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Why the West can’t ignore China’s rise as an e-car empire

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My other car isn't a Tesla. Source: Bloomberg

It was another wakeup call for big-shot Western carmakers when China’s sizzling e-car startup, Byton, presented its very first sports-utility vehicle at this week’s Las Vegas Consumer Electronics Show. At $45,000, it’s a sweetly-priced alternative to Tesla’s Model X or BMW’s X3.

Although still a concept car, Byton’s SUV is a symbol of China’s determination to become a world leader in electric cars and parts. Thanks to government subsidies and the verve of state-backed carmakers such as BAIC and SAIC, the communist country is building an industry that stands to transform the global car market. It could sound the death-knell of the combustion-engine car, which happens to be a German invention (1885).

China has already overtaken the United States as the world’s biggest sales market for e-cars. Sales in the Middle Realm are expected to reach 700,000 for 2017, and this year’s total could exceed 1 million for the first time. In just three years’ time, the Chinese government wants to have five million so-called new energy vehicles on its roads; by 2025, the country may produce five million electric cars every single year – almost the entire output capacity of all German car plants today. “Electromobility has become an important aspect of our economic growth and represents a huge value chain,” Cui Dongshu, general secretary of the Chinese automotive association, told Handelsblatt.

“China is clearly favoring electric cars and is defining the technology the rest of the world needs to follow.”

Wolfgang Bernhart, car expert at consultancy Roland Berger

While US president Donald Trump is banking on cheap oil and Germany is so far only talking about electric cars, China has long been driving the switch to alternative drive systems. As the world’s largest car market, it automatically sets the pace for the entire mobility industry. While established players such as Volkswagen, Mercedes-Benz parent Daimler, and General Motors are hurrying to convert their factories to production of e-cars, Chinese technology companies such as Alibaba, Tencent and Foxconn are investing billions in automotive start-ups like Byton and Nio. Meanwhile, battery producers and car producers benefit from state support. Their aim is to break up the market, which until now has been dominated by foreign manufacturers, with their own Chinese brands.

There are many reasons for China’s change of transport policy. It wants to reduce dependency on oil, cut urban air pollution, and create champions that are able compete globally. With a combination of private entrepreneurship and government support, it has already established leaders in other industries, such as Baidu – the Chinese Google – Alibaba, an online trading giant, or Huawei, a smartphone maker and rival of Samsung.

Although Western companies — including those in Japan and Korea — still dominate the area of combustion technology, Beijing recognized at an early stage that the rise of electric cars offered an opportunity to tip the balance. Chinese companies, such as Warren Buffett-backed BYD and Amperex Technology, have become big players in battery technology, from raw materials to cell production and energy management. “It’s a clear goal of industrial policy,” said Stefan Bratzel of the CAM research center in Bergisch Gladbach. It involves systematic subsidization of the country’s own industry: Korean manufacturers who still lead the battery technology industry, such as Samsung or LG Chem, have been left out in the cold.

Besides tax breaks for buyers of new electric cars manufactured in China, the government will slap mandatory production and sales quotas for e-cars and fuel consumption guidelines from 2019 on domestic and foreign carmakers. If they don’t meet the targets, carmakers could face steep fines. The goals are tougher to achieve for non-Chinese producers, because Beijing’s rules require the cars to use Chinese technology. The government is effectively forcing foreign carmakers to produce in China.

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That’s one reason why VW teamed up with Jianghuai Automobile Group (JAC Motor) last year to produce electric cars in Asia’s largest country. The German carmaker, the world’s biggest by output, already makes and sells one-third of global vehicle deliveries in China through its joint ventures with FAW and SAIC. Daimler plans to begin producing its electric SUV, Mercedes EQC, in Bremen and Beijing next year. It is cooperating with BAIC to cater to Chinese customers.

BMW is also converting its production sites in Dadong and Tiexi for electric cars. By 2021 at the latest, the company wants to be able to produce both combustion and electric models flexibly at all its plants. BMW has also been in negotiations with Chinese automaker Great Wall since mid-2017 about a joint venture for producing electric minis in China.

“If you want to be at the forefront of the electric car industry, you need to supply volumes in China,” said Wolfgang Bernhart, a car expert at strategy consultancy Roland Berger. “China is clearly favoring electric cars and is defining the technology the rest of the world needs to follow.” Even Toyota, a pioneer of hybrid cars, announced shortly before Christmas it will start producing all-electric vehicles. It had so far been promoting fuel-cell powered cars, which run on a tank of compressed hydrogen, and deemed them as a superior to e-vehicles.

As foreign producers scramble to build up a presence in China’s e-car market, domestic players take the lead. BYD, short for “Build Your Dreams,” sold around 100,000 e-cars in 2016 and plans to sell well over 200,000 in the coming year. Most of these are small, economically-priced cars with a short range, which are intended for the domestic market and would be difficult to export to the United States or Europe. The same applies to many other Chinese producers.

Chinese brands Byton and Nio are making use of German expertise.

Of course, China’s zealous plans don’t always work out and it might take a while before international success comes around. Chinese-owned Faraday Future made a splash last year at the CES in Las Vegas with its futuristic FF91, but since then, two German executives and other key staff have left amid cash problems. It abandoned a plan to build a factory in Nevada.

There are, however, enough other candidates that can take up the contest domestically and worldwide. Unlike the US, where dazzling e-car startup Tesla stands out in the landscape, over 200 Chinese companies are currently involved in e-car production, according to the newspaper China Daily. The Las Vegas presentation by Byton, short for “bytes on wheels,” shows that China’s ambitions are global. The newly-founded manufacturer Nio, backed by Baidu and Chinese internet group Tencent, has similar ambitions and plans to enter the global market for purely electric cars. Both brands are making use of German expertise. Byton is led by former BMW manager Carsten Breitfeld, while Nio has located its development center in Munich, right at the gates of the German automotive industry.

Chinese carmakers have also bought up European brands to appeal to Western customers. Geely bought Volvo in 2010 from Ford and the Swedish luxury brand, a rival to BMW, Audi and Mercedes-Benz, plans to focus primarily on electric and hybrid cars from 2019 onward. State-owned truck maker Beiqi Foton Motor has also revived German luxury brand Borgward, which had ceased operations in 1961, and plans to resume production near Bremen in northern Germany. It will sell both conventional as well as electric cars.

All signs point in one direction: China wants to become a global maker of e-cars and take on the hegemony of Western and Asian producers.

Markus Fasse specializes in aviation and automobile industry news and works in Handelsblatt’s Munich office. Sha Hua is Handelsblatt’s China correspondent, based in Beijing. Stefan Menzel writes about the auto industry focusing on Volkswagen. Gilbert Kreijger is an editor with Handelsblatt Global. To contact the authors: fasse@handelsblatt.comhua@handelsblatt.com, menzel@handelsblatt.com and kreijger@handelsblatt.com

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