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Foreign companies were bringing alt fuel tech to China in anticipation of government support for the sector. Looks like that has arrived. But they probably won’t be on the gravy train.

August 11, 2010

A few weeks ago, an automotive executive asked me if I had heard that the Chinese government was pressuring foreign automakers to bring their alternative fuel vehicle—or new energy vehicle, as they are known in Chinese–technology to China or face unspecified consequences. New energy vehicles include electric drive train technologies only, so plug-in hybrid electric, battery-electric, and hydrogen fuel cell.

Turns out it is not that the government told foreign companies to bring NEV technology to China. Not exactly, anyway.  Rather, a combination of government support for the sector and the eagerness of the automakers to be part of a potentially very large market has produced pretty much the same result as a government mandate would have.

In any case, China will need all the outside technology it can get if it hopes to even come close to achieving its ambitious new energy vehicle sector development goals.

Details of the plan recently appeared in the local press.  Briefly, as reported by the Shanghai Securities News on August 4, China aims to be number one in the world in new energy vehicle production and sales by 2020. To achieve that, the government will invest more than 100 billion RMB, (that’s US $14.8 at current exchange rates) in the NEV sector over the next ten years. Half will go to companies producing NEVs. Purchases of NEVs will be subsidized, and the government will give companies in the sector tax breaks.

The policy calls for China to have three to five “key” NEV manufacturing companies as well as two to three “internationally competitive” supplier companies in the area of batteries, motors, or other key components. They should own the intellectual property rights to that technology i.e. they won’t be manufacturing another company’s products.

The policy as reported doesn’t specify if the companies must be fully domestic, or if joint ventures (companies partly owned by a foreign entity) or wholly-owned foreign suppliers qualify. (In China, foreign automakers can own no more than 50% of a company manufacturing vehicles for the domestic market. Suppliers can be 100% foreign-owned.)

But hey, the point of the new energy vehicle policy is to promote the domestic industry. My guess? No way will foreign-invested companies qualify. 

In any case,  many foreign companies already have plans to bring, or have already brought, their NEV technology to China. Those plans probably won’t change regardless of the policy. Why? Firstly, no one knew, and it is still not clear, who will qualify for the subsidies. Second, even if foreign companies can’t climb on the Chinese government’s gravy train, they hope to benefit from overall growth in the sector.

Some examples: Renault-Nissan in April 2009 signed an agreement with the Ministry of Information Industry Technology (MIIT) to set up a partnership to promote pure electric car development, according to a report by InterChina Consulting of Beijing. Nissan Motor Co. plans to begin selling its Leaf Electric vehicle in China in 201, albeit initially as an import.

Last year, I interviewed Tsunehiko Nakagawa, vice president of research and development for Nissan (China) Investment Co. Ltd. (One of a number of interviews I did for the J.D. Power and Associates report “China Automotive 1015: The Cost of Opportunity,” which I co-authored). Nakagawa said EVs could account for 5% of the China market by 2015—if the government subsidized development and purchase. Which we now know will occur.

“Electric vehicles will become very important to business in China,” he said. “Even if only 5% buy one, it will still be a huge market.”

Well, let’s do the numbers. J.D. Power forecasts that China’s light vehicle market, including light commercial vehicles such as minibuses and mini trucks, will grow to 19.1 million units by 2015. So 5% of that would equal nearly one million units annually.

General Motors is developing a prototype Chevy New Sail electric vehicle for China, and in 2011 will introduce the Chevy Volt and a hybrid Buick LaCrosse and to the market. GM built the GM China Advanced Technical Center in Shanghai to “accelerate the realization of GM’s electrification strategy,” GM China Group President Kevin Wale told the “Electrification—Plugging into the Future” forum in Shanghai in June. GM hosted the forum. “We will intensify the research and testing in China of advanced propulsion systems, which include electrification technologies such as batteries, electric motors and power controls,” Wale said.

So, are these moves the result of pressure from the Chinese government? Not exactly, says Michael Wang, manager of the systems assessment section of the Center for Transportation Research at the Argonne National Lab    in Chicago, IL. Wang advises the China on alternative vehicle technology.

Rather, he says, foreign automakers were told in order to participate in any government subsidies for the industry, they would need to bring their new vehicle technology to China, and to produce locally.

Says Wang: “For internal combustion engine technology, China is behind the U.S. and Europe. For electric vehicle technology, the government thinks China has a good chance to get on the same level or even ahead of some other countries. This is a strategic decision to get the Chinese auto industry on the global level.”

To be sure, foreign technology is needed to fill some gaps in domestic companies’ EV production capabilities. InterChina Consulting, in its April 30, 2010 “Electric Car Sector in China” report, notes that Chinese companies lacks crucial EV technologies such as a mature battery management system and powertrain control systems.

Other foreign companies are also coming to the rescue. For example, in May, Daimler AG announced it would form a 600 million RMB (US $85.6 million at current exchange rates) 50/50 joint venture with China’s BYD to develop an electric car for the China market.

Reading over my notes, I noted another intriguing comment from Nakagawa. “In the near future, there might be some restriction on foreign ownership of battery manufacturers in China,” he said.

China’s battery manufacturers could use some help with their electric vehicle battery technology, and a policy restricting foreign ownership in the auto manufacturing sector helped China’s domestic automakers (such as SAIC) gain global technology.

(“China faces difficulties in reducing battery charging time, increasing battery driving distances and lifespans, and maintaining consistent product quality in high-volume production,” says the InterChina report. China’s battery manufacturers also much import most of their battery film, it says.)

Battery producer A123 Systems of Massachusetts to the rescue! (Among others. Don’t want to seem like I’m picking on A123) In December of 2009, A123 formed a joint venture with SAIC Motor Co. Ltd. (whose parent company, Shanghai Automotive Industry Corp, partners with GM in China and India) to develop, manufacture, and sell vehicle traction battery systems for use in pure electric and hybrid vehicles. SAIC owns 51% of the joint venture.

And while Chinese companies such as BYD Co. and Tianjin Lishen Battery Joint Stock Co. are global behemoths in terms of manufacturing lithium-ion batteries for consumer electronics, the margins in the consumer electronic battery business are very thin, and the market has approached saturation, says Wang. Meanwhile, “automotive is a huge opportunity,” he says.

Now, I’m going to sit back and watch how this new NEV policy plays out. As a reference point, I look back about six years ago, when as part of a new auto industry policy Beijing required that automotive manufacturers in China develop their own brands, with their own their intellectual property.

The result was a frenzy of own-brand development by domestic automakers. And that policy didn’t even come loaded with cash. Of course, Chinese automakers are already in a frenzy of talking about NEV development. Maybe now that the government has shown them the money, some real development will begin.

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