't giving out figures.

"It is easy to sell these cars," a sales manager at a Shanghai Lexus dealership said, gesturing at the CT200h hybrid and other models. "We firstly emphasize the six-year warranty and secondly that it saves fuel."

Indeed, fuel economy has not been a strong selling point in China, where most car buyers are first-time purchasers.

Said Boni Sa, an automotive analyst at consultancy IHS Automotive: "For these first-time buyers, they have more to consider, like brand, vehicle size, features or safety. In an emerging market like China, to spend money on a better brand or larger model is much more reasonable than spending money on better fuel consumption."

Price is a key factor even for repeat buyers. In Chengdu, where the Prius is produced, businessman Jimi He recently bought his third car, a Volkswagen Tiguan crossover.

"I'd love a hybrid," He said. "It is more environment-friendly and more energy-saving. However, the price is the key issue that stops me from getting one."

The argument that buyers will recoup the higher upfront cost of a hybrid through fuel savings is not so convincing in China. To recover the 12,000 yuan ($1,976) price premium on the hybrid version of SAIC Motor's locally developed Roewe 750 sedan, for example, would require driving the car at least 100,000 kilometers.

Some automakers had campaigned for Beijing to begin subsidizing gas-electric hybrid purchases this year. They argued this could be more effective in addressing pollution concerns than the government's generous subsidies for pure electric cars and plug-in hybrids, which have not generated significant sales. Instead, China in September renewed the existing subsidies.

So the carmakers are finding other ways to close the price gap. Toyota announced at the Guangzhou show that it will localize production of batteries and hybrid motors for the Prius and Camry Hybrid. These components are now imported and slapped with high duties. As it stands, for the price of a Prius, a Chinese buyer can get a much larger family car.

This is why hybrids are attracting buyers for whom price is less of an issue.

"Some customers are buying a Lexus SUV or a Mercedes-Benz S-class rather than hybrid vehicles," Sa said. "Hybrids' inflated costs can be ignored by these customers."
At the premium end, hybrids can be positioned as high-tech and top-of-the-range rather than fuel-saving and environmentally friendly.
A new Mercedes E400 hybrid is to offer a more powerful engine with better acceleration than that of the standard model.
"Premium carmakers have a higher chance of success in the area of hybrid vehicles, mainly because premium autos are not purchased by price-sensitive consumers" said Bill Russo, president and chief executive of automotive consultancy Synergistics in Beijing. "It is still a small market but will grow as more automakers slowly introduce more models."
The long wheel-base E-class Mercedes will be the first premium hybrid to be produced in China. Infiniti is set to begin producing cars in China 2014, and Lexus is a possibility.

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